Swot Analysis of Indian Banking Industry

7/30/2019 Swot Analysis of Indian Banking Industry

1/13


2/13

Swot analysis of Indian Banking Industry

The accelerating shift in economic power from the developed to emergingeconomies is dramatically changing the banking industry across the world. Theinternational banking scene has in recent years witnessed strong trends towardsglobalization and consolidation of the financial system. Stability of the financialsystem has become the central challenge to bank regulators and supervisorsthroughout the world. The multi-lateral initiatives leading to evolution ofinternational standards and codes and evaluation of adherence thereto representresolute attempts to address this challenge.The Indian banking scene has witnessed progressive deregulation, institution of

prudential norm and an emulation of international supervisory best practices. The

supervisory processes have also concomitantly evolved and have acquired a certain

level of robustness and sophistication in the banking industry.

Strengths of Indian Banks

In the short-term, most developed economies experienced a significant

economic slowdown or recession in 2008-9, reducing significantly the growth of

domestic banking assets. Emerging economies such as India by contrast tended to

maintain relatively high growth rates, although some temporary economic

slowdown was experienced in certain cases. In 2010, however, emergingeconomies grew strongly in general, while the recovery in Europe in particular

remained relatively weak.

High standard regulatory environment. The policy makers, which comprisethe Reserve Bank of India (RBI), Ministry of Finance and related overnment

and financial sector regulatory entities, have made several notable efforts to

improve regulation in the sector.

Bank lending has been a significant driver of GDP growth and employment Presence of more number of Smaller banks that would likely to be impacted

adversely.


3/13

Approximately 53000 networks of branches spread all over the countryprovides easy access to entire spectrum of customers.

Diversification in their operationsBanks offer an entire gamut of servicesincluding insurance, investment banking, asset management, private equity,foreign exchange, payment of utility bills to customers, mobile and internet

banking.

Large manpower with relevant banking skills to manage the operations.

Technological up gradation changing the way the banking is done.Anywhere banking and anytime banking has become a reality and thus

making service faster, error free and competitive.

Banks have gained financial strengths in terms of Productivity andProfitability.

Weakness of Indian Banks

Indian commercial banks, particularly PSBs have been witnessing the following

challenges which have become bottlenecks in achieving competitive edge over

their rivals.

Low operating size High operating costs Inadequate deposit mobilization efforts High level of nonperforming assets Financial exclusion Complex and non-responsive organizational structures Credit to non-productive sectors like commercial estate Poor customer service


4/13

Underutilized capacity particularly in rural areas Unsatisfactory work culture Feudalistic attitude of thee staff Ethnocentric and action flippant management Absence of organizational focus on the employees leading to their de

motivation

Inadequate access to global financial system The cost of banking intermediation in India is higher and bank penetration is

far lower than in other markets

Inadequate risk management skills particularly to cope with market risks andper Basel II norms

Structural weaknesses such as a fragmented industry structure, restrictionson capital availability and deployment, lack of institutional support

infrastructure, restrictive labour laws, weak corporate governance and

ineffective regulations beyond Scheduled Commercial Banks (SCBs)

The inability of bank managements (with some notable exceptions) toimprove capital allocation, increase the productivity of their service

platforms and improve the performance ethic in their organisations could

seriously affect future performance

Opportunities for Indian banks

Increase the profitability by accessing international financial market forprocuring funds cheaply and deploy funds prudently.

The emerging economies banking sectors are expected to outgrow those inthe developed economies.


5/13

As per the PWC projection in Banking 2050 By 2050 the leading E7emerging economies could have domestic banking assets and profits thatexceed those in the G7 by around 50%.

G7 countries: US, Japan, Germany, UK, France, Italy, Canada E7 countries: China, India, Brazil, Russia, Mexico, Indonesia, Turkey Other developed economies: Australia, Republic of Korea, Spain Newly emerging economies:Argentina, Vietnam, Nigeria, Saudi,Arabia, South Africa4

Figure 1: Projections of domestic banking assets in the E7 and G7

India has particularly strong long-term growth potential and PWCprojections suggest it could become the third largest domestic banking sectorby 2050 after China and the US, but ahead of Japan, the UK and Germany.Brazil could also rise strongly up the global banking league table over this

period.


6/13

Dates at which E7 economies overtake G7 in terms of the size of theirdomestic banking assets

To acquire any company, non-bank finance company, housing finance orother businesses to increase their balance sheet size and go into areas where

there is lot of potentials.

Projected changes in population havev an important effect on somecountriesrelative growth rates. For instance, Russia, Japan and Republic of

Korea are expected to experience population falls, depressing overall GDPgrowth. Nigeria, Saudi Arabia and India are all expected to experience

strong population increases, thereby boosting overall GDP growth. Some

advanced economies (e.g. US, Australia) are projected to have stronger

population growth than some emerging economies (notably China due to its

one child policy).

The emerging economies market exchange rates are expected to appreciateover time in real terms due to relative stronger productivity growth (the so-called Balassa- Samuelson effect). This provides a boost to growth in all of

the emerging economies when measured in real US$ terms. Note that this

real exchange rate appreciation could arise due to nominal appreciation

and/or higher inflation rates in the countries

Concerned


7/13

Freedom to pursue new lines of business as part of overall businessstratergy.

Freedom in pricing and Structuring their products Opportunities to access foreign market. Robust economic health of the country and development in different sectors

promises the growth opportunities.

Growing SME sector leading to greater demand of credit facilities. High growth opportunities in Processing sector which at present processes

only 2 percent of fruits and vegetables contributing only 1 percent to global

food processing and 350$ billion worth is fruits and farm products are

wasted.

Boom in Indians consumer spending Huge opportunities in rural area where people still depend of money lenders

and relatives.

Projection of Share of total global banking assets. Source: IMF data for2009, PwC model projections for 2050


8/13

Threats

Competition among banks for highly rated corporates needing lower amountof capital may exert pressure on already thinning interest spread. Further,

huge implementation cost may also impact profitability for smaller banks.

The biggest challenge is the re-structuring of the assets of some of the banksas it would be a tedious process, since most of the banks have poor asset

quality leading to significant


9/13

Proportion of NPA. This also may lead to Mergers & Acquisitions, whichitself would be loss of capital to entire system

Huge surplus manpower, absence of good work culture, antiquated labourlaws, inflexible and inefficient labour and existence of strong labour union.

High level of Non Performing assets(NPA). 6 percent of the advances arestill blocked up which is about 58000 Crore. Therefore problem of non

recognition of interest income and loan loss provisioning exists.

The house hold savings comprising financial assets are moving away frombank deposits to more sophisticated form of financial assets such as mutualfunds, stocks and derivatives.

Asset liability mismatch

Demanding customers are ready to jump from one bank to another whenthey are not satisfied with the service provided. This causes major threat

particularly to PSUs.

Competition from new players.

Competition at global level in terms of product innovation and product mix. Keep pace with the fast growing technology. The current business environment demands


10/13

Stress Test

Stress-test analysis indicates that the banking sector is by and large protected

from the direct exchange rate risk, direct interest rate risk and the indirect credit

risk through changes in the interest rates. Direct credit risk and the indirectexchange rate risk through foreign currency lending are handled satisfactorily by

the banking sector, while for some particular banks these risks are quite significant.

The application of the stress test methodology on banks balance sheet helps to

identify the plausible difficulties the banking system could be faced with as a result

of extreme but plausible shocks.

Among the possible risks are considered the exchange rate risk, credit risk, interestrate risk and the indirect credit risks through foreign currency lending and interest

rates changes.

Stress test is undertaken on a continuous basis in the Reserve Bank to assess theresilience of the financial system to exceptional but plausible stress events. Thestress testing uses single factor sensitivity analysis. In addition, a stress testingmodel which assesses the impact of macroeconomic variables on the financialsoundness indicators of banks has also been attempted. In formulating the quantumof shocks, judicious criteria on selected indicators based on the experience of theIndian financial system are applied.

The methodologies used in these stress tests are

described in Annex-1.

The stress tests currently being conducted by the Reserve Bank on regular basis

cover the following risks:

Credit risk, which estimates the impact on capital adequacy by stressing the non

performing advances for the entire credit portfolio.

Interest rate risk, which estimates the erosion in economic value of the balancesheet for a given interest rate shock using the Duration of Equity method both at

the system and the individual banklevels.

Liquidity risk, under different scenarios, which include sudden withdrawal of

deposits on account of loss of confidence due to adverse economic conditions


11/13

Interest Rate Risk

Duration of Equity (DoE) of commercial banks shows an increasing trend in therecent quarters, pointing towards greater interest rate risk being assumed by banks


12/13

Liquidity Risk

Commercial Banks : The liquidity stress tests assess the ability of a bank to

withstand unexpected deposit withdrawal without recourse to any outside liquidity

support. The scenarios have been developed based on stringent assumptions andassumes unexpected deposit withdrawals in different proportions (depending on

the type of deposits). The tests assess the adequacy of liquid assets available to

fund these withdrawals. The deposit run is assumed to continue for five days.

Sources

www.rbi.org

www.pwc.co.uk/financialservices

http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdf

Management of financial institutionRM Srivatsa and Divya nigam
http://www.rbi.org/http://www.rbi.org/http://www.pwc.co.uk/financialserviceshttp://www.pwc.co.uk/financialserviceshttp://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdfhttp://www.pwc.co.uk/financialserviceshttp://www.rbi.org/


13/13

Swot Analysis of Indian Banking Industry

Documents

Transcript of Swot Analysis of Indian Banking Industry