INDIA

FASTEST GROWING
FREE MARKET DEMOCRACY

FINANCIAL SERVICES

India’s emerging universal banks :

Size does matter

www.ibef.org India Brand Equity Foundation


F I N A N C I A L S E R V I C E S
The strong regula-
tory framework in
India has actually
spurred India’s
financial companies
to bigger, better
things.
www.ibef.org
P A G E 2
INDIA’S EMERGING UNIVERSAL BANKS :
SIZE DOES MATTER
A decade of financial sector reforms has led to the creation of financial
conglomerates in India. Unlike China, where there are huge risks
associated with letting banks get into other businesses, the strong
regulatory framework in India has actually spurred India’s financial
companies to bigger, better things.
Ten years ago, when Kundapur Vaman Kamath, the CEO of ICICI Bank,
spoke about his ambitions to make his bank (then called just ICICI) a
universal bank, selling every conceivable financial product, he created a
flutter. Financial sector reforms in India had just kicked in, but even the
biggest players in financial services were confined to neatly fenced
territories. Was Kamath ahead of his time?
Banking@2005
Today, State Bank of India offers life insurance covers of its subsidiary, SBI
Life, to all its saving account holders for a small fee. This strategy is paying
rich dividends. SBI Life – the insurance arm of State Bank--derives close to
70 per cent of its premium income through this route. With over 100
million customers in the books of State Bank and the seven associate
banks in the SBI group, SBI Life has huge potential to notch up volumes.
Even in areas where foreign banks seemed to have an unassailable
advantage for decades, Indian universal banks are making serious inroads.
On January 1 this year, barely five years after entering retail lending, ICICI
Bank touched the 3 million mark in terms of number of credit cards,
racing ahead of incumbent Citibank (2.5 million cards), which was the
leader in the business for a decade and a half.
Encouraged by the inroads made by SBI and ICICI, more players are
jumping on to the bandwagon.
√ India’s largest insurance company Life Insurance Corporation (LIC)
offers home loans and mutual funds beyond life insurance. Though
it is not into banking yet, it has made a foray by picking up
substantial stake in a state-run bank, Corporation Bank. It is only a
matter of time before the life insurance giant started banking
services through an acquisition or on its own.
√ IDBI, which has a mutual fund operation, is planning a reverse
merger with its subsidiary, IDBI Bank, which is heavily into retail
lending. Before long, IDBI can be expected to get into insurance as
well. The company is now in the process of deploying banking
software across more than 100 locations to help it access retail
customers.
India Brand Equity Foundation

F I N A N C I A L S E R V I C E S
In fourteen years of
financial sector
reforms, there is little
doubt that India’s
banks and development
finance institutions
have successfully made
it to the next level;
they have made the
transition from being
basic lenders to
emerging as financial
conglomerates.
www.ibef.org
P A G E 3
INDIA’S EMERGING UNIVERSAL BANKS :
SIZE DOES MATTER
√ With the government considering mergers of other state-run
banks – for example, that of Bank of India and Union Bank of
India, more universal banks could appear on India’s financial terra
firma.
What’s more, the recent success of universal banks has made some
foreign banks -- which had shut business divisions in India in the last
decade to focus on a single business -- to consider a rethink. For
example, Bank of America (BankAm), sold its retail banking business in
India to ABN AMRO Bank and shut its investment banking business to
focus on treasury operations. According to Vishwavir Ahuja, MD & CEO,
BankAm (India), now the bank is evaluating the opportunities for a
presence in retail banking. BankAm has already resumed investment
banking in the country which it had closed in 2001.
In fourteen years of financial sector reforms, there is little doubt that
India’s banks and development finance institutions have successfully made
it to the next level; they have made the transition from being basic
lenders to emerging as financial conglomerates. They have bulldozed
away all the artificial barriers that separated segments in financial
services. On their part, India’s financial sector regulators have rewritten
rules to make it possible for any institution, as long as it had sound
financials and a good track record, to venture into any area of financial
services. And institutions have matched the regulators’ enthusiasm by
revving up their performances impressively.
State Bank of India, for example, has managed to shed 10% of its
headcount in a tightly unionized environment and has brought its cost-
to-income ratio down from 64% to 50% in less than six years.
The past: separate compartments
All this is a far cry from the past. Till the late nineties in India, trespassing
was seldom, and mostly frowned upon. The country’s largest bank, State
Bank of India, along with other commercial banks, was hardly interested
in anything except lending to the corporate sector for operational
expenses. Firms requiring funds for capital expenditure, went to one of
the three ‘development banks’ - ICICI, the Industrial Development Bank
of India (IDBI) or Industrial Financial Corporation of India (IFCI). India’s
only retail housing finance, company, Housing Development and Finance
Corporation (HDFC) was known only for helping people buy homes. On
the other hand, private sector players like Kotak Mahindra Finance
focused on niche products like car loans.
Cut to 2005. Extensive cross-selling of products has resulted in a
India Brand Equity Foundation

F I N A N C I A L S E R V I C E S
It is estimated that
India’s total foot-
wear market size is
at 1 billion pairs a
year, most of it in
the form of casual
footwear, ethnic
footwear, slippers,
sandals.
www.ibef.org
P A G E 4
INDIA’S EMERGING UNIVERSAL BANKS :
SIZE DOES MATTER
business boom in universal banks, and entities like SBI, ICICI, HDFC and
Kotak Mahindra have all become one-stop departmental stores for
mutual funds, loans, insurance and much else (see chart).
The spinoffs
For savvy institutions, the appeal of becoming a universal bank is now
irresistible. Institutions like ICICI, SBI and HDFC have realised that it
helps to spread risks among different segments. They are also waking up
to the sheer potential for growth: life insurance premium to GDP in India
is estimated at less than 2%; retail loans are less than 3% of GDP; and
more than 70% of mutual fund collections are only from the major
metros.
Besides, with more and more middle class customers wanting to spread
their wealth across banking products, equity, mutual funds, pension
products and insurance— leading banks see sense in becoming one-stop
shops—so they can capture the consumer completely.
In fact, changing consumer preferences has clearly been the biggest driver
of universal banking in India. A retail customer would have been quite
content with a bank deposit about 20 years ago. Today he spreads his
wealth around: equities, mutual funds, pension products and insurance,
for example. A bank either has to offer it all to him, or lose him.
The right regulatory balance
Meanwhile, to create the right environment for universal banking, India’s
banking regulator the Reserve Bank of India (RBI), capital markets
regulator the Securities Exchange Board of India (SEBI) and insurance
regulator the Insurance Regulatory Authority of India (IRDA) are
carefully putting together a set of templates for universal banks to follow,
so they don’t stray out of line. These are at par with the best in the
world in terms of protecting all the stakeholders’ interests.
For example, only an ‘arms-length’ relationship between a bank and an
insurance entity has been allowed by India’s insurance regulator. This
means that commercial banks can enter insurance business either by
acting as agents or by setting up joint ventures with insurance companies.
Also, India’s Reserve Bank allows banks to only marginally invest in equity
(5 per cent of their outstanding credit). Similarly, development financial
institutions can turn themselves into banks, but have to adhere to the
statutory liquidity ratio and cash reserve requirements meant for banks.
Universal banking: India’s headstart
There is no doubt that the carefully calibrated financial sector reforms
India Brand Equity Foundation
 P A G E 5

F I N A N C I A L S E R V I C E S

INDIA’S EMERGING UNIVERSAL BANKS :

SIZE DOES MATTER
has created an environment that has allowed the country’s leading
finance companies to grow up. This has given the country a head start
Profits of Indian over China’s banking sector. China opted for a compartmental approach
universal banks to banking when authorities passed the Commercial Bank Law in 1995.
can grow unfet-
However, unlike India, the rigid implementation of this law will not help
tered since they
Chinese banks compete with global financial powerhouses backed by
will not have to be
financial holding companies. Even if regulators in China now want to opt
ploughed back into
for universal banking, the high proportion of bad loans in the books of
the balance sheet China’s banks comes in the way dismantling restrictions because it will
for filling holes. lead to an enormous systemic risk.
That makes sound
business sense. In addition, non-performing assets of China’s banks are conservatively
estimated to be at a high 40% of GDP compared to a low 13% in India.
In stark contrast, profits of Indian universal banks can grow unfettered
since they will not have to be ploughed back into the balance sheet for
filling holes. That makes sound business sense.

Universal Banks in India: Size does matter

HDFC
Loans $ 10.7 billion
Insurance $ 74.6 million
Mutual Funds $ 3.2 billion
ICICI Bank
Loans $ 14.4 billion
Insurance $ 292.5 million
Mutual Funds $3.7 billion
State Bank of India
Loans $ 36.7 billion
Insurance $ 45.5 million
Mutual Funds $1.2 billion

Resources
1. To learn more about consolidation in the Indian banking industry, read:
http://www.valuenotes.com/krc/
krc_weekender_08jan05.pdf?ArtCd=34618&Cat=&Id=
2. Also visit the following link http://papers.ssrn.com/sol3/
papers.cfm?abstract_id=649855 for a deeper understanding of banking
reforms in India, and how India’s financial sector compares with the
rest of the world.

www.ibef.org India Brand Equity Foundation

 JANUARY 2005 P A G E 6

F I N A N C I A L S E R V I C E S

The India Brand Equity Foundation is a public - private partnership

between the Ministry of Commerce, Government of India and
the Confederation of Indian Industry. The Foundation's primary objective
is to build positive economic perceptions of India globally.

India Brand Equity Foundation

c/o Confederation of Indian Industry
249-F Sector 18
Udyog Vihar Phase IV
Gurgaon 122015 Haryana
INDIA

Tel +91 124 501 4087 Fax +91 124 501 3873
E-mail india-now@ibef.org
Web www.ibef.org

www.ibef.org India Brand Equity Foundation