Nachiket icici

7/31/2019 Nachiket icici

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Opportunities andchallenges for Indian banks

July 5, 2006

FICCI Banking Conclave


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Opportunity spectrum for Indianbanks

Consumer finance

Robust industrial investment outlook

Increasing internationalisation of India

Rural banking

Indias economic momentum driving banking sector

growth


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Consumer finance growth drivers

Changing

structure of theeconomy

Demographicpatterns

Access to financeUpward migration

of incomeConsumer

finance growth


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Changing structure of the economy

FY1991 FY2006

Services

Industry

Agriculture

43% 61%

25%

32%

19%

20%

Rapid growth of services sector

Leveraging high quality education and vast talentpool

Sublimating Indias knowledge capital to createeconomic value


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Upward migration of incomes

FY1996 FY2002

Middle income

High income

33 50

1 3

Rising affluence and growth of the consuming class

NCAER data for top 24 cities in India shows

migration to higher income levels growing at over40% per annum

FY2010

Estimate

98

10

(households in million)

Middle income Rs. 90,000-5,00,000 per household

p.a. High income > Rs. 5,00,000 per household p.a.


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across rural and urban India

FY1996 FY2002

17 16

0.7 0.3

27

1.8

(households in million)

23

0.7

Urban Rural Urban Rural

43% of households in middle and high income groups

from rural India in 2005 Their number has grown by 79% from 1996-2005

High income

Middle income

Figures for 2005 are estimatedMiddle income Rs. 90,000-5,00,000 per householdp.a.High income > Rs. 5,00,000 per household p.a.

FY2005E

35

3.6

28

1.2

Urban Rural


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7

23

35

35

>60

35-59

15-34

0-14

10

30

35

25

23

36

26

16

8

26

37

29

Demographic advantage - BRICS

58% of the population is in the working age group of 15-59years

(Agegroup) (percentage of population)

India China Russi

a

Brazil


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Increased access to finance

Rapid growth in availability of credit

Spread from large cities to second and third tierurban centres

Credit providers focusing on customerconvenience

Delivery at customers doorstep or at point-of-saleof the asset financed

Increasing affordability

Decline in interest rates and rising incomes have

allowed younger to take loans for acquiring assets Drop in average age of home buyers


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Drivers for corporate banking

Early 1990sMid to late 1990s

2000 onwards

Articulation ofinternational

competitiveness

Capitalising ondomestic demand

Restructuring to

achieve world-class efficiency

Key transformational trends Increased deployment of technology De - leveraging & organic capital generation Constantly improving quality standards

Corporate investment plans of

over US$ 50 bn


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Opportunities in corporate banking

Domestic capital expenditure

in infrastructure and

manufacturing

Global expansion organic

and inorganic

Renewed investment cycle

Forex increasing

integration with global

markets

Growing use of derivatives

for risk management

Demand for efficient

transaction banking

Markets and transaction

banking


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Opportunities in global banking Vast Indian diaspora spanning the globe

Inward remittances of about US$ 22 bn

Seeks strong India linkage and ethnic familiarity

Demands world class service

Potential for credit and liability products andtransaction services

For personal as well as business requirements

Expansion of Indian industry to global markets Growing export orientation 25% growth in

FY2006

Setting up international marketing and distributionnetworks

Acquiring/ creating production capacities overseas

Potential for acquisition/ project financing and

trade finance


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Rural banking: A new growthopportunity

1. Source: CERG (Consumer & Economic Research Group)2. Source: Tata Statistical Outline

3. Source: Mckinsey Global Institute May 2006

Opportunities for growth Though agriculture constitutes only 20% of Indias

GDP, rural economy (agri + non-agri) constitutes

about 50% of GDP1

Rural population of about 780 million2 withlimited

access to financial services

Population per bank branch: 22,793

Informal credit in India amounts to US$ 82bn3

A high proportion of agricultural lending is from informal

sources3


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Special needs Doorstep banking

Flexibility in timings

Low value and high volume of transactions

Limited background information and proof of income Require simple processes with minimum

documentation

Conventional banking not suited to meet these

demands High costs of delivery through traditional channels

High transaction costs

Dependence on documentation and financial history

Inflexible procedures

However, banking in rural India ischallenging


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and requires a comprehensive

approach

Multiple products Low-income customers require full range of

services: credit, transaction banking, investmentand risk mitigation

Multiple channels Branches at selected locations

Franchisees, internet kiosks, MFI partners

Deep penetration of the market Using a combination of channels to completely

cover selected areas Rapid-scale up

To reduce average operating costs


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Example: ICICI Banks channel

strategy

District cluster branch

ATM

FranchiseeKiosk (every circle

represents 8 kiosks)

MFI Branch

Crop cluster branch

Post Office Channel


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Challenges faced by Indian banks

Lack of product expertise

Traditionally focused on limited range of products Primarily for corporate clients

Need for acquiring skills in

Retail, structured finance

Lack of distribution expertise Reliance on branch channel and human

intervention

Relatively high unit cost of delivery given smalltransaction sizes

Limited use of technology

Across both customer-facing andinternal functions

Inefficient capital allocation


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To tap opportunities, banks must firstbuild a robust platform

Acquire product knowledge and comprehensiveproduct suite

Build distribution expertise

Look beyond branch coverage

Focus on efficiency and cost-to-serve Improve risk management and capital allocation

Manage new products and associated risks

Operate in increasingly complex environment

Deploy technology effectively to ensure return oninvestment

Develop a flexible model that allows for rapidscale-up at optimal cost


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In summary India: strong growth prospects

Banking has vast growth opportunities

Driven by consumer finance, demographics,industrial resurgence, increasinginternationalisation and deeper penetration offinancial services

This requires a transformation of the traditionalbanking model New channel architecture

Building partner relationships for outreach

Full suite of products and services

A successful mass banking model Is essential to meet the larger objective of

supporting economic growth

Builds a new engine for stakeholder value creation


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Thank you

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