A Report on Analysis of the Banking

Sector
Under the guidance of

Dr. T.J. Joseph

General Management Department

BY:-

Swati Sinha

Alliance University

CONTENTS
• INTRODUCTION
• OVERVIEW OF BANKING INDUSTRY
• PESTEL ANALYSIS
• INDUSTRY TREND
• INDUSTRY STRUCTURE
• PERFORMANCE ANALYSIS
o ANNUAL GROWTH ANALYSIS
o PROFITABILITY TREND
o ROA
o ROS

• ANALYSIS OF COMPETITIVENESS
o PORTER’S FIVE FORCES MODEL

• CONCLUSION

INTRODUCTION
A bank is a financial intermediary that accepts deposits and channels those deposits
into lending activities, either directly or through capital markets. A bank connects
customers with capital deficits to customers with capital surpluses.

Banking is generally a highly regulated industry, and government restrictions on

financial activities by banks have varied over time and location. The definition of a
bank varies from country to country. See the relevant country page (below) for more
information.

Banks act as payment agents by conducting checking or current accounts for

customers, paying cheques drawn by customers on the bank, and collecting
cheques deposited to customers' current accounts. Banks also enable customer
payments via other payment methods such as telegraphic transfer, EFTPOS,
and ATM. Banks borrow money by accepting funds deposited on current accounts,
by accepting term deposits, and by issuing debt securities such as banknotes
and bonds. Banks lend money by making advances to customers on current
accounts, by making instalment, and by investing in marketable debt securities and
other forms of money lending.

Banks provide almost all payment services, and a bank account is considered
indispensable by most businesses, individuals and governments. Non-banks that
provide payment services such as remittance companies are not normally
considered an adequate substitute for having a bank account.

Banks borrow most funds from households and non-financial businesses, and lend
most funds to households and non-financial businesses, but non-bank lenders
provide a significant and in many cases adequate substitute for bank loans, and
money market funds, cash management trusts and other non-bank financial
institutions in many cases provide an adequate substitute to banks for lending
savings too.

Some of the products and services offered by the bank are as follows:
 OVERVIEW OF BANKING INDUSTRY
History of banking:

Banking in India originated in the last decades of the 18th century. The General
Bank of India was set up in the year 1786. The East India Company established
Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks.

State Bank of India was formed to act as the principal agent of Reserve Bank of
India and to handle banking transactions of the Union and State Governments all
over the country. Second phase of nationalisation Indian Banking Sector Reform was
carried out in 1980 with seven more banks. This step brought 80% of the banking
segment in India under Government ownership. In 1991, under the chairmanship of
M Narasimham, a committee was set up by his name which worked for the
liberalisation of banking practices.

NATIONALIZATION:
The Government of India issued an ordinance and nationalized the 14 largest
commercial banks with effect from the midnight of July 19, 1969. Six more
commercial banks followed in 1980 as it was done to give the government more
control of credit delivery. GOI controlled around 91% of the banking business of
India.

LIBERALIZATION:

Narsimha Rao government embarked on a policy of liberalization in 1991. He

allowed private banks to enter in to the Industry and liberalized the interest rates and
reduced the CRR and SLR.

Three Sectors contributed well to economy:

 Public sector banks (those banks in which the Government of India

holds a stake)

 Private sector banks (government does not have a stake in these

banks; they may be publicly listed and traded on stock exchanges)

 Foreign banks

CURRENT SCENARIO:

The banking system remains, as always, the most dominant segment of the financial
sector. Indian banks continue to be well-regulated. Today, banks have diversified
their activities and are getting into new products and services that include
opportunities in credit cards, consumer finance, wealth management, life and
general insurance, investment banking, mutual funds, pension fund regulation, stock
broking services, custodian services, private equity, etc. Further, most of the leading
Indian banks are going global, setting up offices in foreign countries, by themselves
or through their subsidiaries.

The State Bank of India (SBI) has become the first Indian bank to be ranked among
the Top 50 banks in the world, capturing the 36th rank, as per the Brand Finance
study. ICICI Bank also made it to the Top100list.

According to RBI, nationalized banks, as a group, accounted for 51.9 per cent of the
aggregate deposits, while State Bank of India (SBI) and its associates accounted for
22.5 per cent. The share of other scheduled commercial banks, foreign banks and
regional rural banks in aggregate deposits were 17.5 per cent, 5.0 per cent and 3.1
per cent, respectively. With respect to gross bank credit also, nationalized banks
hold the highest share of 52.0 per cent in the In terms of total bank credit, SBI and its
associates share 23.1 per cent and other scheduled commercial banks 17.4 per
cent. Foreign banks and regional rural banks had a share of 4.9 per cent and 2.5 per
cent respectively in the total bank credit. The report also found that scheduled
commercial banks served 34,801 banked centers. Of these centers, 27,946 were
single office centers and 65 centers had 100 or more bank offices.

INDUSTRY ENVIRONMENT
SLEPT ANALYSIS OF BANKING INDUSTRY:
The last decade has seen many positive developments in the Indian banking sector.
The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made
several notable efforts to improve regulation in the sector.

The banking sector in India functions under the umbrella of the RBI—the regulatory,
central bank. The Reserve Bank of India Act was passed in 1934 and the RBI was
constituted in 1935 as the apex bank. The Banking Regulations Act was passed in
1949. This Act brought the RBI under government control. Under the Act, the RBI
received wide-ranging powers in regards to establishment of new banks, mergers
and amalgamations of banks, opening and closing of branches of banks, maintaining
certain standards of banking business, inspection of banks, etc. The Act also vested
licensing powers and the authority to conduct inspections with the RBI.

Scheduled commercial banks are of 3 categories:

 Public sector banks or PSBs (SBI & its associates, and nationalized banks)

 Private sector banks (old and new)

 Foreign banks

Technological:

It is the role of technology in banking that is enabling us to meet the challenge of

economic growth and ensuring financial stability. Technology enables increased
penetration of the banking system, increases cost effectiveness and makes small
value transactions viable. As the cost of Information and Communications
Technology shrink, the time is ripe for using technology to address business growth. 
Technological innovations make it economically viable for financial service providers,
often in partnership, to reach customers including the poor, with a wider range of
products and services.

 Technology adoption enables increased penetration of goods and services. It

has made banking products and services affordable and accessible;
simultaneously ensuring viability and profitability due to the processes of
 customization leading to improved operating margins. Technology allows
transactions to take place faster and reduces costs.
 Technology enhances choices, creates new markets, improves productivity
and has a multiplier effect. In the field of banking, technology has the potential
to extend in a cost effective manner the penetrative reach of banking services
and products to a large section of the excluded society by bringing them into
the formal financial system. It promises universal access thereby pushing the
frontiers of banking outward.
 Core Banking Solution enables banks to extend the full benefits of ATM, tele-
banking, mobile banking, internet banking, card banking (multiple delivery
channels) to all customers allowing banks to offer a multitude of customer-
centric services on a 24x7 basis from a single location, supporting retail as
well as corporate banking activities, as well as all possible delivery channels
existing and proposed. Using CBS, customers can access their accounts from
any branch, anywhere, irrespective of where they have physically opened
their accounts

 Technology implementation in our public sector banks appears to be more for

regulatory and policy compliance. This has oriented the banking technology to
be more employee friendly rather than customer-friendly.

 IT should help banks not just to deliver robust and reliable services to their
customers at a lower cost, but also generate and manage information
effectively. Information comprises data collected based on principles of
integrity, reliability, and accuracy. Banks are collecting humungous quantities
and warehousing volumes of data relating to customers and transactions. The
information is not subjected to meaningful analysis, usage and creation of a
database with an objective to meet not only the diversified internal and
external MIS requirements but also using this information to increase the
volume of profitable business using unique techniques of Customer
Relationship Management (CRM).

 With the high rate of technological obsolescence and for CRM to succeed, the
need for proper IT governance, particularly in the case of banks, is gaining
prominence. Adoption of IT governance in banks would result in effective
 control and deriving better value on the huge IT infrastructure created by
banks.

INDUSTRY TRENDS
• Initially was Oligopoly market in 1960s.

• After liberalization it has features of both Monopolistic and Oligopolistic

market structure.

• But from last few years due to liberalization and new policies implemented by
RBI, by encouraging FIIs, foreign banks to enter in to market by loosening the
entry barriers and increasing foreign stake in a Indian bank, it is now tending
towards Monopolistic.

Monopolistic market:

• Monopolistic is a form of market structure in which there are many sellers

offering differentiated financial products and services.

• The interest rates are to some extent market-determined.

• The entry and exit barriers have been lowered for both domestic and
international players so as to encourage the private banks to conduct banking
business.

• At present there are 29 foreign banks operating in India.

• Exit barriers still remain relatively higher than entry barriers.

 • Foreign banks wishing to establish presence in India for the first time could
either choose to operate through branch presence or set up a Wholly Owned
Subsidiary (WOS).

• They could also hold a subsidiary which has a foreign investment (capped at
74%) in a private bank.

• The WOS required a minimum capital requirement of Rs. 3 billion and a CAR
of 10%.

The banking sector contributes about 7.2% GDP which is very less.

Current Rates:

Bank rate 6% Repo rate 6.5% Reverse Repo rate 5.5%

CRR rate 6% SLR rate 24%

LIST OF BANKS IN INDIA:

STRUCTURE OF ORGANIZED BANKING INDUSTRY
INDUSTRY STRUCTURE
Total number of players in the banking sector is 128. Total market size of the
banking sector is over Rs. 40632 billion in terms of deposits.
HERFINDAHL INDEX
 Value- 515.69

 This value shows, this Sector is low concentrated.

 Concentration ratio: 0% to 50% .

 INDUSTRY CONDUCT AND PRACTICES
 Banking is a highly regulated industry
 A bank can generate revenue in a variety of different ways including interest,
transaction fees and financial advice
 Banks profit from the differential between the level of interest it pays for
deposits and other sources of funds, and the level of interest it charges in its
lending activities

INDUSTRY PERFORMANCE
MARKETING EXPENSES

700

600

500

SBI
400 Axis
Canara
300 HDFC
PNB
ICICI
200

100

0
2006 2007 2008 2009 2010
GAIN ON FOREIGN EXCHANGE TRANSACTIONS

2000

1800

1600

1400

1200
2006
2007
1000
2008
2009
800
2010

600

400

200

0
SBI ICICI HDFC Canara PNB Axis

LEVERAGE OF THE FIRM

1800

1600

1400

1200
ICICI
1000 HDFC
Axis
800 Canara
SBI
600 PNB

400

200

0
2006 2007 2008 2009 2010
WORKING CAPITAL RATIO

0.14

0.12

0.1

SBI
0.08
PNB
Canara
0.06 ICICI
HDFC
Axis
0.04

0.02

0
2006 2007 2008 2009 2010

PERFORMANCE ANALYSIS
ANNUAL GROWTH ANALYSIS
PROFITABILITY TREND (%)

RETURN ON ASSETS (IN DECIMALS)

RETURN ON SALES (IN DECIMALS)
 ANALYSIS OF COMPETITIVENESS
PORTER’S FIVE FORCES MODEL OF COMPETITION

THREAT OF COMPETITORS

Rivalry among competitors is very fierce in Indian Banking Industry. The services
banks offer is more of homogeneous which makes the Company to offer the same
service at a lower rate and eat their competitor market’s share. Market Players use
all sorts of aggressive selling strategies and activities from intensive advertisement
campaigns to promotional stuff. Even consumer switch from one bank to another, if
there is a wide spread in the interest. Hence the intensity of rivalry is very high. The
no of factors has contributed to increase rivalry those are.

 A large no of banks
There is so many banks and non financial institution fighting for same pie ,
which has intensified competition

 High market growth rate

 India is seen as one of the biggest market place and growth rate in Indian
banking industry is also very high. This has ignited the competition.
 Homogeneous product and services

The services banks offer is more of homogeneous which makes the

company to offer the same service at a lower rate and eat their competitor
market’s share.

 Low switching cost

Costumers switching cost is very low, they can easily switch from one bank
to another bank and very little loyalty exist .
 Undifferanciated services
Almost every bank provides similar services. Every bank tries to copy each
other services and technology which increase level of competition.
 High fixed cost
 High exit barriers
High exit barriers humiliate banks to earn profit and retain customers by
providing world class services
 Low government regulations
There are low regulations exist to start a new business due lpg policy
adopted by India.

BARGAINING POWER OF SUPPLIERS

Banking industry is governed by Reserve Bank of India. Reserve Bank of India is

the authority to take monetary action which leads to direct impact on circulation of
money in the Economy. The rules and regulation lay down by RBI.Suppliers of banks
are depositors .these are those people who have excess money and prefer regular
income and safety. In banking industry suppliers have low bargaining power.

 Nature of suppliers
Suppliers of banks are those people who prefer low risk and those who need
regular income and safety as well. Banks best place for them to deposits
theirs surplus money.
 Few alternatives
 RBI rules and regulations
 Banks are subject to rbi rules and regulations .bank have to behave in a way
that rbi wants. So rbi takes all decisions related to interest rates . this reduce
bargaining power of suppliers .

 Suppliers not concentrated

Banking industry suppliers sure not concentrated. There are numerous with
negligible portion of offer .so this reduce their bargaining power .

BARGAINING POWER OF CONSUMERS

In today world, Customer is the King. Banks offers different services According to
clients need and requirement. They offer loans at Prime Lending Rate (PLR) to their
trust worthy clients and higher rate to others clients.

Customers of banks are those who take loans and uses services of banks.
Customers have high bargaining power. These are

1. Large no of alternatives
Customers have large no of alternatives, there are so many banks, which fight
for same pie. There are many non financial institutions like icici, hdfc, and ifci, etc.
which has also jump into these business .there are foreign banks , privet banks, co-
operative banks and development banks together with specialized financial
companies that provides finance to customers .these all increase preference for
customers.

2. Low switching cost

Cost of switching from one bank to another is low. Banks are also providing
zero balance account and another types of facilities. They are free to select any
banks service. Switching cost are becoming lower with internet banking gaining
momentum and a result customers loyalties are harder to retain.

3. Undifferentiated service
 Bank provide merely similar service there are no much diffracted in service
provides by different banks so, bargaining power of customers increase. They
cannot be charged for differentiation.

4. Full information about the market

Customers have full information about the market due to globalization and
digitalization Consumers have become advance and sophisticated .they are aware
with each market condition so banks have to be more competive and customer
friendly to serve them.

For good creditworthy borrowers bargaining power is high due to the

availability of large number of banks
 CONCLUSION
 A larger number of firms increase rivalry because more firms must compete
for the same customers and resources. The rivalry intensifies if the firms have
similar market share, leading to a struggle for market leadership.
 Slow market growth causes firms to fight for market share. In a growing
market, firms are able to improve revenues simply because of the expanding
market.
 High fixed costs result in an economy of scale effect that increases rivalry.
When total costs are mostly fixed costs, the firm must produce near capacity
to attain the lowest unit costs. Since the firm must sell this large quantity of
products, high levels of production lead to a fight for market share and results
in increased rivalry.
 High storage costs or highly perishable products cause a producer to sell
goods as soon as possible. If other producers are attempting to unload at the
same time, competition for customers intensifies.
 Low levels of product differentiation are associated with higher levels of
rivalry. Brand identification, on the other hand, tends to constrain rivalry.
 Strategic stakes are high when a firm is losing market position or has potential
for great gains. This intensifies rivalry.
 High exit barriers place a high cost on abandoning the product. The firm must
compete. High exit barriers cause a firm to remain in an industry, even when
the venture is not profitable. A common exit barrier is asset specificity.
 If there are a larger number of competitors, a shakeout is inevitable.
 Surviving rivals will have to grow faster than the market.
 Eventual losers will have a negative cash flow if they attempt to grow.
 All except the two largest rivals will be losers.
 The definition of what constitutes the "market" is strategically important.
 POTENTIAL ENTRY OF NEW COMPETITORS

Reserve Bank of India has laid out a stagnant rules and regulation for new
entrant in Banking Industry. We expect merger and acquisition in the banking
industry in near future. Hence, the industry is less porn of new competitor.

Barriers to an entry in banking industry no longer exist. So lots of privet and

foreign banks are entering in the market. Competitors can come from an industry to
‘disinter mediate‘bank product differentiation is very difficult for banks and exit is
difficult. So every bank strives to survive in highly competitive market so we see
intense competitive can mergers and acquisitions. Government policies are
supportive to start new bank. There is less statutory requirement needed to start a
new venture? Every bank to tries to achieve economics of scale through use of
technology and selecting and training manpower .

There are public sector banks, private sector and foreign banks along with
non banking finance companies competing in similar business segments.

POTENTIAL DEVELOPMENT OF SUBSTITUTE PRODUCTS

 Every day there is one or the other new product in financial sector.

Banks are not limited to tradition banking which just offers deposit and lending. In
addition, today banks offers loans for all products, derivatives, ForEx, Insurance,
Mutual Fund, Demit account to name a few. The wide range of choices and needs
give a sufficient room for new product development and product enhancement.

Substitute products or services are those, which are different but satisfy the
same set of customers. In private banking industry following are the substitutes:

 NBFC: Non-banking financial Institutions play an important role in giving financial

assistance. Mobilization of financial resources outside the traditional banking
system has witnessed a tremendous growth in recent years in the India. NBFC is
a close substitute of banking in respect of raising funds. Borrower can easily raise
funds from NBFC because it requires less formal procedure for getting funds
compare to private banks.
 Post Office Products: Post office is also providing some service like fixed
deposit facility, saving account, recurring account etc. The interest rate of saving
account is higher than private banks. It is fully secured by the government so
people who do not want to take risk for them post office saving is good substitute.
 Government Bond: Govt. Bond also attracts savings from the general public. It
is less risky and more secured as compare to savings in private banks.
 Mutual Funds: Mutual funds are also now proving as good substitutes for banks.
They assure for providing high return with less time in comparison of banks. The
administrative expenses are also very low as compared to banks. Investment in
Mutual funds is more flexible than investment in banks.
 Stock Market: People who are ready to bear risk and wants a high return on their
investment, stock market is a good substitute for them. Day by day investors are
moving towards stock market as interest rate in banks are decreasing. So now
stock market has proved as a big competitor for baking sector.
 Debentures: Debentures is also proved as a good substitute of bank’s fixed
deposit as return on debenture is fixed and high. There are different types of
debentures, which attract various classes of investors.
 Other Investment Alternatives: Now common people’s attraction is shifting from
banks to other various alternatives such as gold, precious metals, land, small
savings etc. As we can see the growing trend in these alternatives in comparison
of decreasing interest rates in banks.