INTERIM REPORT ON

FUNDAMENTAL ANALYSIS OF BANKING INDUSTRY

BY
Balpreet Kaur Ratra ( 10BSP1076 )

INTERIM REPORT
ON FUNDAMENTAL ANALYSIS OF BANKING INDUSTRY
By Balpreet Kaur Ratra ( 10BSP1076 ) A report submitted in partial fulfillment of the requirements of PGPM program of the IBS Bangalore

Submission Date: 11Jan2012

Table of Contents 1. Introduction About the Project 1.1 Introduction of the Project 1.2 Objective of the Project 1.3 Limitation of the Project 1.4 Research Methodology 2 Fundamental Analysis 2.1 2.2 2.3 Meaning Approaches of Fundamental Analysis Steps of Fundamental Analysis

3 Economic Analysis 3.1 3.2 3.3 State of Global Economy Overview of Indian Economy Key Economic Indicators of Indian Economy

4 Industry Analysis 4.1 4.2 4.3 4.4 4.5 4.6 Meaning Overview of Banking Industry in India Monetary Policy of India Performance of Banking Industry Growth of Industry Challenges for Industry

5. References

INTRODUCTION OF PROJECTFundamental analysisAny investors who go to systematic investment, he/she would like to know, the complete scenario of the industry. It is interesting to know how the fundamental analysis helps to forecast the price of equity. So Fundamental analysis is very helpful to investors, which is reflected in investment.

Many investors use fundamental analysis alone or in combination with other tools to evaluate stocks for investment purposes. The goal is to determine the current worth and, more importantly, how the market values the stock.

Earnings Its all about earnings. When one come to the bottom line, thats what investors want to know. How much money is the company making and how much is it going to make in the future. Earnings are profits. It may be complicated to calculate, but thats what buying a company is about. Increasing earnings generally leads to a higher stock price and, in some cases, a regular dividend. When earnings fall short, the market may hammer the stock. Every quarter, companies report earnings. Analysts follow major companies closely and if they fall short of projected earnings, sound the alarm.

SCOPE OF THE STUDY :The project entitled Fundamental Analysis of Banking Industry in India will enable from the investors point of view to refer the performance of the Banks, their relative growth and thereby decide on to buy or sell the particular slab. This study will also help to identify the bank that is lagging behind in its performance.

Objective of the project

Analysis of fundamentals to acquire knowledge of the Banking Industry To find out how the judgment is taken by the analyst on the basis of fundamental analysis of the company. To establish link between expected share price with the projected companys financial performance. To do the analysis of the different Banks in order to know the financial position of the companies.

MethodologyStudy of available Secondary Data related to Banking industry of India. Study of financial products provided by banks. Understanding of basics of fundamental analysis. Collection of Data from Secondary sources about Economy, Banking Industry. Doing fundamental analysis on the basis of collected Data and give conclusion.

Limitations of the studyThis study is based on the secondary data collected from various secondary data sources; Due to paucity of time important factors has been analysed and discussed. The approach to behavior of share price is based on long time view.

MAIN TEXT-What is Fundamental Analysis?

Fundamental analysis is the examination of the underlying forces that affect the well being of the economy, industry groups, and companies. As with most analysis, the goal is to derive a forecast and profit from future price movements.

At the company level, fundamental analysis involves management, business concept and competition.

examination of financial data,

At the industry level, an examination of supply and demand forces for the products offered.

For the national economy, fundamental analysis focus on economic data to assess the present and future growth of the economy.

To forecast future stock prices, fundamental analysis combines economic, industry, and company analysis to derive a stock's current fair value and forecast future value. If fair value is not equal to the current stock price, fundamental analysts believe that the stock is either over or under valued and the market price will ultimately gravitate towards fair value. Fundamentalists do not heed the advice of the random walkers and believe that markets are weak-form efficient. By believing that prices do not accurately reflect all available information, fundamental analysts look to capitalize on perceived price discrepancies.

Economic analysis with favorable GDP with savings, investment, stable prices, balance of payment, and infrastructure facilities which provides a best environment for common stock investment.

Industrial analysis growth follow a pattern. This replicates the banking industry monitory policy, CPR, SLR, and the flow of the industry.

Company analysis explains of the profile of the companies and then deals with financial statement analysis of the companies.

Approaches of Fundamental Analysis: Investors can use either a top-down or bottom-up approach:

The top-down investor starts his analysis with global economics, including both international and national economic indicators, such as GDP growth rates, inflation, interest rates, exchange rates, productivity, and energy prices. One narrows ones search down to regional/industry analysis of total sales, price levels, the effects of competing products, foreign competition, and entry or exit from the industry. Only then does he narrow his search to the best business in that area.

The bottom-up investor starts with specific businesses, regardless of their industry/region.

Steps to fundamental Analysis: The most common way that fundamental analysis is done in is in three steps:

1. Economic Analysis:-

2. Industry Analysis: -

3. Company Analysis:-

ECOMONIC ANALYSIS
The level of economy has an impact on investment in many ways. If the economic growth rapidly, the industry can also be expected to show rapid growth and vice versa. When the level of economic activity is low, stock price are low, and when the level of economic activity is high the stock price are high reflecting the prosperous outlook for sales and profit of the firms vigorous growth with strong macroeconomic fundamentals has characterized developments in stock market.

The economy is like the tide and the various industry groups and individual companies are like boats. When economy expands most industry groups and companies benefits and grows.When the economy decline, most sectors and companies usually suffer. The stock market does not operate in a vacuum it is an integral part of the whole economy of a country.

To gain an insight into the complexities of stock market one needs to develop a sound economic understanding and be able to interpret the impact of important economic indicators on stock markets.

The following are some important factors which should be taken into account while doing fundamental analysis: Economic Growth Per capita income Industrial Production Inflation Interest Rates Foreign Exchange Reserves Budgetary Deficit Domestic Savings and Investment Tax Rates Infrastructure Political Situation

State of Global EconomyThe global economy continues to recover amidst ongoing policy support and improving financial market conditions. The recovery process is led by EMEs, especially those in Asia, as growth remains weak in advanced economies. The global economy continues to face several challenges such as high levels of unemployment, which are close to 10 per cent in the US and the Euro area. Despite signs of renewed activity in manufacturing and initial improvement in retail sales, the prospects of economic recovery in Europe are clouded by the acute fiscal strains in some countries. Core measures of inflation in major advanced economies are still moderating as the output gap persists and unemployment remains high. Inflation expectations also remain well-anchored. In contrast, core measures of inflation in EMEs, especially in Asia, have been rising. This has prompted central banks in some EMEs to begin phasing out their accommodative monetary policies. Growth In its World Economic Outlook Update for January 2010, the International Monetary Fund (IMF) projected that global growth will recover from (-) 0.8 per cent in 2009 to 3.9 per cent in 2010 and further to 4.3 per cent in 2011. Organisation for Economic Co-operation and Developments (OECD) composite leading indicators (CLIs) in February 2010 continued to signal an improvement in economic activity for the advanced economies. Three major factors that have contributed to the improved global outlook are the massive monetary and fiscal support, improvement in confidence and a strong recovery in EMEs.

US GDP rose by 5.6 per cent on an annualised basis during Q4 of 2009. However, household spending remains constrained by high unemployment at 9.7 per cent. Though business fixed investment is turning around and housing starts are picking up, investment in commercial real estate is declining. Growth in the euro area, on a quarter-on-quarter basis, was 0.1 per cent in Q4 of 2009. It may remain moderate in 2010 because of the ongoing process of balance sheet adjustment in various sectors, dampened investment, low capacity utilisation and low consumption. Though exports are improving and the decline in business fixed investment is moderating, several euro-zone governments are faced with high and unsustainable fiscal

imbalances which could have implications for medium and long-term interest rates. In Japan, improved prospects on account of exports have been offset by the levelling off of public investment and rise in unemployment.

Amongst EMEs, China continues to grow at a rapid pace, led mainly by domestic demand. Malaysia and Thailand have recovered to register positive growth in the second half of 2009. Indonesia recorded positive growth throughout 2009.

Overview of Indian EconomyThe Indian economy is one of the fastest growing economies and is the 12th largest in terms of the market exchange rate at $1,242 billion (India GDP). In terms of purchasing power parity, the Indian economy ranks the fourth largest in the world. However, poverty still remains a major concern besides disparity in income. The Indian economy has been propelled by the liberalization policies that have been instrumental in boosting demand as well as trade volume. The growth rate has averaged around 7% since 1997 and India was able to keep its economy growing at a healthy rate even during the 20072009 recession, managing a 5.355% rate in 2009 (India GDP Growth). The biggest boon to the economy has come in the shape of outsourcing. Its English speaking population has been instrumental in making India a preferred destination for information technology products as well as business process outsourcing. The economy of India is as diverse as it is large, with a number of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its livelihood from this area. However, the service sector is greatly expanding and has started to assume an increasingly important role. The fact that the Indian speaking population in India is growing by the day means that India has become a hub of outsourcing activities for some of the major economies of the world including the United Kingdom and the United States. Outsourcing to India has been primarily in the areas of technical support and customer services.

Other areas where India is expected to make progress include manufacturing, construction of ships, pharmaceuticals, aviation, biotechnology, tourism, nanotechnology, retailing and telecommunications. Growth rates in these sectors are expected to increase dramatically. Despite the liberalization the economy still largely controlled by the government and the 500+ major companies it owns, which together are worth around US$500 billion, or around 40% of GDP at current exchange rates. Thanks to past profligate spending, government debt is running at around 80% of GDP. Servicing the interest payments on that debt is now the single largest component of the federal budget. Fiscal discipline and deficit reduction is therefore vital for India's future prospects. It is also crucial to understand that India is driven primarily by domestic (consumer) consumption. This stands in marked contrast to Japan, the Asian Tigers and now China, all of whom have followed the export-oriented model. With the massive growth of the Indian middle class, this vast country may become Asia's first major 'buy' economy.

Some of the Key Economic Indicators of Indian EconomyIndia GDP Growth Rate-

The Gross Domestic Product (GDP) in India expanded at an annual rate of 7.20 percent in the last quarter. India Gross Domestic Product is worth 1217 billion dollars or 1.96% of the world economy, according to the World Bank. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of

India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points.

India Interest Rate-

Year 2010 2009 2008 2007

Jan 3.25 4.05 6.00 6.00

Feb 3.25 4.00 6.00 6.00

Mar 3.34 3.55 6.00 6.00

Apr 3.55 3.39 6.00 6.00

May 3.25 6.00 6.00

Jun 3.25 6.00 6.00

Jul 3.25 6.00 6.00

Aug 3.25 6.00 6.00

Sep 3.25 6.00 6.00

Oct 3.25 6.00 6.00

Nov 3.25 6.00 6.00

Dec 3.25 5.24 6.00

* The table above displays the monthly average.

India benchmark interest rate stands at 3.75 percent. In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase rate.

India Inflation Rate

The inflation rate in India was 14.86 percent in February of 2010. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy. This page includes: India Inflation Rate chart, historical data and news.

Year 2010 2009 2008 2007

Jan 16.22 10.45 5.51 6.72

Feb 14.86 9.63 5.47 7.56

Mar Apr May Jun Jul 8.03 7.87 6.72 8.70 8.63 7.81 7.75 6.67 6.61

Aug

Sep

Oct

Nov

Dec

9.29 11.89 11.72 11.64 11.49 13.51 14.97 7.69 8.33 9.02 9.77 10.45 10.45 9.70 5.69 6.45 7.26 6.40 5.51 5.51 5.51

* The table above displays the monthly average.

The average inflation of India in 2011: 9.08 %

India Industrial Production

Industrial Production in India expanded 15.10 percent during the last surveyed month. Industrial production measures changes in output for the industrial sector of the economy which includes manufacturing, mining, and utilities. Industrial Production is an important indicator for economic

forecasting and is often used to measure inflation pressures as high levels of industrial production can lead to sudden changes in prices.

Year 2010 2009 2008 2007

Jan 16.70 1.00 6.20 11.60

Feb 15.10 0.20 9.50 11.00

Mar

Apr

May

Jun Jul

Aug

Sep

Oct

Nov

Dec

0.30 1.10 2.10 8.30 7.20 10.60 9.30 10.20 12.00 17.60 5.50 6.20 4.40 5.40 6.40 1.70 6.00 0.10 2.50 -0.20 14.80 11.30 10.60 8.90 8.30 10.90 7.00 12.20 4.90 8.00

* The table above displays the monthly average

FDI in IndiaForeign direct investment (FDI) is probably one of the most significant factors leading to the globalization of the international economy. FDI inflows to the developing countries increased remarkably in the 1990s and now accounts for about 40 per cent of global FDI. Improved global sentiment and strong industrial output numbers in India are increasingly attracting foreign investors in the country. Other factors being attributed to the revival in foreign direct investment (FDI) in recent times include increasing consumer confidence.

India has been ranked at the third place in global foreign direct investments this year, following the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years, India attracted FDI inflows of US$ 1.74 billion during November 2009, a 60 per cent increase over the US$ 1.08 billion achieved in same month last year. The cumulative amount of FDI inflows from August 1991 to December 2009 stood at US$ 127.46 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP). India attracted FDI equity inflows of US$ 1.54 billion during December 2009. On a cumulative basis, FDI equity inflows of US$ 20.92 billion were recorded during April-December 2009. India's FDI inflows touched US$ 26.5 billion in the April-December period last fiscal. The country has attracted FDI worth US$ 23.82 billion in the January-October 2009 period and October 2009 alone witnessed a 56 per cent year-on-year jump in FDI with inflows of US$ 2.33 billion, according to the DIPP.The services sector comprising financial and non-financial services attracted FDI worth US$ 3.54 billion during April-December 2009-10, while computer software and hardware sector garnered about US$ 595 million during the said period.

Foreign Exchange ReservesForeign Exchage reserves is very important for any economy as it is the main indicator of an economy when it comes to comparison with other economies in global front. Foreign exchange reserves increased by US$ 11 billion as against a decline of US$ 20 billion during the corresponding period a year ago. Foreign exchange reserves stood at US$ 279 billion as on March 31, 2010. The six-currency trade-based real effective exchange rate (REER) (199394=100) appreciated by 15.5 per cent during 2009-10 up to February as against 10.4 per cent depreciation in the corresponding period of the previous year. According to the latest data released by the Reserve Bank of India, the value of gold in reserves rose $551 million to touch $18,537 million. Foreign currency assets comprising dollars, pounds and euro, among others, on the other hand dipped $354 m during the week. Special Drawing Rights (SDR) reserve currency with the International Monetary Fund and the reserve capital with the IMF dipped by $6m and $34m, respectively, during the week.

In the banking sector, banks have again started parking funds in mutual funds in the absence of lending opportunities during this time of the year. They parked an additional Rs 766 crore during the fortnight ended April 23 to take their total MF exposure to Rs 1,06,285 crore.

FISCAL POLICY The fiscal policy of 2010-11 is being guided by the principles of gradual adjustment from the fiscal expansion undertaken during 2008-09 and 2009-10. The adjustment path is being so calibrated that it would not affect the revival process and at the same time stabilize the debt to GDP ratio of the Government in the medium term. In the Medium Term Fiscal Policy Statement of 2009-10, the Government had enumerated the roadmap for fiscal consolidation during 201011 and 2011-12. The Government is adhering to these commitments made in July 2009 and has also benefitted from the recommendations of the 13th Finance Commission on fiscal consolidation. Accordingly fiscal deficit in BE 2010-11 has been reduced to 5.5 per cent of GDP. This correction of fiscal deficit is attributed to reduction in total expenditure by 0.6 per cent of GDP (from 16.6 per cent in BE 2009-10 to 16.0 per cent in BE 2010-11), increase in gross tax revenue by 0.4 per cent of GDP (from 10.4 per cent in BE 2009-10 to 10.8 per cent in BE 2010-11) and increase in non debt capital receipt by 0.6 per cent of GDP (from 0.1 per cent in BE 2009-10 to 0.7 per cent in BE 2010-11). All the above numbers are with reference to the revised GDP numbers.

INDUSTRY ANALYSISMeaningThe purpose of industry analysis is to review prevailing conditions within specific industry and its segments. The company's industry obviously influences the outlook for the company. Even the best stocks can post mediocre returns if they are in an industry that is struggling. It is often said that a weak stock in a strong industry is preferable to a strong stock in a weak industry. To assess the industry group potential, an investor would want to consider the overall growth rate, market size, and its importance to economy. While the individual company is still important, its industry group is likely to exert as much as, or more, influence on the stock price. When stock move the usually move as groups; there are very few lone guns out there. An understanding of the industry sector involved, including the maturity of the sector and any cyclical effects that the overall economies have on it, is also necessary. The followings are some important factors which should be considered in Fundamental Analysis Growth: A growing industry gives room for profitability. Profitability: Average profitability of the industry should be attractive. Competition and Market share: Technology trends Government Policy

Indian Banking IndustryOverview The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold.

After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-ofthe-art technology, which in turn helps them to save on manpower costs and provide better services.

Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The pace of transformation has been more

significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with Singapore, may have an impact on the shape of the banking industry. Banks will also have to cope with challenges posed by technological innovations in banking. Banks need to prepare for the changes. In this context the need for drawing up a Road Map to the future assumes relevance. The idea of setting up a Committee to prepare a Vision for the Indian Banking industry came up in IBA, in this background.

Monetary Policy in IndiaIn the wake of the global economic crisis, the Reserve Bank pursued an accommodative monetary policy beginning mid-September 2008. This policy instilled confidence in market participants, mitigated the adverse impact of the global financial crisis on the economy and ensured that the economy started recovering ahead of most other economies. However, in view of the rising food inflation and the risk of it impinging on inflationary expectations, the Reserve Bank embarked on the first phase of exit from the expansionary monetary policy by terminating some sector-specific liquidity facilities and restoring the statutory liquidity ratio (SLR) of scheduled commercial banks to its pre-crisis level in the Second Quarter Review of October 2009.

The process was carried forward by the second phase of exit when the Reserve Bank announced 75 basis points increase in the CRR in the Third Quarter Review of January 2010. As inflation continued to increase, driven significantly by the prices of non-food manufactured goods, and exceeded the Reserve Banks baseline projection of 8.5 per cent for March 2010 (made in the Third Quarter Review), the Reserve Bank responded expeditiously with a mid-cycle increase of 25 basis points each in the policy repo rate and the reverse repo rate under the LAF on March 19, 2010.

The monetary policy response in India since October 2009 has been calibrated to Indias specific macroeconomic conditions. Accordingly, our policy stance for 2010-11 has been guided by the following three major considerations: First, recovery is consolidating. The quick rebound of growth during 2009-10 despite failure of monsoon rainfall suggests that the Indian economy has become resilient. Growth in 2010-11 is projected to be higher and more broad-based than in 2009-10. In its Third Quarter Review in January 2010, the Reserve Bank had indicated that our main monetary policy instruments are at levels that are more consistent with a crisis situation than with a fast recovering economy. In the emerging scenario, lower policy rates can complicate the inflation outlook and impair inflationary expectations, particularly given the recent escalation in the prices of non-food manufactured items. Despite the increase of 25 basis points each in the repo rate and the reverse repo rate, our real policy rates are still negative. With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalising our policy instruments.

Second, inflationary pressures have accentuated in the recent period. More importantly, inflation, which was earlier driven entirely by supply side factors, is now getting increasingly generalised. There is already some evidence that the pricing power of corporates has returned. With the growth expected to accelerate further in the next year, capacity constraints will re-emerge, which are expected to exert further pressure on prices. Inflation expectations also remain at an elevated level. There is, therefore, a need to ensure that demand side inflation does not become entrenched.

Third, notwithstanding lower budgeted government borrowings in 2010-11 than in the year before, fresh issuance of securities will be 36.3 per cent higher than in the previous year. This presents a dilemma for the Reserve Bank. While monetary policy considerations demand that surplus liquidity should be absorbed, debt management considerations warrant supportive liquidity conditions. The Reserve Bank, therefore, has to do a fine balancing act and ensure that while absorbing excess liquidity, the government borrowing programme is not hampered. Against this backdrop, the stance of monetary policy of the Reserve Bank is intended to: Anchor inflation expectations, while being prepared to respond appropriately, swiftly and effectively to further build-up of inflationary pressures. Actively manage liquidity to ensure that the growth in demand for credit by both the private and public sectors is satisfied in a non-disruptive way. Maintain an interest rate regime consistent with price, output and financial stability. Due to inflation reaching 2 digit figures , RBI has been continuously changing the monetary policy and increasing the repo rate during 2011. CRR RatesRBI uses CRR either to drain excess liquidity or to release funds needed for the economy from time to time. Increase in CRR means that banks have less funds available and money is sucked out of circulation. Thus we can say that this serves duel purposes i.e. it not only ensures that a portion of bank deposits is totally risk-free, but also enables RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks in lending money. CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits in the form of cash. However, actually Banks dont hold these as cash with

themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which is considered as equivlanet to holding cash with themselves.. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the cash reserve

ratio is 9%, the banks will have to hold additional Rs 9 with RBI and Bank will be able to use only Rs 91 for investments and lending / credit purpose. Therefore, higher the ratio (i.e. CRR), the lower is the amount that banks will be able to use for lending and investment. This power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system. RBI decreased CRR for the banks when the global slowdown was taking toll of all the economies and specially banking and finance institutions. RBI in first in its moves reduced CRR from its August 2008 9% to 5% in January 2009. But recently RBI has started its normalization policy and hiked CRR to 6% in its annual monetary policy. Reverse Repo Rates The rates at which the Reserve Bank of India takes money from the commercial banks are known as reverse repo rates. The private or public sector banks always prefer to provide loans to the Central Bank as they know that their money would be in safe hands if given to it. The commercial banks always prefer to lend during when the reverse repo rates are higher as it provides generation of more revenues. So in other words we can define Reverse repo rate as the rate at which the RBI absorbs liquidity from the commercial banks.

Repo RatesRepo (Repurchase) rate is the rate at which the RBI lends shot-term money to the banks. When the repo rate increases borrowing from RBI becomes more expensive. Therefore, we can say that in case, RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

The following table shows the trends of Repo and Reverse repo rates in India.

Source:RBI

Policy Announcement

Reverse Repo Rate

Repo Rate

November 2008 December 2008 January 2009 March 2009 April 2009 March 2010 April 2010 April 2011 December 2011

6.00% 5.00% 5.50% 3.50% 3.25% 3.50% 3.75% 7% 7.5%

7.50% 6.50% 5.50% 5.00% 4.75% 5.00% 5.25% 8% 8.5%

This table shows how RBI has timely increased and decreased the rates according to the state of the economy and specially for the good health of the Banking and Finance Industry in the times of Economic slowdown.

SLREvery bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and unencumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). Present SLR is 24%. RBI is empowered to increase this ratio up to 40%. An increase in SLR also restrict the banks leverage position to pump more money into the economy.

Bank RateBank Rate is the rate at which central bank of the country (in India it is RBI) allows finance to commercial banks. Bank Rate is a tool, which central bank uses for short-term purposes. Any upward revision in Bank Rate by central bank is an indication that banks should also increase

deposit rates as well as Prime Lending Rate. This any revision in the Bank rate indicates could mean more or less interest on your deposits and also an increase or decrease in your EMI. Bank rate in India is 6% currently and there has been no change in the Bank rate from 2003.

Performance of Indian Banking IndustryThe Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tonnes of gold from the International Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent. Following the financial crisis, new deposits have gravitated towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalised banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit also, nationalised banks hold the highest share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the total bank credit. The report also found that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR)

accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

Growth of Indian Banking IndustryThe growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.

Challenges to Banking industry in India

The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated seller market to completed deregulated customers market. Deregulation: This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility and decontrolled interest rate and liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates has led to entry of a number of players in the banking industry. At the same time reduced corporate credit off take thanks to sluggish economy has resulted in large number of competitors batting for the same pie. New rules: As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets. Diffused Customer loyalty: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices, the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery. Misaligned mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized. Competency Gap: Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

ReferencesBooksGetting Started in Fundamental Analysis by Michael C. Thomsett Mastering Fundamental Analysis by Michael C. Thomsett Financial Management- I by ICFAI publication Websiteswww. Indianmoney.com www. Money.rediff.com www. Moneycontrol.com www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx