Effect of Melting Down of Economies on Indian Economy

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A STUDY ON

EFFECT OF MELTING DOWN OF ECONOMIES ON INDIAN ECONOMY

Done for

Financial markets and IT Industry

PROJECT REPORT

Submitted in partial fulfillment of the requirements for the award of the Degree of

MASTER OF BUSINESS ADMINISTATION

By

Under The Guidance Of

OSMANIA UNIVERSITY

HYDERABADACADEMIC YEAR 2008-2010


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ACKNOWLEDGEMENT

Undertaking any project in life proves to be a milestone in more ways than one. Its

successful completion reifies on a myriad of people & their priceless help.

Project work in never the work of an individual, it is more of a combination

of views, suggestions &contribution of many individuals. Thus one of the most pleasant

parts of doing this project is the opportunity to thank all these who have contributed

towards successful completion of this project.


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DECLARATION

I here by declare that the project report entitled A STUDY ON EFFECT OF

MELTING DOWN OF ECONOMIES IN INDIAN ECONOMY Under taken for the

Financial markets and IT Industry, submitted by me in partial fulfillment for the

requirement of Master Of Business Administration degree from Osmaniya

University, Hyderabad and it has not been submitted previously in part of any

university or institution.

Place:

Date: (-----------------------)


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EXECUTIVE SYNOPSIS

Need for the study: -

This project is an attempt to look into the impact of global recession on Indian financial

market, major initiatives taken up by the Government and Reserve Bank of India in the order to contain it

with special focus on employment, import-export, interest rates, risk management, credit demand and

taxation.

Objectives of the study: -

To study and analyze the Indian economy during recession.

To study which factors are influencing the Indian economy while recession is going on.

Impact of an American Recession on India:

Indian companies have major outsourcing deals from the US. India's exports to the US have also

grown substantially over the years. The India economy is likely to lose between 1 to 2 percentage points

in GDP growth in the next fiscal year. Indian companies with big tickets deals in the US would see their

profit margins shrinking. The worries for exporters will grow as rupee strengthens further against the

dollar. But experts note that the long-term prospects for India are stable. A weak dollar could bring more

foreign money to Indian markets. Oil may get cheaper brining down inflation. A recession could bring

down oil prices to $70.

The whole of Asia would be hit by a recession as it depends on the US economy. Even though

domestic demand and diversification of trade in the Asian region will partly counter any drop in the US

demand, one simply can't escape a downturn in the world's largest economy. The US economy accounts

for 30 per cent of the world's GDP. Says Sudip Bandyopadhyay, director and CEO, Reliance Money: "In

the globalised world, complete decoupling is impossible. But India may remain relatively less affected by

adverse global events." In fact, many small and medium companies have already started developing trade

ties with China and European countries to ward off big losses. Manish Sonthalia, head, equity, Motilal

Oswal Securities, says if the US economy contracts much more than anticipated, the whole world's GDP

growth-which is estimated at 3.7 per cent by the IMF-will contract, and India would be no exception.

The only silver lining is that the recession will happen slowly, probably in six months or so. As of

now, IT and IT-enabled services, textiles, jewellery, handicrafts and leather segments will suffer losses

because of their trade link. Certain sections of commodities could face sharp impact due to the volatile


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nature of these sectors. C.J. George, managing director, Geojit Financial Services, says profits of lots of

re-export firms may be affected. Countries like China import commodities from India, do some

valueaddition and then export them to the US. The IT sector will be the worst hit as 75 per cent of its

revenues come from the US. Low demand for services may force most Indian Fortune 500 companies to

slash their IT budgets. Zinnov Consulting, a research and offshore advisory, says that besides companies

from ITeS and BPO, automotive components will be affected.

During a full recession, US companies in health care, financial services and all consumers

demand driven firms are likely to cut down on their spending. Among other sectors, manufacturing and

financial institutions are moderately vulnerable. If the service sector takes a serious hit, India may have to

revise its GDP to about 8 to 8.5 per cent or even less.

Over the past couple of months, fears of a slowdown in the United States of America have

increased. The impact of the subprime crisis along with a slowdown in mortgages has led to a significant

lowering of growth estimates. Since the United States dominates the global economy, any slowdown

there would have an impact on most of the global economic variables. For India, it could mean a further

appreciation in the rupee vis--vis the US dollar and a darkening of business outlook for sectors dependent

on US companies. The overall impact of a US slowdown on India would, however, be minimal as the

factors driving growth here are more local in nature. Unlike the rest of Asia, India is a strong domestic

demand story, so any slowing in the US is likely to have a more muted impact on India. Strong growth in

domestic consumption and significant spending on infrastructure are the two pillars of Indias growth

story. No sector has a dominant influence on earnings growth and risks to our estimate are limited.

Corporate India is also learning to master the art of efficient capital management, reduction in costs and

delivery of value-added services to sustain profit margins. Further, interest rates are expected to be stable

primarily due to control over inflation and proactive measures undertaken by the RBI.


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CONTENT

Chapter 1

CONCEPTUAL FRAME WORK

Chapter2

RECESSION EFFECT ON INDIAN FINANCIAL MARKET

Chapter3RECESSION EFFECT ON INDIAN IT INDUSTRY

Chapter4

FUTURE OUT LOOK ON INDIAN ECONOMY

Annexure

Bibliography


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CONCEPTUAL FRAME WORK


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Introduction

The economic slowdown of the advanced countries which started around mid-2007, as a

result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many

hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors

collapsed and several became bankrupt in this crisis. According to the current available assessment of

the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six

months ago, there was a view that the fallout of the crisis will remain confined only to the financial

sector of advanced economies and at the most there would be a shallow effect on emerging

economies like India. These expectations, as it now turns out, have been belied. The contagion has

traversed from the financial to the real sector; and it now looks like the recession will be deeper and

the recovery longer than earlier anticipated. Many economists are now predicting that this Great

Recession of 2008-09 will be the worst global recession since the 1930s. Meaning Of Recession A

recession is a decline in a country's gross domestic product (GDP) growth for two or more

consecutive quarters of a year. A recession is also preceded by several quarters of slowing down. An

economy, which grows over a period of time, tends to slow down the growth as a part of the normal

economic cycle. An economy typically expands for 6-10 years and tends to go into a recession for

about six months to 2 years. A recession normally takes place when consumers lose confidence in the

growth of the economy and spend less. This leads to a decreased demand for goods and services,

which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investorsspend less; as they fear stocks values will fall and thus stock markets fall on negative sentiment. Risk

aversion, deleveraging and frozen money markets and reduced investor interest adversely affect

capital and financial flows, import-export and overall GDP of an economy. This is exactly what

happened in US and as a result of contagion effect spread all over the world due to high integration in

the global economy.


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Impact on Indian Economy:

In India, the impact of the crisis has been deeper than what was estimated by our policy makers

although it is less severe than in other emerging market economies. The extent of impact has been

restricted due to several reasons such as-

Indian financial sector particularly our banks have no direct exposure to tainted assets and its

off-balance sheet activities have been limited. The credit derivatives market is in an embryonic stage and

there are restrictions on investments by residents in such products issued abroad.

Indias growth process has been largely domestic demand driven and its reliance on foreign

savings has remained around 1.5 per cent in recent period.

Indias comfortable foreign exchange reserves provide confidence in our ability to manage our

balance of payments notwithstanding lower export demand and dampened capital flows.

Headline inflation, as measured by the wholesale price index (WPI), has declined sharply.

Consumer price inflation too has begun to moderate.

Rural demand continues to be robust due to mandated agricultural lending and social safety net

programmes.

Indias merchandise exports are around 15 per cent of GDP, which is relatively modest. Despite

these mitigating factors, India too has to weather the negative impact of the crisis due to rising two-way

trade in goods and services and financial integration with the rest of the world. Today, India is certainly

more integrated into the world economy than ten years ago at the time of the Asian crisis as the ratio of

total external transactions (gross current account flows plus gross capital flows) to GDP has increased

from 46.8 per cent in 1997-98 to 117.4 per cent in 2007-08. Although Indian banks have very limited

exposure to the US mortgage market, directly or through derivatives, and to the failed and stressed

financial institutions yet Indian economy is experiencing the knock-on effects of the global crisis, through

the monetary, financial and real channels all of which are coming on top of the already expected

cyclical moderation in growth.


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I. Stock Market:

The economy and the stock market are closely related as the buoyancy of the

economy gets reflected in the stock market. Due to the impact of global economic

recession, Indian stock market crashed from the high of 20000 to a low of around 8000

points. Corporate performance of most of the companies remained subdued, and the

impact of moderation in demand was visible in the substantial deceleration during the

current fiscal year. Corporate profitability also exhibited negative growth in the last three

successive quarters of the year. Indian stock market has tumbled down mainly because of

'the substitution effect' of:

Drying up of overseas financing for Indian banks and Indian corporates;

Constraints in raising funds in a bearish domestic capital market; and

Decline in the internal accruals of the corporates.

Thus, the combined effect of the reversal of portfolio equity flows, the reduced

availability of international capital both debt and equity and the perceived increase in the price of

equity with lower equity valuations has led to the bearish influence on stock market.

II. Forex Market:

In India, the current economic crisis was largely insulated by the reversal of

foreign institutional investment (FII), external commercial borrowings (ECB) and trade

credit. Its spillovers became visible in September-October 2008 with overseas investors

pulling out a record USD 13.3 billion and fall in the nominal value of the rupee from Rs.

40.36 per USD in March 2008 to Rs. 51.23 per USD in March 2009, reflecting at 21.2 per

cent depreciation during the fiscal 2008-09. The annual average exchange rate during

2008-09 worked out to Rs. 45.99 per US dollar compared to Rs. 40.26 per USD in 2007-

08 which is the biggest annual loss for the rupee since 1991 crisis. Moreover, there is

reduction in the capital account receipts in 2008-09 with total net capital flows falling

from USD 17.3 billion in April-June 2007 to USD 13.2 billion in April-June 2008.


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Hence, sharp fluctuation in the overnight forex rates and the depreciation of the rupee

reflects the combined impact of the global credit crunch and the deleveraging process

underway in Indian forex market.

III. Money Market

The money market consists of credit market, debt market and government

securities market. All these markets are in some or other way related to the soundness of

banking system as they are regulated by the Reserve Bank of India. According to the

Report submitted by the Committee for Financial Sector Assessment (CFSA), set up

jointly by the Government and the RBI, our financial system is essentially sound and

resilient, and that systemic stability is by and large robust and there are no significant

vulnerabilities in the banking system. Yet, NPAs of banks may indeed rise due to

slowdown as Reserve Bank has pointed out. But given the strength of the banks balance

sheets, that rise is not likely to pose any systemic risks, as it might in many advanced

countries. Nevertheless, the call money rate went over 20 per cent immediately after the

Lehman Brothers collapse and banks borrowing from the RBI under daily liquidity

adjustment facility overshot Rs.50, 000 crore on several occasions during September-

October 2008 under tight liquidity situation.

IV. Slowing GDP:

In the past 5 years, the economy has grown at an average rate of 8-9 per cent.

Services which contribute more than half of GDP have grown fastest along with

manufacturing which has also done well. But this impressive run of GDP ended in the first

quarter of 2008 and is gradually reduced. Even before the global confidence dived, the

economy was slowing. According to the revised estimates released by the CSO (May 29,

2009) for the overall growth of GDP at factor cost at constant prices in 2008-09 was 6.7 per

cent as against the 7 per cent projection in the midyear review of the Economy presented inthe Parliament on December 23, 2008. The growth of GDP at factor cost (at constant 1999 -

2000 prices) at 6.7 per cent in 2008-09 nevertheless represents a deceleration from high

growth of 9 per cent and 9.7 per cent in 2007-08 and 2006-07 respectively. (Table 1) The

RBI annual policy statement 2009 presented on July 28, 2009 projects GDP growth at 6

percent in 2009-10 in 2009-10.


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Table 1: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)

The slowdown in growth of GDP is more clearly visible from the growth rates over

successive quarters of 2008- 09. In the first two quarters of 2008-09, the growth in GDP was 7.8 and

7.7 respectively which fell to 5.8 per cent in the third and fourth quarters of 2008-09. The third

quarter witnessed a sharp fall in the growth of manufacturing, construction, trade, hotels and

restaurants. The last quarter was an added deterioration in manufacturing due to the deepening

impact of the global crisis and a slowdown in domestic demand.

Table 2: Rate of Growth at Factor Cost at 1999-2000 Prices (per cent)


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Hence, the slowdown in Indian economy is evident from the low GDP growth with

deceleration in the industrial activity, particularly in the manufacturing and infrastructure sectors and

moderation in the services sector mainly in the construction, transport and communication, trade,

hotels and restaurants.

V. Strain on Balance Of Payments

The overall balance of payments (BoP) situation remained resilient in 2008-09 despite signs

of strain in the capital and current accounts, due to the global crisis. During the first three quarters of

2008- 09 (April-December 2008), the current account deficit (CAD) was US $ 36.5 billion as against

US $ 15.5 billion for the corresponding period in 2007-08.

The capital account balance declined significantly to US $ 16.09 billion in 2008-09 as

compared to US $ 82.68 billion during the corresponding period in 2007-08. As at end-March 2009

the foreign exchange reserves stood at US $ 252 billion.

VI. Reduction In Import-Export

During 2008-09, the growth in exports was robust till August 2008. However, in September

2008, export growth evinced a sharp dip and turned negative in October 2008 and remained negative

till the end of the financial year. For the first time in seven years, exports have declined in absolute

terms in October 2008.

Chart 1: Export Growth Year Wise


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Chart 2: Quarterly Export Growth in 2008-09

Source: Economic Survey 2009, Government of India

The above chart show that the exports have declined since October 2008 due to

contraction in global demand due to the synchronised global recession. Similarly, imports

growth also witnessed a deceleration during October-November 2008, before turning

negative thereafter.

The merchandise trade deficit declined during 2009-10 (April-May) over the

corresponding period of the previous year, reflecting the sharper decline in the imports in

relation to exports.

VII. Reduction In Employment

Employment is worst affected during any financial crisis. So is true with the current

global meltdown. This recession has adversely affected the service industry of India mainly

the BPO, KPO, IT companies etc. According to a sample survey by the commerce ministry

109,513 people lost their jobs between August and October 2008, in exportrelated companies in

several sectors, primarily textiles, leather, engineering, gems and jewelry, handicraft and food

processing. Economic Survey of India gives alarming bell about the on-going effects of the global

slowdown on employment and has pressed upon the government the urgency of the major response,

especially in the unorganized sector.

Chart 3: Growth in Employment Rate


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Source: Economic Survey 2009, Government of India

VIII. Taxation

The economic slowdown has severely dented the Centres tax collections with

indirect taxes bearing the brunt. The tax- GDP ratio registered a steady increase from 8.97

per cent to 12.56 per cent between 2000-01 and 2007-08. But this trend has been reversed as

the tax-GDP ratio has fallen to 10.95 per cent during current fiscal year mainly on account of

reduction in Customs and Excise Tax due to effect of economic slowdown.

Chart 4: Reduction in Tax-GDP ratio


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Source: Central Statistical Organisation

Response to the Crisis

The future trajectory of the economic meltdown is not yet clear. However, the Government

and the Reserve Bank responded to the challenge strongly and promptly to infuse liquidity and

restore confidence in Indian financial markets.

The Government introduced stimulus package while the Reserve Bank shifted its policy

stance from monetary tightening in response to the elevated inflationary pressures in the first half of

2008-09 to monetary easing in response to easing inflationary pressures and moderation of growth

engendered by the crisis. The fiscal and monetary response to the crisis has been discussed in the

following points-

I. Fiscal Response

The Government launched three fiscal stimulus packages between December 2008

and February 2009. These stimulus packages came on top of an already announced expanded

safety-net programme for the rural poor, the farm loan waiver package and payout following

the Sixth Pay Commission report, all of which added to stimulating demand. The challenge

or fiscal policy is to balance immediate support for the economy with the need to get back on

track on the medium term fiscal consolidation process. The fiscal stimulus packages and

other measures have led to sharp increase in the revenue and fiscal deficits which, in the face

of slowing private investment, have cushioned the pace of economic activity. The borrowing


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programme of the government has already expanded rapidly in an orderly manner by the

Reserve Bank of India which would spur investment demand in the domestic market. So

while the government will continue to support liquidity in the economy, it will have to ensure

that as economic growth gathers momentum, the excess liquidity is rolled back in an orderly

manner. In India monetary transmission has had a differential impact across different

segments of the financial market. While the transmission has been faster in the money and

bond markets, it has been relatively muted in the credit market on account of several

structural rigidities. In order to address these issues, the government has to effectively and

carefully take up the following steps

Enhance coordination and harmonization of the regulatory apparatus internationally,

given the global scope of the recent crises with increased cross border financial integration;

Introduction of countercyclical prudential regulatory policy;

Design regulation and supervision of financial companies for non-deposit taking

financial entities having the potential to cause systematic instability, as evident in the current

crisis;

Supervision and management of liquidity risk and greater transparency in the

financial sector to improve better risk assessment by the customers and investors;

Improvement in transparency in the structured credit instruments.

The rise in macroeconomic uncertainty and the financial dislocation of the year 2008 have

raised a problem of adjustment in market interest rates in response to changes in policy rates gets

reflected with some lag. The Union Budget for 2009-10, presented against the backdrop of persistent

global economic slowdown and the associated dampened domestic demand, has placed the fiscal

deficit at 6.8 per cent of GDP in 2009-10 with a view to providing the necessary boost to demand and

thereby support a faster recovery.


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II. Monetary Response

The RBI has taken several measures aimed at infusing rupee as well as foreign exchange

liquidity and to maintain credit flow to productive sectors of the economy such as infusing liquidity

through interest rate management, risk management and credit management which is described in

detail under the following heads:-

1. Interest Rate Management

In order to deal with the liquidity crunch and the virtual freezing of international

credit, RBI took steps for monetary expansion which gave a cue to the banks to reduce their

deposit and lending rates. The major changes in the interest rate policy of RBI are given

below-

Reduction in the cash reserve ratio (CRR) by 400 basis points from 9.0 per cent in

August 2008 to 5 per cent in January 2009.

Reduction in the repo rate (rate at which RBI lends to the banks) by 425 basis points

from 9.0 per cent as on October 19 to 4.75 per cent by July 2009 (the lowest in past 9 years)

in order to improve the flow of credit to productive sectors at viable costs so as to sustain the

growth momentum.

In order to make parking of funds with RBI unattractive for banks, the reverse reporate (RBIs borrowing rate) was reduced by 275 points which currently stands at 3.25 per

cent.

Table 3: Changes in Regulatory Rates during 2008-2009

Source: www.rbi.org.in


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The above said policy changes since mid-September 2008, enabled Reserve Bank of India to

infuse Rs.5,61,700 crore (excluding Rs.40,000 crore under SLR reduction) in market in order to

ensure ample liquidity in the banking system.

2. Risk Management

There has been a sustained demand from various quarters for exercising regulatory

forbearance in regard to extant prudential regulations applicable to the banking sector. As a

part of counter-cyclical package, RBI has already made several changes to the current

prudential norms for robust risk disclosures, transparency in restructured products and

standard assets such as-

Implementation of Basel II w.e.f. March 2009 by all Scheduled Commercial Banks

except RRBs which would promote closer cooperation, information sharing and coordination

of policies among sector wise regulators, especially in the context of financial conglomerates.

Further guidance to strengthen disclosure requirements under Pillar 3 of Basel II.

Counter-cyclical adjustment of provisioning norms for all types of standard assets

(except in case of direct advances to agriculture and small and medium enterprises which

continue to be at 0.25 per cent)

Reduction in the risk weights for claims on unrated corporate and commercial real

estate to 100 per cent;Reduction in the provisioning requirement for all standard assets to 0.40 per cent;

Improve and converge financial reporting standards for offbalance sheet vehicles;

Develop guidance on valuations when markets are no longer active, establishing an

expert advisory panel in 2008.

Market participants and securities regulators will expand the information provided

about securitised products and their underlying assets.

Permitting housing loans to be restructured even if the revised payment period

exceeds ten years;

Making the restructured commercial real estate exposures eligible for special

treatment if restructured before June 30, 2009.

Hence, RBI has ensured perseverance of prudential policies which prevent institutions from

excessive risk taking, and financial markets from becoming extremely volatile and turbulent.


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3. Credit Management

There was a noticeable decline in the credit demand during 2008-09 which is

indicative of slowing economic activity- a major challenge for the banks to ensure healthy

flow of credit to the productive sectors of the economy. The reduced funding demand on the

banks should enable them to reduce the interest rates on deposit and thereby reduce the

overall cost of funds. Although deposit rates are declining and effective lending rates are

falling, there is clearly more space to cut rates given declining inflation. In order to facilitate

demand for credit in the economy the Reserve Bank has taken certain steps such as-

Opening a special repo window under the liquidity adjustment facility for banks for

on-lending to the non-banking financial companies, housing finance companies and mutual

funds.

Extending a special refinance facility, which banks can access without any

collateral

Unwinding the Market Stabilization Scheme (MSS) securities, in order to manage

liquidity

Accelerating Governments borrowing programme

Upward adjustment of the interest rate ceilings on the foreign currency non-resident

(banks) and non-resident (external) rupee account deposits

Relaxing the external commercial borrowings (ECB) regimeAllowing the NBFCs and HFCs access to foreign borrowing

Allowing corporates to buy back foreign currency convertible bonds (FCCBs) to

take advantage of the discount in the prevailing depressed global markets

Instituting a rupee-dollar swap facility for banks with overseas branches to give

them comfort in managing their short-term funding requirements

Extending flow of credit to sectors which are coming under pressure include

extending the period of pre-shipment and postshipment credit for exports

Expanding the refinance facility for exports

Expanding the lendable resources available to the Small Industries Development

Bank of India, the National Housing Bank and the Export-Import Bank of India


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INDIAN FINANCIAL SYSTEM OVERVIEW


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Background

Major constituents of the Indian financial sector are banks, financial institutions, and

markets, which mobilize the resources from the surplus sector and channelize the same to the

different needy sectors in the economy. In fact, the Indian financial system is characterized by its

two major segments - an organized sector and a traditional sector that is also known as informal

credit market. Financial intermediation in the organized sector is conducted by a large number of

banks and financial institutions. Financial institutions are further classified based on their

mandate and activities, which may be term lending, specialized, and investment institutions.

Banks are further classified into public and private sector banks, cooperative banks, and regional

rural banks. Non-bank financial institutions include hire purchase and leasing companies, and

investment institutions include LIC, GIC, and UTI. The banking system is, by far, the most

dominant segment of the financial sector, accounting for over 60% of the funds flowing through

the financial sector. The Government has also set up two separate regulatory bodies, viz.,

Insurance Regulatory Development Authority (IRDA) of India for the insurance sector, and the

Securities and Exchange Board of India (SEBI) for the capital market.

The Indian financial sector today is significantly different from what it used to be in the 1970s

and 1980s. The financial sector prior to the 1990s was characterized by segmented and

underdeveloped financial markets coupled with paucity of instruments. For maintaining spreads

of banking sector, regulation of both deposit and lending rates resulted not only in distorting the

interest rate mechanism, but also adversely affected the viability and profitability of banks. The

low level of recognition of the importance of transparency, accountability and prudential norms

in the operations of the banking system also led to a rising burden of non-performing assets.


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_

Post 1991, the financial sector liberalization was calibrated on cautious and appropriate

sequencing of reform measures and was marked by a gradual opening up of the economy. This

gradualist strategy seemed to have served the country well, in terms of aiding growth, avoiding

crises, enhancing efficiency and imparting resilience to the system. From the vantage point of

2010, one of the successes of the Indian financial sector reform has been the maintenance of

financial stability and avoidance of any major financial crisis (caused due to domestic reasons)


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since early 1990s - a period that has been turbulent for the financial sector in most emerging

market countries.

The process of financial liberalization has resulted in innovations in instruments and processes,

technological sophistication and growing capital flows. In order to fulfill the broad objectives of

the financial liberalization in India, a multi-pronged approach is being adopted. This includes:

removing the constraints faced by the financial system through the creation of an enabling policy

environment; improving the functioning of the financial institutions, and through the pursuit of

financial stability as an essential ingredient of macroeconomic stability.

Major Market Players

Players in Banking Industry

As per the Reserve Bank of India Act, 1934, banks in India are classified into scheduled and

non-scheduled banks. Scheduled banks are those which are entered into the second schedule of

the RBI Act, 1934. It includes those banks which have a paid-up capital and reserves of an

aggregate value of not less than Rs.5 lakhs and which satisfy RBI that their affairs are being

carried out in the interests of the depositors. While, non-scheduled banks are those which have

not been included in the second schedule of the Act. The scheduled banks comprise scheduled

commercial banks and scheduled cooperative banks. Further, the scheduled commercial banks in

India are categorised into five different groups according to their ownership and/or nature of

operation:- (i) Nationalised Banks; (ii) State Bank of India and its associates; (iii) Regional Rural

Banks (RRBs); (iv) Foreign banks; and (v) Other Indian private sector banks. Scheduled Co-

operative Banks consist of Scheduled State Co-operative Banks and Schedule Commercial

Banks.

At present, there are 170 scheduled commercial banks in the country, which includes 91 regional

rural banks (RRBs), 19 nationalised banks, 8 banks in State Bank of India group and the

Industrial Development Bank of India (IDBI Ltd). Besides, there are only four non-scheduled

commercial banks in the country.


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Public Sector Banks in India

Allahabad Bank Indian Bank

Andhra Bank Indian Overseas Bank

Bank of Baroda Oriental Bank of Commerce

Bank of India Punjab & Sind Bank

Bank of Maharshtra Punjab National Bank

Canara Bank Syndicate Bank

Central Bank of India UCO Bank

Corporation Bank Union Bank of India

Dena Bank United Bank of India

Vijaya Bank

Regional Rural Banks (RRBs) have been set up in the country on the sponsorship of

individual nationalised commercial banks. These banks aim at taking the banking facilities to the

doorsteps of rural masses especially in the remote areas. The objective was to provide credit to

small and marginal farmers, agricultural labourers, artisans and small entrepreneurs so as to

develop productive activities in the rural areas. They have been conceived as institutions that

combine the features of both the co-operatives and commercial banks.

Initially, five RRBs were set up in 1975, at Moradabad and Gorakhpur in Uttar Pradesh; Bhiwani

in Haryana; Jaipur in Rajasthan and Malda in West Bengal. But gradually the spread of these

banks has increased and the Government has taken several policy measures for their growth and

expansion.

Foreign banks like Citibank, HSBC, Standard Chartered Bank, etc. are the branches of those

banks which are incorporated in foreign countries. Most of them perform essentially the same

range of services as local banks, except that their focus in terms of product and customers may

be different due to their limited branch network. They bring in new technology and facilitate in

the introduction as well as assimilation of international products into the domestic markets. They

help the local banking industry keep pace with developments in the financial centres abroad.

They also help provide Indian corporations access to foreign capital markets. In keeping with the


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general trend towards liberalisation, the Government has introduced several measures for

widening the scope for foreign banks to enter and operate in India.

Given this set up, with liberalisation, banks in India are venturing into non-traditional and

diversified areas other than the core banking activities. They are facing increased competition

both domestically and abroad. Hence, in order to make a benchmark in the changed environment,

they need to tackle issues like profitability, efficiency, technological upgradation, customer

satisfaction, etc in an effective manner.

Players in Insurance Industry

The insurance industry is largely categorized into public and private players. In the life insurance

segment the only Government-held entity is the Life Insurance Corporation of India. Both the

life and non-life insurance firms are listed below:-

Private Life Insurance Players

1. Bajaj Allianz Life Insurance Co. Ltd.

2. Birla Sun Life Insurance Co. Ltd. (BSLI)

3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)

4. ICICI Prudential Life Insurance Co. Ltd. (ICICI PRU)

5. ING Vysya Life Insurance Co. Ltd. (ING VYSYA)

6. Max New York Life Insurance Co. Ltd. (MNYL)

7. MetLife India Insurance Co. Pvt. Ltd. (METLIFE)

8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.

9. SBI Life Insurance Co. Ltd. (SBI LIFE)

10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)

11. Reliance Life Insurance Company Ltd.

12. Aviva Life Insurance Co. Pvt. Ltd. (AVIVA)

13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)

14. Shriram Life Insurance Co. Ltd (SHRIRAM LIFE)


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15. Bharti AXA Life Insurance Co. Ltd. (BHARTI AXA)

16. Future Generali India Life Insurance Co. Ltd.

17. IDBI Fortis Life Insurance Co. Ltd.

18. Canara HSBC Oriental Bank of Commerce Life Insurance

19. Aegon Religare Life Insurance Company Limited.

20. DLF Pramerica Life Insurance Co. Ltd.

Government Non - Life Insurance Players

1. New India Assurance Co. Ltd. (NEW INDIA)

2. National Insurance Co. Ltd. (NATIONAL) .

3. The Oriental Insurance Co. Ltd. (ORIENTAL)4. United India Insurance Co. Ltd. (UNITED)

5. Export Credit Guarantee Corporation Ltd. (ECGC)

6. Agriculture Insurance Company of India Ltd. (AIC)

Private Non - Life Insurance Players

1. Bajaj Allianz General Insurance Co. Ltd.

2. ICICI Lombard General Insurance Co. Ltd.

3. IFFCO Tokio General Insurance Co. Ltd.

4. Reliance General Insurance Co. Ltd. (RELIANCE)

5. Royal Sundaram Alliance Insurance Co. Ltd.

6. TATA AIG General Insurance Co. Ltd. (TATA AIG)

7. Cholamandalam MS General Insurance Co. Ltd.

8. HDFC General Insurance Co. Ltd. (HDFC CHUBB)

9. Star Health and Allied Insurance Company Limited

10. Apollo DKV Insurance Co. Ltd. (APOLLO DKV)

11. Future Generali India Insurance Co. Ltd.

12. Universal Sompo General Insurance Co. Ltd.

13. Shriram General Insurance Co. Ltd.

14. Bharti AXA General Insurance Co. Ltd.


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Current Status in India

Financial sector is the backbone of any economy and plays a crucial role in the

mobilization and allocation of resources. Though India was not hit as badly by the financial

contagion of 2008-09, as has been in the West, where it emerged, it becomes imperative for India

to have an inherently strong and functionally diverse financial system displaying efficiency and

flexibility, which are quintessential for creating a market-driven, productive and competitive

economy. A mature financial system seeks to support higher levels of investment and promote

growth in the economy with its depth and coverage.

The Indian financial system has been relatively in good health as compared to its

counterparts in the other parts of the globe. Balance sheets of the banks appear healthy and were

little affected by the unsettled conditions in financial markets. Despite not being part of the

financial sector challenges, India has been affected by the crisis through the feedback loops

between external shocks and domestic vulnerabilities by way of the financial, real and

confidence channels. In this context it is important to remember that although the origins of the

crisis are common around the world, the crisis has impacted different economies differently.

Importantly, in advanced economies where it originated, the crisis spread from the financial

sector to the real sector. In emerging economies, the transmission of external shocks to domestic

vulnerabilities has typically been from the real sector to the financial sector. Countries have

accordingly responded to the crisis depending on their specific country circumstances. Thus,

even as policy responses across countries are broadly similar, their precise design, quantum,

sequencing and timing have varied. In particular, while policy responses in advanced economies

have had to contend with both the unfolding financial crisis and deepening recession, in India,

the policy response has been predominantly driven by the need to arrest moderation in economic

growth.


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Scheduled Commercial Banks Current Scenario

The balance sheets of Scheduled Commercial Banks in India remained robust against the

backdrop of global crisis and its effects on Indian economy through various transmission

channels. However, the Indian banking sector was not completely insulated from the effects of

the slowdown of the Indian economy as evident from the financial performance of Scheduled

Commercial Banks. The growth rates of income as well as the expenditure of Scheduled

Commercial Banks decelerated, leading to deceleration in growth of net profits. This

deceleration in growth of profit was due to the rising cost of deposits and borrowing but

declining return on investments. The efficiency parameters like RoA (Return on Assets) and RoE

(Return on Equities), however, increased during the year.

According to Committee on Financial Sector Assessment - CFSA (2009), financial position of

commercial banks shows that the global financial meltdown has led to a crisis of confidence in

the global markets and is not without its echo in the Indian financial system. In contrast to the

trend observed till 2007-08, there has been a reversal in capital flows to India during 2008-09.

This has led to some disturbance in the Indian financial markets, particularly in the equity and

foreign exchange markets. Against this background, the CFSA assessed the financial soundness

of commercial banks and found that the banking sector has withstood the shocks of the global

meltdown well and none of the key financial parameters, namely capital ratio, asset quality,

earning and profitability pointed to any discernable vulnerability.

The consolidated balance sheets of Scheduled Commercial Banks, expanded by 21.2%, as at

end-March 2009, as compared with 25% growth witnessed in the previous year. The assets of

SCBs, however, continued to grow at a higher rate than the nominal Gross Domestic Product

(GDP) (at current market prices) resulting in a higher ratio of assets of SCBs to GDP. This ratio

increased to 98.5% at end-March 2009, from 91.6% at end-March 2008.

It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in India

has remained high reflecting the strength of the Indian banking system. For instance, as observed

by the World Bank (2009)1, the leverage ratio2 of banks in the UK witnessed a decline

throughout 1990s, which was accentuated after 2000 to reach a level of about 3% by 2008, from

around 5% in the 1990s. On the other hand, the leverage ratio for Indian banks has risen from

about 4.1% in March 2001 to reach a level of 6.3% by March 2009.


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While the balance sheet of public sector banks maintained their growth momentum, the private

sector banks and foreign banks registered a deceleration in growth rate. During 2008-09, the

growth rate of banks lending to industries, personal loans and services sector witnessed a

deceleration, while growth rate of banks lending to agriculture and allied activities increased

substantially.

Provisional data on sectoral deployment of credit available till July 17, 2009 indicate that

on year-on-year basis bank credit growth to industry, services and personal loans decelerated to

20.8%, 13.8% and 3.4%, respectively, from a level of 30.7%, 36.9% and 17.0% respective

growth rates. Growth of credit to agriculture accelerated to 29.1% from 14.9% in the same period

of the previous year. Credit to real estate and non-banking financial companies (NBFCs)

remained high at 46.7% (43.9% in July 2008) and 31.4% (53.9% in July 2008).

Overall, the incremental CreditDeposit (C-D) ratio declined sharply reflecting the

slowdown in credit growth, as corporates deferred their investments against the backdrop of

widespread uncertainty. Growth rate of investments by banks decelerated marginally but the

proportion of Statutory Liquidity Ratio (SLR) investment in Net Demand and Time Liabilities

(NDTL) increased, reflecting a large Government market borrowing programme. The growth

rate of income as well as that of expenditure of SCBs decelerated, leading to deceleration in

growth rate of net profits. The Capital to Risk-Weighted Assets Ratio (CRAR) of SCBs

improved to 13.2 % at end-March 2009 from 13.0 % a year ago, thus, remaining significantly

above the stipulated minimum of 9.0 %.

The international liabilities of Indian banks (in Rs.terms) declined by 1.1 % as at end

March 2009 as against an increase of 8.4 % during 2007-08. The decline of international

liabilities was mainly due to decline in other liabilities like ADRs/GDRs reflecting the drying

up of overseas lines of credit for banks and corporates. On the other hand, in a reversal of trend,

the share of foreign currency deposits in total international liabilities, which had witnessed a

continuous fall during the period 2005-08, registered a sharp rise during 2008-09. This was

mainly on account of the encouraging policy initiatives by Reserve Bank like upward adjustment

of the interest rate ceiling on the foreign currency deposits by non-resident Indians, as also

continuing confidence of depositors in Indian economy against the backdrop of international

uncertainty.


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Insurance Current Scenario

The Insurance industry in India has been progressing at a rapid pace since opening up of

the industry in 2000. The US$ 41-billion Indian insurance industry is the fifth largest life

insurance market in the emerging insurance economies globally, growing at 32-34% annually.With the increasing popularity of insurance plans that are linked to the stock market, insurance

companies are emerging as a major force on the bourses. According to data made available by

the Life Council of India and the Life Insurance Corporation, currently, the insurance industry

manages equity assets to the tune of US$ 58.01 billion.

The momentum in equity investments by insurers picked up from 2004 when private insurance

companies began marketing ULIPs (market-linked products) to investors. With collections

increasing under such plans, insurance companies have raised their investments in the Indianstock market to US$ 10.96 billion in 2008-09.

The assets held by the insurance industry currently stand higher than the US$ 44.05 billion

managed by mutual funds till the end of November 2009 and are one- third of that managed by

foreign institutional investors, which stands at US$ 162.23 billion. In the insurance sector, LIC

alone manages US$ 34.8 billion worth of equity assets, while private players manage US$ 23.2

billion worth of equity assets.

Currently, there are 22 life insurance firms operating in India and as per industry estimates, thelife insurance business constitutes about 4% of the total GDP in the country; the contribution by

non-life business has been at 0.6%. The investment (FDI) limit in the insurance space for foreign

players is capped at 26%permissible under the automatic route subject to obtaining a licence

from the regulator, Insurance Regulatory and Development Authority (IRDA).

According to the Investment Commission of India, the Indian insurance market is expected to be

around US$ 52 billion by 2010. The total investment opportunity is estimated to be US$ 14

billion-US$ 15 billion. Further, according to a report 'Booming Insurance Market in India (2008-

2011) by Research and Markets, total life insurance premium in India is projected to grow to

US$ 253.2 billion by 2010-11. Total non-life insurance premium is expected to increase at a

CAGR of 25 per cent for the period spanning from 2008-09 to 2010-11. In fact, considering the

worlds largest population and an annual growth rate of nearly 7%, India offers great

opportunities for insurers.


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Capital Market Current Scenario

Capital market is one of the most important segments of the Indian financial system. It is the

market available to the companies for meeting their requirements of the long-term funds. It refers

to all the facilities and the institutional arrangements for borrowing and lending funds. In other

words, it is concerned with the raising of money for purposes of making long-term investments.

The market consists of a number of individuals and institutions (including the Government) that

canalize the supply and demand for long -term capital and claims on it. The demand for long

term capital comes predominantly from private sector manufacturing industries, agriculture

sector, trade and the Government agencies. The supply of funds for the capital market comes

largely from individual and corporate savings, banks, insurance companies, specialized financing

agencies and the surplus of Governments.

The Indian Market is more popularly known as the Indian Stock Market. Indias market

capitalisation positions the country as ninth largest in the world. Indias share in the total world

M-Cap has risen to 2.79% currently. In fact, the Indian market has become the third biggest after

China and Hong Kong in the Asian region. As of March 2009, the market capitalization was

around US$ 598.3 billion, which is one-tenth of the combined valuation of the Asia region. The

market was slow since early 2008 and continued till the first quarter of 2009. The Indian stock

market has currently responded to the optimism of reforms by the stable government and itscontinuity in policies.

Government Policies

Financial sector reforms have long been regarded as an integral part of the overall policy reforms

in India. India has recognized that these reforms are imperative for increasing the efficiency of

resource mobilization and allocation in the real economy and for the overall macroeconomic

stability. The reforms have been driven by a thrust towards liberalization and several initiatives

such as liberalization in the interest rate and reserve requirements have been taken on thesefronts. During the last fifteen years, the Indian financial system has been incrementally

deregulated and exposed to international financial markets along with the introduction of new

instruments and products. At the same time, the Government has also been emphasizing stronger

regulation aimed at strengthening prudential norms, transparency and supervision to mitigate the


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prospects of systemic risks. Due to such measures, the Indian financial structure is increasingly

becoming strong, functionally diverse, efficient and globally competitive.

The success of stronger regulations and prudential norms became evident when the impact of

global financial crisis, which showed repercussions on many financial sector markets across the

world, on this sector was minimal. In fact, in the last 15 years, India has not faced significant

repercussions of financial crisis which hit regional economies, including several Asian

economies.

Policies in the Banking Industry

To aid the financial recovery, the RBI has introduced a substantial reduction in policy rates since

October 2008: the repo rate by 425 basis points, and the reverse repo rate by 275 basis points.

The CRR was also reduced by 400 basis points. Banks used the ample liquidity available with

them to make large investments in Government securities and also fairly sizeable investments (of

the order of US$ 19.59 billion. During In the Second Quarter Review of Monetary Policy for

2009-10, RBI observed that the global economy was showing incipient signs of recovery and the

prospects for the domestic economy were improving. the current financial year April

September 2009) in units of mutual funds.

According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be

to:

Keep a vigil on the trends in inflation and be prepared to respond swiftly and effectively

through policy adjustments to stabilise inflation expectations.

Monitor the liquidity situation closely and manage it actively to ensure that credit

demands of productive sectors are adequately met while also securing price stability and

financial stability.

Maintain a monetary and interest rate regime consistent with price stability and financial

stability, and supportive of the growth process.

Meanwhile, the RBI has restored the Statutory Liquidity Ratio (SLR) back to 25 % on October

27, 2009, which was reduced to 24 % in November 2008.


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Policies in the Insurance Industry

To improve returns under the unit-linked insurance plans (ULIPS), the IRDA has capped the

amount insurance companies can charge the fund. IRDA, also tightened the guidelines by asking

the insurance companies to ensure that no policies are issued to persons with fictitious names.

From June 2009, non-life insurance companies can neither reject the renewal of existing health

insurance policies on the premise that claims had been made in the previous years, nor arbitrarily

increase the premium while renewing cover. The grounds for such rejection have been made rare

and exceptional, according to an IRDA circular.

Apart from this, the concern for customer value through intermediaries has continued to be a

matter of importance for the Regulator, and a number of Committees were formed and guidelines

issued to address various issues. These include:

A.C.Mukherjee Committee Report 2003, to examine the remuneration system for

Insurance Brokers, Agents etc. in general insurance business.

IRDA Guidelines on Licensing of Corporate Agents, 14th July 2005.

G.K.Raman Committee Report, November, 2006 on Brokers and Broker related issues.

Guidelines on Insurance and Reinsurance of General Insurance Risks dated 15th

September 2006 to set rules of conduct for both insurers and brokers.

N.M.Govardhan Committee Report on Distribution Channels.

Report of the IRDA Committee to Evaluate the Performance of Third Party

Administrators (Health Services), April 2009.

Select Issues

International Competitiveness

As the globalization in Indian economy progresses, it is inevitable that the global players in the

financial sector would also enter Indian market and thereby the domestic players would get

exposed to competition on a global scale. With FDI norms set to relax for both banking and

insurance sectors in the near future, major global players are expected to set up base in India.

This is all the more so because foreign banks are widely expected to be given more operational

freedom sooner than later, and it may be a challenge for the Indian banks, especially the smaller


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ones to compete operational economies of scale that are envisaged. It, therefore, becomes

important that the Indian financial sector prepares itself to compete in the international arena. In

an industry, where size is equated with financial soundness, consolidation is likely to happen

among the players of the industry to combat the global competition.

Risk Management in the Financial Sector

Risk assessment is a continuous process and the stress tests need to be conducted taking into

account the macroeconomic linkages as also the contagion risks. With the increase in the size of

the Indian financial sector and the gamut of services being provided by this sector, it becomes

imperative for the organizations to understand the various dimensions of risks and their potential

systemic impact. It is important to analyze the aggregation of exposures across the entire

organization and avoid merely managing risks individually in respect of each exposure. One of

the most critical issues in risk management is of liquidity risk management in the banks,

especially in the wake of the global financial crisis. In recent times, increase in the banks

dependence on bulk deposits to fund credit growth has assumed significance as this could have

liquidity and profitability implications. There is a need to strengthen liquidity management in

this context as also to shore up the core deposit base and to keep an adequate cushion of liquid

assets to meet unforeseen contingencies.

Management of NPAs

The increase in the level of NPAs has a number of negative consequences. From the banking

systems point of view, high loan loss provisions reduce net profits and tend to put pressure on

the lending rates. High real lending rates discourage new and credit worthy borrowers from

seeking loans from banks, with negative consequences for real economic activity. From a

macroeconomic policy point of view, rigidities in lending rates that result from the large stock of

NPAs dampen the effectiveness of monetary policy. In addition, to the extent that the public

sector banks have to be recapitalized by the Government, because of Basel II compliance, the

NPAs represent a source of quasi-fiscal liabilities. Though there has been a consistent decline in

NPAs in the last couple of years in the Indian banking system, given the recent downturn in the

economy, an increase in NPA may not come as a surprise. In order to safeguard from such a

mishap it is advisable to maintain a healthy net worth which can act as a cushion.


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Basel II Norms

Basel II aims to encourage the use of modern risk management techniques, and to encourage

banks to ensure that their risk management capabilities are commensurate with the risks of their

business. Basel II takes a sophisticated approach to credit risk, in the sense that it allows banks to

make use of internal ratings based Approach - or 'IRB Approach' as they have become known -

to calculate their capital requirement for credit risk. It also introduces, in addition to the market

risk capital charge, an explicit capital charge for operational risk.

RBI Deadlines for Implementing Basel -II

. Approach The earliest date of

making application by

banks to the RBI

Likely date of

approval by

the RBI

No.

a. Internal Models Approach (IMA)

for Market Risk

01-Apr-10 31-Mar-11

b. The Standardised Approach(TSA) for Operational Risk

01-Apr-10 30-Sep-10

c. Advanced Measurement

Approach (AMA) for Operational

Risk

01-Apr-12 31-Mar-14

d. Internal Ratings-Based (IRB)

Approaches for Credit Risk

(Foundation- as well as Advanced

IRB)

01-Apr-12 31-Mar-14


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Having regarded the necessary for up-gradation of risk management framework, as also

increasing capital efficiency in the banks by adoption of the advanced approaches, envisaged

under the Basel II Framework, and the emerging international trend in this regard, it is

considered desirable to lay down a timeframe for implementation of the advanced approaches in

India. This would enable the banks to plan and prepare for their migration to the advanced

approaches for credit risk and operational risk, as also for the Internal Models Approach (IMA)

for market risk. RBI has drawn up the following schedule for implementation of BASEL II in

India.

Structural Changes

Technological progress across the globe can act as a catalyst to the entire financial sector. The

last decade has seen tremendous growth in the financial sector at the behest of the technology

infusion. However, given the growth opportunity available in the financial sector in India,

technology can play a much greater role in facilitating better services across the board. Better

technological infrastructure will also further Governments endeavour in consolidation of banks

in India. Apart from technology, a proper manpower planning with a strong skill set, adept to

address the challenges of the financial sector, is also a must.

Promoting Financial Inclusion

Unequivocal consensus exists on the need to foster financial deepening in effect, inclusive

growth. Indian financial sector has been growing and has been sound and strong. However,

going ahead, the challenge of the industry is to reach out to the various layers of the socio

economic pyramid to ensure sustainable economic growth. The world over, financial institutions

have developed various products and strategies to serve the lower income group. For example, in

Brazil several banks have adopted a correspondent banking model that distributes credit, savings

and insurance products through grocery stores, retailers and local centres. Financial inclusion in

India can only be achieved, when the poor and the downtrodden, who have been excluded from

the benefits of the financial services in the formal sector, are able to access basic banking and

financial services at a affordable cost.


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Future Prospects

Demographic Shifts will Transform Financial Sector

With a chunk of the Indian population being below the age of 35 years, the demands from the

financial sector is expected to be huge. At the same time, it is to be noted that this generation ishaving a huge propensity to consume with an ever increasing purchasing power. This will

provide the entire financial sector with a gamut of opportunities. Banking is expected to flourish

and insurance penetration is expected to increase by leaps and bounds. With cash at their

disposal the number of people investing in the stock market is expected to grow. However, with

the growth in the financial sector a new range of risks may also unfold. Boundaries between

traditional risk coverage, asset management, and investment banking expertise will blur, and new

players with tacit knowledge will emerge to handle new generation requirements to capitalize

upon the opportunity.

Technology will Enable New Products and Delivery Models

The technology revolution across the globe is poised to change the entire financial sector.

Technology per se does not drive innovation, but it does enable it. Aggressive innovation is

expected to address customers requirements better and quicker. Retail banking distribution in

India is also expected to see unprecedented growth. Technology will enable to cut the costs of

accessing information by customers. For traditional branch based banks, both the increased use

of online banking and their own back-office improvements will allow branch formats to become

less like transaction centers and more oriented towards customer needs. Another prospective area

is the growth of electronic payments that has occurred over the past few years and may be

accelerated by the combination of customers increasing acceptance of alternative payment

systems and digitalization of micro-payments. The insurance industry would also be able to use

technology to lower their transaction costs and increase the penetration of insurance; besides

making it affordable to the vast sections of the society who are still out of the insurance ambit.

Increase in the usage of mobile based platform would increase the accessibility for the

consumers with premium payment reminder alerts, and other policy transactions would become

much simpler in the days to come.


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Consolidation in Indian Banking

In a globalizing market, the scale and the reach of financial institutions will often be a key factor

in the years to come. With the advent of aggressive private sector banking in the country, it may

seem imperative for the smaller banks present in the country to change their existing structure to

stay alive. The Raghuram Rajan Committee, 2008, recognizes the fact that these small banks

have not been able to distinguish themselves in India, often due to poor Governance structures,

excessive Government and political will or interference, and the unwillingness / inability of the

regulator to undertake prompt corrective action. As time changes, the challenge of managing

smaller organizations will also become enormous. With the number of banks in the country

increasing, profit margins are expected to decline. In such a case consolidation, can take place

through strategic alliances or partnerships. Mergers and alliances will be helping in capitalizing

upon the synergies of each other and thereby bringing in economies of scale. Prospects in such

consolidations are going to reap healthy benefits and making the financial sector in the country

more robust and in tandem with the global standards.

Increase in Insurance Penetration

Low levels of financial literacy have hampered the adoption of financial savings in the past. The

insurance industry has played a stellar role in improving awareness of long term financial

planning amongst potential customers. This has taken place through innovative use of various

media, internet and on the ground initiatives. The need to plan for various life stage events

education, marriage, housing, retirement and the role that life insurance can play in meeting

that eventuality, is certainly far better than what was the case ten years ago. The age dividend

that India benefits from should be tapped in order to ensure a secure financial future for its

citizens.

Blurring Distinction between Banks and Insurance

Today, financial markets are turbulent, globally. Traditional business models, when businesses

were clearly differentiated (Banks conducted banking, insurance companies offered risk covers

and securities companies offered investment opportunities), are slowly becoming blurred. Today,

insurance companies are exploring values in the banking and investment products and vice versa.

It is no more a bank competing with another bank and insurance company competing with

another insurance company, but an insurance company competing with banks. Hence, there is a


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convergence of opportunity in financial markets where every entity is prepared to undertake

enter a new territory, if it senses profits.

Exchange of Financial Services through a Common Platform

Another possibility is a greater coordination amongst the existing network of banks. It is a matter

of fact that the Banking system in India is spread wide and far with a concrete network and this

is made even stronger by the presence of a number of Regional Rural Banks in the interiors of

the country. A paradigm shift will be the creating of a platform wherein the unique services

offered by select banks is utilized at select branches through an exchange-sharing basis. The

intent is to bring local knowledge to bear on the products that are needed locally, and to have the

locus of decision-making close to the banker who is in touch with the client, so that decisions can

be taken immediately. It would also offer an entry point into the banking system, which some

Banks can use to eventually grow into large firms. This will also augment the Banks businesses

without incurring operational costs.

Venture Capital may become an Integral Part of the Financial Sector

The growth of the Indian economy will bring in new requirements which may be quite contrary

to the traditional ones. Seed capital may become the need of the hour. In such a scenario the

progress and the growth of venture capitalism in the country is quite eminent. In developed

countries like USA, venture funding is an integral part of the financial sector and plays a very

critical role in the growth of the economy. With India aspiring for a double digit growth, India

will become a prime target for venture capital and private equity, owing to various factors such

as fast growing knowledge based industries, favourable investment opportunities, cost

competitive workforce, booming stock markets and supportive regulatory environment among

others.


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A Matured Capital Market

With a strong and resilient banking and insurance industries, the Indian capital market is poised

to become more mature and be counted among the other renowned financial markets. The

leading stock exchanges of India, the Bombay Stock Exchange, as also the National Stock

Exchange, have extended their work-time in tandem with the other major financial markets of

the world.


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INDUSTRY ANALYSIS-Indian IT industry


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Global economic slowdown and its impact on the Indian

IT industry

Executive summary

The current global economic slowdown has its epicenter in the United States (US) but the

contagion is being witnessed in all major economies of the world. Several countries are

experiencing rapid contraction in their Global Domestic Product, rising unemployment levels

and an overall slowdown in the pace of investment activity. What started as a shock in the

financial markets has spread to all sectors of the world economy and the exact depth and breadth

of the impact is still unclear. Indias economy has been fuelled by the growth in the technology

sector in the recent past. A large part of this growth is dependent on the outsourcing or off

shoring of key business processes and software development activity (and related services) by

large global corporations and other organizations. Hence, the global slowdown has also affected

the business climate within India and the growth rate of the Information Technology (IT) and

Information Technology Enabled Services (ITES) sector is also experiencing the tremors of the

global recession. The Indian IT software and services industry which has seen a Compounded

Annual Growth Rate (CAGR) of around 30% over the last three or four years is now projected to

grow at 20%. Indian IT sectors derives approximately 61% revenues from the US based clients.

The revenue contribution from US clients to the top five Indian IT companies (who account for

46% of the IT industrys revenues) is approximately 58%. Hence, the impact of the slowdown in

the US is likely to have a deep impact on the prospects of the Indian IT sector. Moreover, about

41% of the IT industry revenues in India are estimated to be from financial services. Since this

sector has been affected most severely in the current climate, the impact on Indian companies

catering to this sector has been (and will continue to be) more acute. The margins are prone to be

challenged on account of the slowing growth in the US and European Banking and Financial

Services Industry (BFSI) sectors. Interestingly, the Indian IT / ITES sector has so far been

resilient in spite of the global slowdown. Part of this is due to the segmentation in the Indian IT /

ITES sector whereby some of the firms are the back office support service centers of large global

multinationals while the other is the indigenous IT service companies of Indian origin. While the


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current slowdown has impacted the indigenous IT companies business in India, a part of this has

been offset by a greater amount of business flowing to the captive units of foreign companies

operating in India owing to the pricing and margin pressure in their local markets. The

indications are also that the next decade will be very different from the last one, with structural

shifts in demographics that will reflect more prominently in international trade and economics.

Technology evolution and adoption is expected to witness some disruptive changes as the

Internet generation take over the workforce. Experts suggest that the performance of the Indian

IT software and services and ITES industry, while impacted by US economic slowdown, will be

catalyzed by a revival in technology spending during the first half of 2009. There are some

offsetting factors softening the revenue slowdown - favorable Rupee-Dollar exchange rate

expected to lead to higher INR revenue growth figures during the year, growth de-risking

through other emerging markets, growth in non-financial verticals, and growth through

countercyclical new business initiatives.

1.Current global scenario and the uncertainties involvedAs 2008 ended, predictions of where the world economy is heading turned dire. The

World Bank projected world output to grow by a mere 0.9% in 2009 (as compared with 2.5% in

2008 and a high of 4% in 2006) and world trade to contract by a significant 2.1% (compared to

positive rates of growth of 6.2% in 2008 and a high of 9.8% in 2006). Asia Pac is likely to

witness a sharper fall in the growth rate, i.e. from 13.4% in 2007 to 5.5% in 2010E in

comparison to the world growth estimated at 6.3% in 2010E from the 2007 figures of 9.7%. The

overall impact of the global financial crisis has been felt in Asia / Pacific in terms of the local

stock exchanges and currency exchange rates and lower GDP growth forecasts for 2009.

Impact on stock market

The year 2008 saw the credit crisis push several major economies, with banks particularly

being badly hit - many requiring government bail-outs. Shanghai which had soared more than

300% in 2006 and 2007 had its share values wiped nearly by $3 trillion (2.1 trillion)

Japanese shares also suffered their biggest yearly decline, with the Nikkei dropping 42% as

worlds second-largest economy slid into recession Indias main index sensex plunged nearly


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2.Structure of the global IT industryGrowth of global IT economy

The global IT industry has matured over the years and has emerged to be a chief

contributor to the global economic growth. The global IT sector, constituted by the software and

services, Information Technology Enabled Services (ITES) and the hardware segments, has been

on a gradual growth trajectory with a steady rise in revenues as witnessed in the past few years.

2008 was a strong year as the number of contracts; the total value and the annualized contract

values exceeded that of the preceding year. Among all users above average growth was

witnessed in the government, healthcare and the manufacturing segments.

The global software and services industry touched USD 967 billion, recording an above

average growth of 6.3% over the past year. Worldwide ITES grew by 12%, the highest among all

technology related segments. Hardware spend is estimated to have grown by 4% from USD 570

billion to nearly USD 594 billion in 2008. Currently, the global IT industry is experiencing a

slump with the recessions in the US and many industrial countries with the level of impact

varying by country/market and industry.

Forrester in its recent report has predicted that the US IT market will dip to 1.6% in 2009,

down from 4.1% growth in 2008 (see figure below). The Asia Pacific region, using a weighted

average1 of local currencies, will do a bit better in 2009, with 3.1% growth.The Western and Central Europe markets will have growth in local currency that is closer

to 1%. By 2010, the US market will shift to 7.3% growth, not far behind the 9.5% growth in the

other Americas, well ahead of the 5.5% growth in Asia Pacific and 5.3% growth in Western and

Central Europe.

The global IT sector, constituted by the software and services, Information

Technology EnabledServices (ITES) and the hardware segments, has been on a

gradual growth trajectory with a steady rise in revenues as witnessed in the past

few years


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Global scenario - IT purchases

As it stands, the US market accounts for majority of the global purchases of IT goods and

services. The US market which represented 37% of the global market for IT goods and services

in 2005 had shrunk to 33% share in 2008. Western and Central Europe would see its share of

global IT purchases fluctuate between 26% and 28% between 2008 to 2010; Eastern Europe, the

Middle East, and Africa and Asia Pacific are expected to hold their share positions.


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The global IT purchases are expected to plummet as strong dollar would hurt dollar-

denominated growth rates for IT purchases going ahead. The British pound was 23% lower in Q4

2008 from the year-ago level, the Indian rupee is down 20%, the Canadian dollar is 19% weaker,

and the euro is down 9%. Only the Japanese yen and the Chinese yuan renminbi have gained in

value against the US dollar. While these currency swings are likely to reverse in 2009 as the

financial crisis fades, the dollar is still likely to remain above 2008 levels for most of the year.

That will dampen global IT market growth measured in dollars and hurt the reported revenues of

US vendors like Accenture, Hewlett-Packard (HP), and IBM with large overseas operations.

With global tech market in US dollars likely to shrink, global IT vendors revenues is

expected to equal $1.66 trillion in 2009, declining by 3% after an 8% rise in 2008. The Asia

Pacific region has been a major growth engine for the tech industry. Its total purchases of IT

goods and services of $448 billion in 2008 were almost as large as Western and Central

Europes. Countries like Hong Kong, India, Malaysia, Singapore, South Korea, and Taiwan,

have seen growth slow as exports to the US and Europe slowed.

Asia / Pacific would experience a delayed impact of the global financial crisis. Gross

Domestic Product (GDP) growth is expected to slow in most countries / markets in 2009, which

will affect IT spending. Asia / Pacific is still growing more aggressively than other regions in

GDP and in IT. As a result, vendors would be looking to this region for growth and stability.

Asia / Pacific is still growing more aggressively than other regions in GDP and

in IT.As a result, vendors would be looking to this region for growth and stabilityUnited State

33%

%


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3.Structure of Indian IT industry

IT-ITES industry in India has today become a growth engine for the economy,contributing substantially to increases in the GDP, urban employment and exports, to achieve the

vision of a powerful and resilient India. While the Indian economy has been impacted by the

global slowdown, the IT-ITES industry has displayed resilience and tenacity in countering the

unpredictable conditions and reiterating the viability of Indias fundamental value proposition.

Value proposition

The main reasons for the successful establishment of software companies in India and its

strong performance can be attributed to the following:

Cost advantage

Given the labor market conditions in India, there exists substantial scope of cost arbitrage

for performing services from India. This, along with a large pool of talented and English people

labor force, was the genesis of the IT sectors dominance in the world IT services industry.

Breadth of service offering and innovation

Service offerings have evolved from low-end application development to high-end

integrated IT solutions

Quality / maturity of process

Having made its mark as a center of low-cost and wide range of service offerings, the

Indian IT / ITES sector has also proved its mettle in the quality of the service offerings, as

demonstrated by the fact that it hosts more than 55% of SEI CMM level five firms and the

highest number of ISO certified companies

Ease of scalability

The vast and trained labor pool of technically competent, English speaking people has

made it easy for the Indian companies to enter and exit this industry. Moreover, the ease with


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which a company can scale its operations (up or down) has been a great value driver for the

success of the Indian IT / ITES service sectors growth story

Performance of the Indian IT-ITES industry

The information technology sector has been playing a key role in fuelling the Indian

economic performance which has been stellar with robust GDP growth. Indias total IT

industrys (including hardware) share in the global market stands at 7%; in the IT segment the

share is 4% while in the ITES space the share is 2%.

The industry is dominated by large integrated players consisting of both Indian and

international service providers. During the year, the share of Indian providers went up to 65-70%

due to the emerging trend of monetisation of captives. MNCs however, continued to make

deeper inroads into the industry and strengthened their Indian delivery centres during 2008.

The continuing contribution of this sector to the Indian economy is evident from the fact

that revenue generated from this sector has grown from 1.2% in FY 1998 to an estimated 5.8% in

the FY 2009. The net value added by this sector to the economy is estimated at 3.5-4.1% for FY

2009.

Some of the key highlights of the Indian IT / ITES industry for FY 2009 is enumerated

below:

The export revenues are estimated to gross USD 47.3 billion in FY 2009, accounting for

66% of the total IT-ITES industry revenues

IT services exports grew substantially on account of increasing traction of the industry

in emerging markets such as remote infrastructure management and traditional segments such as

application management

Domestic market continued to gain momentum, growing at 26% in INR terms on

account of the overall positive economic climate, increased adoption of technology and

outsourcing

Engineering services and software product exports increased by 29% (USD)


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Direct employment reached nearly 2 million with 1.5 million in the exports segment, a

YoY increase of 26% in 2008. The indirect employment multiplier suggested that the industry

created between 6-8 million additional jobs

US and UK together constituted 79% of the global exports in FY 2008 thereby

dominating the export markets

BFSI remained the largest market followed by Hitech / Telecom which together

accounted for more than 60% of exports

Global IT and Indian IT offshoreTodays escalating, competitive and demanding environments have forced companies to

be more efficient, operate leaner and continuously create new procedures to k

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