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Alliance Business School

Bangalore, India
San Jose State University, USA
Summer Study Tour : July 24, 2008
Financial Services in India
Prof Chowdari Prasad
Flow of Presentation
 Indian Rupee, US Dollar, Savings
 Five Year Plans in India
 Indian Financial System
 RBI, SBI, Public, Private and Foreign Banks
 Financial Sector Reforms – 1991, 1993 ….
 WTO and Financial Services – 1995 …
 Financial Savings & Market Share Data
 Financial Services Products
 References

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The Indian Rupee in 9 Denominations
(1,000 / 500 / 100 / 50 / 20 / 10 / 5 / 2 / 1)
 The Rupee is relatively
confined to India, and is not
used extensively in any other
country
 Later years of British colonial
rule: Pegged to gold standard
b/w of Great British Pound
 1966: de-pegged from the
British Pound; pegged to the
US Dollar
 1971: de-pegged from US
Dollar (b/c US$ was tanking)
 Today, the RBI conducts a
managed float on the INR /
USD exchange rate; INR / EUR
and INR / JPY are market
determined
03/30/09 Financial Services : IFS 3
Distribution of Financial Savings
- Household Sector in India
 Currency .. .. .. 13 %
 Bank Deposits . .. .. 28 %
 Non Banking Deposits .. 14 %
 LIC Policies & UTI .. .. 11 %
 PF & Pension Funds.. .. 20 %
 Claims on Government .. 9%
 Shares and Debentures ... 5%
 TOTAL .... 100%

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Rupee, Dollar and Values
 1 USD = 40 INR (approx)
 1 K = 1,000 (One Thousand)
 1 Lac = 1,00,000 (One Hundred Thousand)
 1Million = 10 Lacs (10,00,000)
 1 Crore = 100 Lacs or 10 Million ( or 1,00,00,000)
 1 Billion = 100 Crores (1,000 Mn or 1,00,00,00,000)

 So, USD 1 Bn = INR 4,000 Crores or


 INR 1 Crore = USD 250,000 (approx)

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Five Year Plans in India
 I Plan (1951 - 1956)  VI Plan (1980 – 1985)
 II Plan (1956 - 1961)  VII Plan (1985 – 1990)
 III Plan (1961 – 1966)  Break 1990 - 1992
 Plan Holiday 1966-69  VIII Plan (1992 – 1997)
 IV Plan (1969 – 1974)  IX Plan (1997 – 2002)
 V Plan (1974 – 1979)  X Plan (2002 – 2007)
 Break 1979 - 1980  XI Plan (2007-2012)
03/30/09 Financial Services : IFS 6
Growth of GDP and major Sectors
(% per year)

03/30/09 Financial Services : IFS 7


Indian Financial System
MoF,GOI, New Delhi
RBI/
SIDBI/NABARD
SEBI / NHB /
IRDA / PFRDA

Development NBFCs, Chit Funds,


Banks – SB Group,
Finance Institutions Nidhi Cos, Postal /
Public / RRBs /
IFCI, IDBI, ICICI, Nat’l Small Savings /
Private-Old & New/
IIBI, IDFC Ins Cos/HFCs/CRAs/
Foreign / LAB / Coop
EXIM Bank, IL&FS, Credit Card Cos

03/30/09 Financial Services : IFS 8


Reserve Bank of India

Scheduled Banks
Commercial Banks Co-operatives
RRB's (96) & LABs (4)
Foreign Banks State
(29) CO-operatives
Urban (16)
Co-operatives
(52)

Public Sector Banks


(28) Private Sector Banks
(25)

Old (17) New (8)

State Bank of India


IDBI Bank Nationalised Banks (19)
& Associates (8)
03/30/09 Financial Services : IFS 9
The Banking Regulator - RBI
 Reserve Bank of India
(RBI): The Central Bank
 Controls Currency (Rupee)
 Manages Foreign Exchange
 Supervises and regulates the
Financial System
 Promotes Economic
Development
 Banker to the Central
Government
 Headquarters in Mumbai,
and 22 regional branches
 URL www.rbi.org.in

03/30/09 Financial Services : IFS 10


Reserve Bank of India
 Central Bank of the country
 Imperial Bank of India handled the functions earlier
 Hilton Young Commission recommendations
 The Reserve Bank of India Act, 1934
 Started as Share Holders’ Bank : Apr 01,1935
 The Banking Regulation Act, 1949
 RBI was nationalised in 1949
 Accounting Year July 01 to June 30
 Regulator, Adviser, Banker, Lender, etc
 Set up DICGC,UTI, IDBI, NABARD, SIDBI, EXIM
03/30/09 Financial Services : IFS 11
www.rbi.org.in
 Weekly Statistics as on Friday, July 04, 2008
 Total Assets/Liabilities : Rs 14,51,820 crores
 Total Forex Reserves : US $ 311.79 bn
 Agg Dem / Time Deposits : Rs.32,49,776 crs
 Total Investments : Rs. 10,07,948 crs
 Total Bank Credit : Rs. 23,92,447 crs
 Credit – Deposit Ratio : 73.62
 Bank Rate : 6 per cent
 Cash Reserve Ratio : 8.5 per cent
 Statutory Liquidity Ratio : 25 per cent
03/30/09 Financial Services : IFS 12
Indian Financial System
 Commercial Banks
28 Public Sector (8 SB Group,
19 Nationalised & IDBI Bank)
25 Private Sector (17 Old and 8 New)
2,800 plus Co-operative Banks !
96 RRBs, 4 Local Area Banks !!
29 Foreign Banks
 More than 70,000 bank branches
 Average popln served per branch : 15,000 !!!
 Over 30,000 ATMsFinancial
– on-site,
Services : IFS
off-site & Bio-Metric
13
03/30/09
Indian Financial System (2)

 Development Finance Institutions


LIC, GIC & its 4 Subsidiaries
UTI, DICGC, ECGC, EXIM Bank, ICICI,
IFCI, IDBI, IIBI, NABARD, SIDBI, NHB,
SHCIL, NSDL, CDSL, IIFCL, IRFC
SFCs, SIDCs, ITCOs, AFC, etc
STCI, DFHI, IDFC, IL & FS, etc
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Indian Financial System (3)
 Government Sector
National Savings Organisation
 (NSCs, NSS, IVPs, KVPs, PPF etc)

Post Office Savings, RD Accounts

Employees Provident Fund Orgn., etc.

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Indian Financial System (4)
 Non Banking Financial Companies
 Nidhi Companies
 Chit Fund Companies
 Investment Companies
 Hire Purchase Companies
 Lease Finance Companies
 Housing Finance Companies
 Stock Exchanges,., Broking Cos
 Credit Rating Agencies, RNBCs., MFIs.,
 Mutual Funds, CIBIL, ARCs, Insurance Cos
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State Bank Group
 STATE BANK OF INDIA – 1955
 Seven Subsidiaries in 1957
 STATE BANK OF HYDERABAD
 STATE BANK OF MYSORE
 STATE BANK OF BIKANER & JAIPUR
 STATE BANK OF TRAVANCORE
 STATE BANK OF INDORE
 STATE BANK OF PATIALA
 STATE BANK OF SAURASHTRA

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20 Public Sector Banks
 14 (July 1969) + 6 (February 1980) – 1 (New Bank of India
merged with PNB in 1993) = 19 NATIONALISED BANKS

4. ANDHRA BANK
5. ALLAHABAD BANK
6. BANK OF BARODA
7. BANK OF INDIA
8. CANARA BANK
9. CENTRAL BANK OF INDIA
10. DENA BANK
11. INDIAN BANK
 ………………………………………
 ………………………………………
20. IDBI Bank
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17 Old Private Sector Banks
 Bank of Rajasthan 10. Lakshmi Vilas Bank
 Catholic Syrian Bank 11. Nainital Bank Ltd
 City Union Bank Ltd 12. Ratnakar Bank Ltd
 Dev’ment Credit Bank
13. Sangli Bank Ltd
 Dhanalakshmi Bank
14. SBI Comm’l & Int’l Bank
 Federal Bank
 J & K Bank Ltd 15. South Indian Bank Ltd
 Karnataka Bank Ltd 16. TN Mercantile Bank Ltd
 Karur Vysya Bank Ltd 17. ING Vysya Bank Ltd.

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New Private Sector Banks - 1994
1. Centurion BANK OF PUNJAB Ltd.***
2. ICICI Bank (taken over Bank of Madura and ICICI, etc)
3. IDBI Bank (merged with IDBI in March 2005; taken over United Western
Bank in 2006)
4. INDUSIND BANK (taken over Ashok Leyland Finance Ltd ’04)
5. HDFC BANK (taken over Times Bank)
6. UTI BANK LTD (now named as AXIS Bank)
7. KOTAK MAHINDRA BANK (NBFC converted in Mar’03)
8. YES BANK (off shoot of Rabo Finance Corporation : commenced
operations in September 2004; IPO in Apr 05)

----------------------------------------------------------------------------------------------------------------
* TIMES BANK (Since merged with HDFC Bank-2000)
** GLOBAL TRUST BANK (since merged with OBC – 2004)
-----------------------------------------------------------------------------------------------------------------------------
*** Centurion Bank and Bank of Punjab Ltd merger in 2005 (CBOP)
**** Lord Krishna Bank Ltd merged with CBOP in 2007
***** CBOP (with Lord Krishna Bank) merged with HDFC Bank in 2008

03/30/09 Financial Services : IFS 20


Foreign Banks in India
 29 Foreign Banks having 273 Branches from 21
Countries; The Top 4 banks being
 Standard Chartered Bank (UK) – 83 brs
 HSBC Bank (Hong Kong) – 47 branches
 Citibank NA (USA) – 39 branches
 ABN AMRO Bank NV (Netherlands) – 28 brs
 Remaining 25 Foreign Banks – 80 Branches
 http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/81450

03/30/09 Financial Services : IFS 21


Financial Sector Reforms 1991
 Geographical spread of Bank branches
 Directed Investments / Credit Programs
 Administered Rates of Interest
 Problems of Recovery of Loans
 Deterioration in Quality of Assets
/Loans
 Erosion of Profits
 Low level of Computerisation
 Trade Union Issues
03/30/09 Financial Services : IFS 22
Indian Banking Sector - Reforms

03/30/09 Financial Services : IFS 23


Banking Reforms 1993 … 2
 L-P-G Policy of GOI since 1991
 Technological Changes all over
 New Products and Services : Competition
 Narasimham Committees - I / II on Financial / Banking
Sector Reforms (1991 & 1997)
 Capital Adequacy : IRAC Norms : NPAs
 Priority Sector Loans: Reduce from 40 to 10%
 Reduced SLR (from 40% to 25%); CRR (15% to 4%)
 Provisioning for all types of Assets (Standard & NPAs)?
 Benchmark Prime Lending Rates
 Enactment / Amendments to various laws
 Ombudsman Scheme, 1995

03/30/09 Financial Services : IFS 24


Banking Sector Reforms …3
 Market determined Rates of Interest
 No directed lending or investments
 Organisational Changes : Transparency
 4 way classification of Loan Accounts
 Provisioning for Losses o/a NPAs
 DRTs and DRATs and enactment, Lok Adalat
System and now Corporate Debt Reconstruction
 ALM and Risk Management (1999)
 Know Your Customer (KYC) in Banks (2002)
 Non Performing Assets definition revised from 4
(four) quarters (1993) dues in Principal & Interest
to 3 (three) (1994) to 2 (1995) quarters and now
from April 01, 2004 – just 90 days / 1 quarter !
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Banking Sector Reforms …….4
 SARFAESI Act in 2002 – Asset Reconstruction Cos
 Credit Information Bureau in 2005, SMERA in 2006
 Raghuram Rajan Committee on Financial Sector
Reforms in 2007
 Basel II norms for Bank Supervision from 2008 !
 More Foreign Banks / Branches from 2009
 Cross Selling, CRM, DSAs, Outsourcing,
 Internet Banking, Retail Banking, Mobile Banking
 Customer Service, Customer Care, Customer Delight
 Outsourcing, Franchisees, Recovery Agents,
Business Correspondents, allowed…………

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WTO & Financial Services-1995
 Opening up for Foreign Banks
 NBFCs in collaboration with MNCs
 Privatisation of Insurance Industry etc
 Gradual reduction in rates of Interest
 Greater inflow of FDI in Banking Sector
 Increase in inflow of FII investment
 Greater use of Technology &
Competition

03/30/09 Financial Services : IFS 27


PROGRESS OF COMMERCIAL BANKING

PARAMETERS 1950-51 June-’69 March - 07


NO OF COMMERCIAL BANKS 93 89 200

BRANCHES* (+ >30,000 ATMs) 2335 8,262 70,711*


RURAL BRANCHES NA 1,833 30,461
POPULATION PER BRANCH 153 64 16
(THOUSANDS )
DEPOSITS (IN CRORES) 881 4,646 25,98,823
ADVANCES (IN CRORES) 547 3,599 19,49,567
DEPOSITS AS % OF 9.6 NA NA
NATIONAL INCOME
PER CAPITA DEPOSIT NA Rs.88 Rs.21,388
PER CAPITA CREDIT NA Rs.66 Rs.15,610

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EVOLUTION OF BANKING SINCE 1950

Credit Credit/
Deposits Total Business
Year (Rs. in Deposit
(Rs. in Crores) (Rs. in Crores)
Crores) Ratio (%)

1950-51 882 547 1,429 62

1960-61 1,736 1,336 3,072 77

1970-71 5,906 4,684 10,590 79

1980-81 37,988 25,371 63,359 66

1990-91 1,92,541 1,16,301 3,08,842 60

2000-01 9,62,618 5,11,434 14,74,052 53

2006-07 25,94,259 19,23,192 45,17,451 74

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BANKING PROFILE AT METRO / URBAN / SEMI URBAN / RURAL (AS ON 31-3-2007)

Credit/
No of bank Deposits Credit
Geographical Segment Deposit
branches (Rs. In Crores) (Rs. In Crores)
ratio(%)
All India 70,711 25,98,823 19,49,567 75
Top 6 metros 6,795 11,89,536 11,03,937
93
(9.62%)* (45%) (56%)
Metro Centres 11566 14,52,599 12,88,833
88
(16.3%) (56%) (66%)
Top 100 Centres
17,578 17,89,500 15,08,095
(inclusive of metro 84
(24.8%) (68.8%) (77.3%)
Centres)
Urban Centres inclusive
24,215 19,83,868 16,04,999
of metro & other 81
(34%) (76%) (82%)
Centres
Semi-urban cenres 16,035 3,56,827 1,89,783
53
(22%) (13.7%) (9.73%)
Rural Centres 30,461 2,58,128 1,54,785
60
(44%) (10.3%) (8.1%)
03/30/09 Financial Services : IFS 30
Growth of Banking Industry over the last five and half years
Deposits Credit % of CD
No. of Branches
Geographica (Rs. in Crores) (Rs. in Crores) Ratio
l
Segment Sept. March Sept. March Sept. March Sept Mar
2001 2007 2001 2007 2001 2007 2001 2007

All India 66,25


70,711 10,11,460 25,98,823 5,67,706 19,49,567 56 75
5
Metro
Centres 8,617 11,566 4,29,960 14,52,599 3,47,772 12,88,833
81 88
(13%) (16%) (42%) (56%) (61%) (66%)

Top 100
Centres 14,86
17,578 5,95,794 17,89,500 4,27,630 15,08,095
(inclusiv 6 71 84
(24%) (59%) (68%) (75%) (77%)
e of (22%)
metros)
Urban
Centres 19,10
24,215 6,64,879 19,83,868 4,44,095 16,04,999
inclusive 9 66 81
(34%) (66%) (76%) (78%) (82%)
of metro (29%)
& others
Semi-urban 14,60
16,035 1,98,631 3,56,827 64,318 1,89,783
cenres 8 32 53
(22%) (19.6%) (13.7%) (11%) (9.7%)
(22%)
32,53
Rural 30,461 1,47,950 2,58,128 59,293 1,54,785
8 40 60
Centres (44%) (14.6%) (10.3%) (10.4%) (8.1%)
(49%)
03/30/09 Financial Services : IFS 31
ATMs

Electronic
Banking

Branch
Banking
Branch 3
Branch 2

Branch 1
Head Office
Branch 4

Branch 5
Branch n

Branch 6

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Cheque Truncation

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TECHNOLOGY & DEVELOPMENTS
 ALPMs  ALM & RM, MIS
 CLEARING HOUSE  CRM, KYC, AML
 CAR, CRR, SLR, PS, NPAs  Core Banking Solutions
 CREDIT/DEBIT CARDS  KISAN /SME CARD
 NICNET, I-NET, RABMN  CREDIT INFO BUREAU
 INFINET, RBINET  DISASTER MANAGEMENT
 BANKNET, NDS, SFMS  CREDIT RATING
 MICR, ATMs, SWIFT  CYBER LAWS
 DEMAT, IT ACT-2000  CYBER CRIMES – HACKING,
 INTERNET BANKING PHISHING, PHARMING, TROJAN,
SKIMMING, ETC
 ECS, EFT, SEFT, RTGS
 SMART CARDS
 CROSS SELLING
 Cheque Truncation
 SECURITISATION

03/30/09 Financial Services : IFS 34


ICICI Bank – A Case Study

03/30/09 Financial Services : IFS 35


03/30/09 Financial Services : IFS 36
Market Shares in Banking (excluding R R Bs)
Total
Type of Banks Deposits Capital Reserves Assets

SB Group (8) 27.85 4.33 28.10 28.03

Nat’ Banks (19) 49.02 54.97 37.27 44.89

Old Private (21) 6.51 2.71 7.18 5.96

New Private (9) 8.24 9.51 13.13 10.90

Foreign (34) 4.94 18.82 11.32 6.60


03/30/09 Financial Services : IFS 37
Financial Services / Products
 Deposits, Loans and Remittances
 Letters of Credit, Bank Guarantees
 Credit (Debit, Smart, Charge, Combo) Cards
 Insurance – Life and Non-Life, Term Insurance
 Safe Deposit, Safe Custody and SD Lockers
 Portfolio Management, Sale of Gold, Micro Fin
 NRI / Tax Advisory Services, Wealth
Management, Personal Finance to HNIs
 Rail ticket booking, payment of Utility bills

03/30/09 Financial Services : IFS 38


Financial Services……...2
 Lease, Hire Purchase, Bill Discounting
 Factoring, Forfaiting, Securitisation, etc
 Asset Reconstruction Companies
 Car / Consumer Loans, Housing finance etc
 Demat facility, e-Stock Broking, IPO Fin., etc
 Forex Broking, Merchant Banking, M & A
 Mutual Funds, Infrastructure Funding
 Private Equity, Venture Capital
 Credit Rating, Credit Info, Bancassurance
03/30/09 Financial Services : IFS 39
03/30/09 Financial Services : IFS 40
03/30/09 Financial Services : IFS 41
Bank Credit (% to GDP)

03/30/09 Financial Services : IFS 42


03/30/09 Financial Services : IFS 43
03/30/09 Financial Services : IFS 44
Banking – Asset Quality

03/30/09 Financial Services : IFS 45


References...Books
 Avadhani, VA - Marketing of Financial Services
 Guruwamy S - Financial Services and System -
Thomson Learning, Asia
 Jessica Keyes, Editor - Handbook of Technology in
Financial Services – 1999
 John Marsh - Managing Financial Services
Marketing : 1988 /1992
 Khan, M Y - Financial Services, TMH
 Meiden A - Marketing Financial Services
 Ravi Shanker - Services Marketing : (2002)
 Trend and Progress of Banking in India : RBI - 2007

03/30/09 Financial Services : IFS 46


References...Papers/Articles...(2)
 Chowdari Prasad - Impact of Economic Reforms on Indian
Banking – Jan 2002
 Chowdari Prasad & KSS Rao – Can Public Sector Banks
compete with Foreign / Private Banks in India? A Statistical
Analysis – December 2003
 Chowdari Prasad – Functioning of Foreign Banks in India –
February 2004
 Chowdari Prasad & KSS Rao – Private Sector Banks in
India – A SWOT Analysis – Dec 2004
 Chowdari Prasad, Biswajeet Mohanty & Umesh Nazkani –
Problems and Prospects in Retail Banking in India – April
2005
 Chowdari Prasad & KSS Rao – Sustainability of Foreign
Banks in India – A Statistical Analysis – December 2005
03/30/09 Financial Services : IFS 47
Questions please?

THANK YOU EVERY ONE


03/30/09 Financial Services : IFS 48
“CHALLENGES AND POTENTIAL OF
INDIA’S BANKING SYSTEM”

03/30/09 Financial Services : IFS 49


Reserve Bank of India

Scheduled Banks
Commercial banks Co-operatives
RRB's (96)
Foreign Banks State
(29) CO-operatives
Urban (16)
Co-operatives
(52)

Public Sector Banks


(28) Private Sector Banks
(25)

Old (18) New (7)

State Bank of India Nationalised & PSB


& associates (8) (20)
03/30/09 Financial Services : IFS 50
USAGE OF BANKING SERVICES BY INDIAN HOUSE HOLDS (HHs)

Source: CENSUS OF INDIA 2001 Figures in Crore

% of % of
Total % of
RURAL Total URBAN Total
No. HHs
HHs HHs

Total No. of HHs


19.19 13.83 72 5.36 28

No. of HHs which


use banking
services 6.8 35.5 4.16 30.1 2.65 49.5

03/30/09 Financial Services : IFS 51


STATE-WISE USAGE OF BANKING BY HOUSEHOLDS

Area No. of House Holds (in Households Having Bank


Millions) Accounts (Per Cent)

Urban Rural Total Urban Rural Total

India 53.7 138.3 192 49.5 30.1 49.5

AP 4.2 12.7 16.9 30.4 33.1 31

Tamil Nadu 5.9 8.3 14.2 17.7 30 22.8

Maharashtra 8.1 11 19.1 60.0 39.4 48.1

Gujarat 3.8 5.9 9.7 50.3 29.9 37.8

UP 5.2 20.6 25.8 53.0 41.9 44.1

West Bengal 4.6 11.2 15.8 59.4 27.6 36.8

Karnataka 3.6 6.7 10.3 49.0 35.2 40

Bihar 1.3 12.7 14 47.2 18.6 21.3

Delhi 2.4 0.2 2.6 51.3 46.5 51.3


03/30/09 Financial Services : IFS 52
THE PAST & FUTURE TRENDS OF COMMERCIAL
BANKING

PARAMETERS 1950-51 March VISION


2007 2010
NO. OF COMMERCIAL BANKS 93 200 ?

BRANCHES 2335 70,711 ?


POPULATION PER 153 16 ?
BRANCH(THOUSANDS
DEPOSITS (IN CRORES) 881 25,98,823 35,00,000

ADVANCES (IN CRORES) 547 19,49,567 19,00,000

DEPOSITS AS % OF NATIONAL 9.6 60 ?


INCOME
03/30/09 Financial Services : IFS 53
SECTOR WISE GROWTH RATES OF REAL GDP ( at 1999-2000 Prices)
(Percent)
S.No Particulars 2004-05 2005-06 2006-07
Agriculture and allied
1 Activities
20.20 19.70 18.50
1.1 Agriculture (0) (6.00) (2.70)
19.70
19.60 19.40
2 Industry (8.40) (8.00) (11.00)
2.1 Mining and Quarrying 7.50 3.60 5.10
2.2 Manufacturing 8.70 9.10 12.30
2.3 Electricity, Gas, and Water Supply 7.50 5.30 7.40
60.20 60.90 61.8
3 Services (10.00) (10.30) (11.00)
Trade ,Hotels, Restaurants,
Transport ,Storage and
3.1 communication 10.90 10.40 13.00
Financing, Insurance, Real Estate
3.2 and Business Services 8.70 10.90 10.60
Community ,Social and
3.3 personal Services 7.90 7.70 7.80
3.4 Construction 14.10 14.20 10.70
4 Real GDP at Factor Cost 7.50 9.00 9.40
03/30/09 Financial Services : IFS 54
FOREIGN DIRECT INVESTMENT
($ millions)
Country 2000 2001 2002 2003 2004 2005
India 3584 5462 5626 4585 5474 6598
Argentina 10418 2166 2149 1652 4274 4730
Brazil 32779 22457 16590 10144 18166 15193
Chile 4860 4200 2550 47077 7173 6667
China 38399 44241 49308 4307 54936 79127
Indonesia -4550 -2977 145 -597 1896 5260
Malaysia 3788 554 3203 2473 4624 3966
Mauritius 266 -28 32 63 14 39
Mexico 17773 27142 19044 15256 18941 18772
Philippines 2240 195 1542 491 688 1132
Russian
Federation
South 2714 2748 3461 7958 15444 15151
Africa 969 7270 735 783 701 6257
Thailand 3366 3892 953 1949 1718 4527
03/30/09 Financial Services : IFS 55
FOREIGN PORTFOLIO INVESTMENT
($ millions)
Country 2000 2001 2002 2003 2004 2005
India 2345 2853 1022 8216 8835 11968
Argentina -3227 31 -116 65 -86 -48
Brazil 3076 2481 1981 2973 2081 6451
Chile -427 -217 -320 318 8 1635
China 6912 849 2249 7729 10923 20346
Indonesia -1021 442 877 1131 2043 -165
Malaysia 0 0 -55 1340 4239 -1200
Mauritius -4 -9 -1 8 19 36
Mexico 447 151 -104 -123 -2522 3353
Philippines -202 125 227 501 518 1461
Russian
Federation
South 150 542 2626 422 233 -215
Africa 4169 -962 -388 685 6661 7230
Thailand 901 352 539 1787 1319 5665
03/30/09 Financial Services : IFS 56
FOREIGN EXCHANGE RESERVES
US $ million

AS AT END OF MARCH TOTAL


1993 10,128
1995 22,517
2000 38,694
2002 54,716
2004 1,12,959
2005 1,41,514
2006 1,51,622
2007 1,99,179
5th October-07 2,51,330
03/30/09 Financial Services : IFS 57
• At about $900 billion, India's stock of financial
assets—including bank deposits, equities, and
debt securities—is one-fifth the size of China's.

• By 2010, China's financial stock will reach $9


trillion, while India's will remain around $ 1.9
trillion.

03/30/09 Financial Services : IFS 58


•India's financial system is more effective than China's,
because the market share of more efficient foreign and
privately owned banks in India has crept up to 25
percent.

• Many nonperforming loans have been cleaned up,


and while the true figure is hard to determine, they are
now estimated at around 9 percent of all lending,
compared with up to 40 percent in China.

03/30/09 Financial Services : IFS 59


DOMESIC
DOMESIC
SAVINGS
SAVINGS
COUNTRY COUNTRY AS% OF
AS% OF
GDP
GDP

CHINA 47.6 BRAZIL 25.10


SINGAPORE 46.7 INDIA 32.40
MALASIA 42.6 GERMANY 22.10
THAILAND 32 FRANCE 21.10
SOUTH KOREA 31.9 ITALY 20.10
CHILE 30.5 MEXICO 18.20
RUSSIA 27.8 TURKEY 15.60
JAPAN 25.6 USA 14.00

03/30/09 Financial Services : IFS 60


DOMESIC
DOMESIC
CREDIT AS
CREDIT AS
COUNTRY % OF GDP COUNTRY
% OF GDP
(2005)
(2005)

BRAZIL 83 MEXICO 35
CANADA 206 RUSSIAN 21
FEDERATION
CHINA 86 SOUTH AFRICA 185
FRANCE 110 INDIA 51
GERMANY 136 THAILAND 111
INDONESIA 47 TURKEY 57

JAPAN 319 UNITED 168


KINGDOM
MALAYSIA 144 UNITED STATES 224

03/30/09 Financial Services : IFS 61


DISTRIBUTION OF HOUSEHOLD SAVINGS
DISTRIBUTION OF HOUSEHOLD PERCENTAGE OF SHARE
SAVINGS
SAVINGS IN PHYSICAL ASSETS

55%
LAND

HOUSES

CATTLE

GOLD

SAVINGS IN FINANCIAL ASSETS

NET DEPOSITS

45%
NET CLAIMS ON GOVT

PROVIDENT FUND & PENSIONS

LIC FUNDS

CURRENCY

SHARES

03/30/09 Financial Services : IFS 62


Why is the stock of financial assets so small?

Not because we save too little: although the country's


gross national savings rate is half of China's, it isn't
bad by international standards.

Despite the fact that we should save more, the main


challenge is to capture more of the existing savings

03/30/09 Financial Services : IFS 63


•Instead of putting money into financial assets, Indian
households invest more than half of their savings in physical ones
such as land, houses, cattle, and gold . In rural areas, the
proportion is even higher. In fact, India's people—denied of
accessibility to formal financial system—are the world's
largest consumers of gold at 800 tonnes per annum.

• They possess $200 billion of it, equal to nearly half of the


country's bank deposits, and last year bought $10 billion worth,
nearly the amount of the foreign direct investment India(13 Billion
$ in 2006)received. Households could earn higher returns by
investing in financial assets, and the country would be
better off if savings were pooled to finance more productive
investments.

03/30/09 Financial Services : IFS 64


The government reckons that $500 billion
will be needed over the 11th Five Year Plan to
upgrade the country's crumbling
infrastructure.

To sustain the GDP growth at above 9


percent and given today's investment rate of
32 percent—an additional $40 billion savings
per annum are required for infrastructure
requirements.

03/30/09 Financial Services : IFS 65


Domestic savings are the only plausible source of
extra funding, so more of them must be mobilized.

Foreign direct investment alone won't fill the gap:


although China is the world's largest recipient, for
example, the $60 billion FDI it received in 2004 was
only 10 percent of domestic savings. India’s policy, in
contrast to China, remains still ambivalent about FDI
in most sectors and FDI alone would not bridge the
gap.

03/30/09 Financial Services : IFS 66


More of the savings that India's financial system
captures could finance investment if banks reduced
their cut from matching savers and users of capital.
Intermediation costs remain high mainly because
productivity of most of Indian Banks is 10 percent of US
levels. India's new private banks achieved an average
productivity of 55 percent of US levels.

03/30/09 Financial Services : IFS 67


 Domestic savings are the only plausible source of
extra funding, so more of them must be mobilized

 Moving all Indian banks toward their productivity


potential of 90% of US levels - ambitious but
achievable goal – would unleash $2.5 billion a year in
savings. Interest rates could fall by 1 percent

 With full reform, it could generate up to 7.5 percent


of GDP and employ 1,500,000 people, as well as
boost investment and growth throughout the
economy.

03/30/09 Financial Services : IFS 68


What would be the factors propelling
changes in financial system?
 Enhanced Customer Awareness
 Growing contribution of Services to GDP
 Infrastructural Requirements
 Impact of WTO & Globalisation
 Basel II Norms
 Consolidation through M & As
 Micro Finance
 Financial Inclusion
 More Foreign Competition in 2009
 Demands of Young Population
03/30/09 Financial Services : IFS 69
03/30/09 Financial Services : IFS 70

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