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CHAPTER - 1 BANKING INDUSTRY

Introduction

A bank is a financial institution that provides banking and other financial services to their

customers. A bank is generally understood as an institution which provides fundamental

banking services such as accepting deposits and providing loans. A banking system also

referred as a system provided by the bank which offers cash management services for

customers, reporting the transactions of their accounts and portfolios, throughout the day.

History of Banking in India

The first bank in India, though conservative, was established in 1786. From 1786 till today,

the journey of Indian Banking System can be segregated into three distinct phases. They are

as mentioned below:

PHASE I - Early phase from 1786 to 1969 of Indian Banks

PHASE II - Nationalization of Indian Banks and up to 1991

PHASE III - Indian Financial & Banking Sector Reforms after 1991.

PHASE I:

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and

Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay

(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks.

These three banks were amalgamated in 1920 and Imperial Bank of India was established

which started as private shareholders banks, mostly Europeans shareholders. During the first

phase the growth was very slow and banks also experienced periodic failures between 1913

and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning

and activities of commercial banks, the Government of India came up with The Banking

Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per

amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with

extensive powers for the supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit

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mobilization was slow. Abreast of it the savings bank facility provided by the Postal

department was comparatively safer. Moreover, funds were largely given to the traders.

PHASE II:

Government took major steps in this Indian Banking Sector Reform after independence. In

1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale

especially in rural and semi-urban areas. Second phase of nationalization Indian Banking

Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the

banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking

Institutions in the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India raised to

approximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the

sunshine of Government ownership gave the public implicit faith and immense confidence

about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its

reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up

by his name which worked for the liberalisation of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put togive a satisfactory service to customers. Phone banking and net banking is introduced. The

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entire system became more convenient and swift. The financial system of India has shown a

great deal of resilience. It is sheltered from any crisis triggered by any external

macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible

exchange rate regime, the foreign reserves are high, the capital account is not yet fully

convertible, and banks and their customers have limited foreign exchange exposure.

Nationalization

A significant milestone in Indian Banking happened in the late 1960s when the then Indira

Gandhi government nationalized, on 19th July, 1969, 14 major commercial Indian banks,

followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason

for the nationalization was more control of credit delivery. After this, until the 1990s, the

nationalized banks grew at a leisurely pace of around 4%-also called as the Hindu growth of

the Indian economy. After the amalgamation of New Bank of India with Punjab National

Bank, currently there are 59 nationalized banks in India .

Liberalization

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization

and gave licenses to a small number of private banks, which came to be known as New

Generation tech-savvy banks, which included banks like ICICI Bank and HDFC Bank. This

move along with the rapid growth in the economy of India, kick started the banking sector in

India, which has seen rapid growth with strong contribution from all the three sectors of

banks, namely, government banks, private banks and foreign banks. However there had been

a few hiccups for these new banks with many either being taken over like Global Trust Bank

while others like Centurion Bank have found the going tough.

The next stage for the Indian banking has been setup with the proposed relaxation in thenorms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%.

Current scenario

The growth in the Indian Banking Industry has been more qualitative than quantitative and it

is expected to remain the same in the coming years. Based on the projections made in the

"India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the reportforecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The

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total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs

40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as

compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite

rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent

that existed between 1994-95 and 2002-03. It is expected that there will be large additions to

the capital base and reserves on the liability side.

The Indian Banking Industry can be categorized into non-scheduled banks and scheduled

banks. Scheduled banks constitute of commercial banks and co-operative banks. There are

about 67,000 branches of Scheduled banks spread across India. As far as the present scenario

is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened

with excessive Non Performing assets (NPAs), massive manpower and lack of modern

technology. On the other hand the Private Sector Banks are making tremendous progress.

They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as

foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBIBank, ING Vyasa Bank ,SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd.

and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank,

Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank,

American Express Bank Ltd, Citibank are some of the foreign banks operating in the India

Future outlook

Total banking assets are expected to double and grow to $915 billion by 2015 - a CAGR of 15%

$70 billion additional equity needed for growth plus Basel III compliance

Mutual Funds: Assets Under Management (AUM) are expected to grow by 15% till 2015

Retail Finance is expected to grow at an annual rate of 18%, from $27.6 billion in 2003-04 to

$64.2 billion by 2011-12.

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Banking Structure in India

There are various types of banks which operate in our country to meet the financial

requirements of different categories of people engaged in agriculture, business, profession,

etc. On the basis of functions, the banking institutions in India may be divided into the

following types:

Central Bank

A bank which is entrusted with the functions of guiding and regulating the banking system of

a country is known as its Central bank. Such a bank does not deal with the general public. It

acts essentially as Governments banker; maintain deposit accounts of all other banks and

RESERVE BANK OF INDIA

SCHEDULED BANKS

COMMERCIAL BANKS

PUBLIC SECTOR BANKS (27)

SBI AND ASSOCIATES (8)

NATIONALIZED BANKS (19)

PRIVATE BANKS (31)

OLD BANKS (23)

NEW BANKS (8)

CO-OPERATIVE BANKS

URBAN CO-OPERATIVE(52)

STATE CO-OPERATIVE (16)

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advances money to other banks, when needed. The Central Bank provides guidance to other

banks whenever they face any problem. It is therefore known as the bankers bank. The

Reserve Bank of India is the central bank of our country.

The Central Bank maintains record of Government revenue and expenditure under various

heads. It also advises the Government on monetary and credit policies and decides on the

interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also

determined by the central bank.

Another important function of the Central Bank is the issuance of currency notes, regulating

their circulation in the country by different methods. No other bank than the Central Bank can

issue currency.

Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-term loans

and advances to their customers. In addition to giving short-term loans, commercial banks

also give medium-term and long-term loan to business enterprises. Now-a-days some of the

commercial banks are also providing housing loan on a long-term basis to individuals. There

are also many other functions of commercial banks, which are discussed later in this lesson.

Types of Commercial banks: Commercial banks are of three types i.e., Public sector banks,

Private sector banks and Foreign banks.

Public Sector Banks : These are banks where majority stake is held by the Government of

India or Reserve Bank of India. Examples of public sector banks are: State Bank of India,

Corporation Bank, Bank of Baroda and Dena Bank, etc.

Private Sectors Banks : In case of private sector banks majority of share capital of the bank

is held by private individuals. These banks are registered as companies with limited liability.

For example: The Jammu and Kashmir Bank Ltd., Bank of Rajasthan Ltd., Development

Credit Bank Ltd, Lord Krishna Bank Ltd., Bharat Overseas Bank Ltd., Global Trust Bank,

Vysya Bank, etc.

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Foreign Banks : These banks are registered and have their headquarters in a foreign country

but operate their branches in our country. Some of the foreign banks operating in our country

are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express

Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of fo reign banks

operating in our country has increased since the financial sector reforms of 1991.

Development Banks

Business often requires medium and long-term capital for purchase of machinery and

equipment, for using latest technology, or for expansion and modernization. Such financial

assistance is provided by Development Banks. They also undertake other development

measures like subscribing to the shares and debentures issued by companies, in case of under

subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and

State Financial Corporations (SFCs) are examples of development banks in India.

Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative

society under the Co-operative Societies Act. When a co-operative society engages itself in

banking business it is called a Co-operative Bank. The society has to obtain a license from

the Reserve Bank of India before starting banking business. Any co-operative bank as a

society is to function under the overall supervision of the Registrar, Co-operative Societies of

the State. As regards banking business, the society must follow the guidelines set and issued

by the Reserve Bank of India.

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit

societies, central co-operative banks and state co-operative banks. These banks are organizedat three levels, village or town level, district level and state level.

Primary Credit Societies : These are formed at the village or town level with borrower and

non-borrower members residing in one locality. The operations of each society are restricted

to a small area so that the members know each other and are able to watch over the activities

of all members to prevent frauds.

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Central Co-operative Banks : These banks operate at the district level having some of the

primary credit societies belonging to the same district as their members. These banks provide

loans to their members (i.e., primary credit societies) and function as a link between the

primary credit societies and state co-operative banks.

State Co-operative Banks : These are the apex (highest level) co-operative banks in all the

states of the country. They mobilize funds and help in its proper channelization among

various sectors. The money reaches the individual borrowers from the state co-operative

banks through the central co-operative banks and the primary credit societies.

Specialised Banks: There are some banks, which cater to the requirements and provide

overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and

NABARD are examples of such banks. They engage themselves in some specific area or

activity and thus, are called specialized banks. Let us know about them.

Export Import Bank of India (EXIM Bank) : If you want to set up a business for exporting

products abroad or importing products from foreign countries for sale in our country, EXIM

bank can provide you the required support and assistance. The bank grants loans to exporters

and importers and also provides information about the international market. It gives guidance

about the opportunities for export or import, the risks involved in it and the competition to befaced, etc.

Small Industries Development Bank of India (SIDBI): If you want to establish a small-

scale business unit or industry, loan on easy terms can be available through SIDBI. It also

finances modernization of small-scale industrial units, use of new technology and market

activities. The aim and focus of SIDBI is to promote, finance and develop small-scale

industries.

National Bank for Agricultural and Rural Development (NABARD): It is a central or

apex institution for financing agricultural and rural sectors. If a person is engaged in

agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide

credit, both short-term and long-term, through regional rural banks. It provides financial

assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries,

cottage and village industries handicrafts and allied economic activities in rural areas.

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Global Scenario

Global Bank has undergone a series of substantial changes in the last 10 years, starting with the

deregulation of the U.S. financial services industry in the late 1990s. Seeking to rapidly expand its

portfolio, the bank undertook a series of mergers and acquisitions. Global Bank now has over 200 branches across the western United States and offers a complete line of integrated financial services,

including:

Core accounts . This includes savings and checking accounts.

Lending . This includes credit cards, consumer loans (such as auto and line of credit),

mortgage, and home equity.

Investing . This includes certificates of deposit, trust services, brokerage services (including

securities), annuities, individual retirement accounts, and mutual funds.

Financial planning . This includes comprehensive financial planning services (including

retirement, education, and tax) and estate planning (including both future planning and plan

execution services).

The bank's profitability lags behind many of its competitors of similar size, but the chief executive

officer (CEO) is actively exploring ways to substantially improve profitability in the future.

Improve cross-selling between services

A recent customer survey demonstrated that in many cases customers are unaware of the full

suite of services offered by Global Bank. The CEO sees a significant opportunity to

encourage existing customers to make use of additional, more profitable services. To this end,

the CEO has tasked the chief technology officer (CTO) to explore ways technology can be

used to promote cross-selling opportunities.

Increase efficiency from branch offices

The mergers and acquisitions in Global Bank's recent history are also reflected in the branch

office experience. Branch office workers must use a variety of different systems to perform

customer service operations. This increases training costs for employees and results in slower

customer service in each branch. The CEO wants to provide more efficient service in

branches, which he believes will result in lower training costs and greater satisfaction for

both the bank customers and staff.

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Make one or more additional acquisitions

The CEO has determined that the fastest way to significantly increase market share is to

further acquire financial businesses. He is also looking to use these acquisitions to shift the

portfolio of Global Bank to increase its focus on more profitable services. Through well

chosen acquisitions, the CEO aims to increase both revenue and profitability in the medium

term.

Technology Objectives

After meeting with the CEO, the CTO realizes that the following changes to the IT environment are

necessary for Global Bank to meet its business objectives:

Improve current application integration and simplify the integration of future

applications.

Provide a single client application for branch office and call center employees. Provide a smart client application for the appraiser. The following section discusses each objective in more detail.

Improve Application Integration

The problem of application integration is at the core of many of the problems identified by the CEO.With technology from a number of different vendors, and a patchwork environment that has evolved

over time, compromises have been necessary to get systems working quickly. This has resulted in

high operations costs and difficulty in adding new services in a cost-effective and timely manner.

To improve interoperability, one option would be to standardize on a single platform. However, the

CTO is worried about the migration costs that would occur and recognizes that, with future

acquisitions on the horizon, the problem is only likely to reoccur. Instead, the CTO decides the best

solution is to focus on better application integration for the existing applications and providing a morestandardized approach to application integration. In particular, the CTO wants to make it significantly

easier to add and remove systems.

Provide a Single Client Application for Branch Office and Call Center Employees

The CTO wants to develop a single application that the branch officers can use for all day-to-day

branch operations. This application would display an interface specific to the job role of the branch

office employee, and it would be able to communicate with the bank's many different systems. The

same application will also be used in the call centre located in Fargo, North Dakota.

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The CTO believes that providing a single client application for branch employees will increase

employee productivity and satisfaction, reduce data entry errors, reduce training costs, and decrease

customer wait times in branches.

Provide a Smart Client Application for the Appraiser

After analyzing its loan processing time, the CTO determined it needs to provide a smart

client application for its appraiser to use through the appraisal process. The bank employs

appraisers to assess the value of different properties. The appraisers will use the smart client

application to obtain assignments and to enter appraisal information. The appraiser can use

the application in the office or at the property. When the appraiser is at a property, the

application works in offline mode. After the appraiser connects to the centralized application,

the appraisal information is synchronized with the bank systems.

Indian Scenario

The RBI took a few important steps to make the Indian Banking industry more robust and

healthy. This includes de-regulation of savings rate, guidelines for new banking licenses and

implementation of Basel Norm III. Since March 2002, Bankex (Index tracking the

performance of leading banking sector stocks) has grown at a compounded annual rate of

about 31%. After a very successful decade, a new era seems to have started for the Indian

Banking Industry. According to a Mckinsey report, the Indian banking sector is heading

towards being a high-performing sector.

Bankex 10 Year Performance

Indias gross domestic product (GDP) growth will make the Indian banking industry the third

largest in the world by 2025. According to the report, the domestic banking industry is set for

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an exponential growth in coming years with its assets size poised to touch USD 28,500

billion by the turn of the 2025 from the current asset size of USD 1,350 billion (2010).

Historical Performance of Bank

If we look at 5 years historical performance of different types of players in the banking

industry, public sector bank has grown its deposits, advances and business per employee bythe highest rate 21.7%, 23% and 21.1% respectively. As far as net interest income is

concerned, private banks are ahead in the race by reporting 24.2% growth, followed by public

banks (21.4%) and then by foreign banks (14.8%). Though the growth in the business per

employee and profit per employee has been the highest for public sector banks, in absolute

terms, foreign banks have the highest business per employee as well as profit per employee.

Bank group-wise performance

The business of all schedule commercial bank (SCBs) grew at a CAGR of around 22 per

cent, from Rs. 36,810 billion in 2005-06 to Rs.99,151 billion in 2010-11. Public sector banks,

which includes State Bank of India and associates and Nationlised banks continued to remain

major driver behind the overall growth of SCBs business constituting around 77 per cent

share in total business in 2010-11. Investment of the Banking sector in government securities

held in India recorded lower growth in 2010-11 as compared with the previous year in tune

with the reduction in SLR requirement from 25 per cent to 24 per cent with effect from

December 18, 2010.

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Public sector Banks

The business of public sector banks grew at a CAGR of 23 per cent from Rs.27,286 billion in

2005-06 to Rs.73,786 billion in 2010-11, driven by CAGR of 24 per cent in advance and 22

per cent in deposits during the same period. The share of advance in fund deployed remained

almost flat at 62.4 per cent in 2010-11 (62.8 per cent in 2009-10), while the proportion of

investment in funds deployed declined to 25 per cent in 2010-11 from around 28 per cent in

2009-10, due to the accommodation of higher credit growth.

Private sector banks

The business of private sector banks grew at a CAGR of 19.4 per cent from Rs.7,411 billion

in 2005-06 to Rs.18,003 billion in 2010-11, driven by CAGR of 21 per cent in advance and18.5 per cent in deposits during the same period. The share of advance in fund deployed

increased to 59.6 per cent in 2009-10, while the proportion of investment in funds deployed

declined to 31.6 per cent in 2010-11 from around 32.2 per cent in 2009-10. The segment

stood second in term of the shares in total business at 18 per cent in 2010-11.

Foreign banks

The business of banks foreign grew at a CAGR of 15.6 per cent over the past five years, thelowest amongst all bank group, from Rs.2,113 billion in 2005-06 to Rs.4,362 billion in 2010-

11, driven by CAGR of 16.2 per cent in deposits between 2005-06 and 2010-11. Advance

grew at a CAGR of 15 per cent during the same period. The group had the lowest share of

around 4 per cent in total business of SCBs in 2010-11.

6%

74%

20%

Share of Bank groups in SCBs - Total

buiness (2005-06)

Foreign Banks

PSUs

Private Banks

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Graphs of ROA, Net NPA and CAR in banking sector in Indian Scenario

In the last 5 years, foreign and private sector banks have earned significantly higher return on

total assets as compared to their pubic peers. If we look at its trend, foreign banks show an

overall decreasing trend, private banks an increasing trend and Public banks have been more

or less stagnant. The net NPA of public sector bank was also significantly higher than that of

private and foreign banks at the end of FY11, which indicates the asset quality of public

4%

78%

18%

Share of Bank groups in SCBs - Total buiness(2010-11)

Foreign Banks

PSUs

Private Banks

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banks is comparatively poor. The Capital Adequacy ratio was also very high for private and

foreign bank as compared to public banks.

In conclusion, we could say that the current position of ROA, Net NPA and CAR of different

kinds of players in the industry indicates that going ahead; public banks will have to face

relatively more problems as compared to private and foreign banks.

SWOT analysis of banking sector

Strength

Indian banks have compared favorably on growth, asset quality and profitability with other

regional banks over the last few years. The banking index has grown at a compounded

annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in

the market index for the same period.

Policy makers have made some notable changes in policy and regulation to help strengthen

the sector. These changes include strengthening prudential norms, enhancing the

payments system and integrating regulations between commercial and co-operative

banks.

Bank lending has been a significant driver of GDP growth and employment. Extensive

reach: the vast networking & growing number of branches & ATMs. Indian banking

system has reached even to the remote corners of the country.

In terms of quality of assets and capital adequacy, Indian banks are considered to have

clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region.

Weakness

Public Sector Banks need to fundamentally strengthen institutional skill levels especiallyin sales and marketing, service operations, risk management and the overall

organizational performance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few

customer segments and geographies.

Structural weaknesses such as a fragmented industry structure, restrictions on capital

availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled

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Commercial Banks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in

PSU banks below 51% thus choking the headroom available to these banks for raining

equity capital.

Impediments in sectoral reforms: Opposition from Left and resultant cautious approach

from the North Block in terms of approving merger of PSU banks may hamper their

growth prospects in the medium term.

Opportunity

The market is seeing discontinuous growth driven by new products and services that

include opportunities in credit cards, consumer finance and wealth management on the

retail side, and in fee-based income and investment banking on the wholesale bankingside. These require new skills in sales & marketing, credit and operations.

With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities and

service levels from banks.

New private banks could reach the next level of their growth in the Indian banking sector

by continuing to innovate and develop differentiated business models to profitably servesegments like the rural/low income and affluent/HNI segments; actively adopting

acquisitions as a means to grow and reaching the next level of performance in their

service platforms. Attracting, developing and retaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternative

approaches to win the race for the customer and build a val ue-creating customer

franchise in advance of regulations potentially opening up post 2009.

Reach in rural India for the private sector and foreign banks. Liberalization of ECB norms: The government also liberalised the ECB norms to permit

financial sector entities engaged in infrastructure funding to raise ECBs. This enabled

banks and financial institutions, which were earlier not permitted to raise such funds,

explore this route for raising cheaper funds in the overseas markets.

Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed

them to raise perpetual bonds and other hybrid capital securities to shore up their capital.

If the new instruments find takers, it would help PSU banks, left with little headroom for

raising equity.

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Threats

Threat of stability of the system: failure of some weak banks has often threatened the

stability of the system.

Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the Public Sector Bank as

well as the private players.

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CHAPTER - 2 AXIS BANK

Company profile

Axis Bank India, the first bank to begin operations as new private banks in 1994 after the

Government of India allowed new private banks to be established. Axis Bank was jointly

promoted by the Administrator of the specified undertaking of the

Unit Trust of India (UTI-I) Life Insurance Corporation of India (LIC) General Insurance Corporation Ltd

Also with associates viz. National Insurance Company Ltd., The New India Assurance

Company, The Oriental Insurance Corporation and United Insurance Company Ltd.

Axis Bank in India today is capitalised with Rs. 232.86 Crores with 47.50% public holding

other than promoters. It has more than 200 branch offices and Extension Counters in the

country with over 1250 Axis Bank ATM proving to be one of the largest ATM networks in

the country. Axis Bank India commits to adopt the best industry practices internationally to

achieve excellence. Axis Bank has strengths in retail as well as corporate banking. By the end

of December 2004, Axis Bank in India had over 2.7 million debit cards. This is the first bank in India to offer the AT PAR Cheque facility, without any charges, to all its Savings Bank

customers in all the places across the country where it has presence.

With the AT PAR cheque facility, customers can make cheque payments to any beneficiary

at any of its existence place. The ceiling per instrument is Rs. 50,000/-.The latest offerings of

the bank along with Dollar variant is the Euro and Pound Sterling variants of the International

Travel Currency Card. The Travel Currency Card is a signature based pre-paid travel card

which enables travelers global access to their money in local currenc y of the visiting country

in a safe and convenient way. The Bank has strengths in both retail and corporate banking

and is committed to adopting the best industry practices internationally in order to achieve

excellence.

With a balance sheet size of Rs.2,85,628 crores as on 31st March 2012, Axis Bank is ranked

9th amongst all Indian scheduled banks. Axis Bank has achieved consistent growth and stable

asset quality with a 5 year CAGR (2007-12) of 31% in Total Assets, 30% in Total Deposits,

36% in Total Advances and 45% in Net Profit.

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Evolution

UTI was established in 1964 by an Act of Parliament; neither did the Government of India

own it nor contributes any capital. The RBI was asked to contribute one-half of its initial

capital of Rs 5 crore, and given the mandate of running the UTI in the interest of the unit-

holders. The State Bank of India and the Life Insurance Corporation contributed 15 per cent

of the capital each, and the rest was contributed by scheduled commercial banks which were

not nationalized then. This kind of structure for a unit trust is not found anywhere else in the

world. Again, unlike other unit trusts and mutual funds, the UTI was not created to earn

profits.

In the course of nearly four decades of its existence, it (the UTI) has succeeded phenomenally

in achieving its objective and has the largest share anywhere in the world of the domestic

mutual fund industry.'' The emergence of a "foreign expert" during the setting up of the UTI

makes an interesting story. The announcement by the then Finance Minister that the

Government of India was contemplating the establishment of a unit trust caught the eye of

Mr. George Woods, the then President of the World Bank. Mr. Woods took a great deal of

interest in the Indian financial system, as he was one of the principal architects of the ICICI,

in which his bank, First Boston Corporation Bank, had a sizeable shareholding. Mr. Woods

offered, through Mr. B.K. Nehru, who was India's Executive Director on the World Bank, the

services of an expert.

The Centre jumped at the offer, and asked the RBI to hold up the finalization of the unit trust

proposals till the expert visited India. The only point Mr. Sullivan made was that the

provision to limit the ownership of units to individuals might result in unnecessarily

restricting the market for units. While making this point, he had in mind the practice in the

US, where small pension funds are an important class of customers for the unit trusts. TheCentre accepted the foreign expert's suggestion, and the necessary amendments were made in

the draft Bill. Thus, began corporate investment in the UTI, which received a boost from the

tax concession given by the government in the 1990-91 Budget. According to this

concession, the dividends received by a company from investments in other companies,

including the UTI, were completely exempt from corporate income tax, and provided the

dividends declared by the investing company were higher than the dividends received.

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The result was a phenomenal increase in corporate investment which accounted for 57 per

cent of the total capital under US-64 scheme. Because of high liquidity the corporate sector

used the UTI to park its liquid funds. This added to the volatility of the UTI funds. The

corporate lobby which perhaps subtly opposed the establishment of the UTI in the public

sector made use of it for its own benefits later. The Government-RBI power game started

with the finalization of the UTI charter itself. The RBI draft of the UTI charter stipulated that

the Chairman will be nominated by it, and one more nominee would be on the Board of

Trustees. While finalizing the draft Bill, the Centre changed this stipulation. The Chairman

was to be nominated by the Government, albeit in consultation with RBI. Although the

appointment was to be made in consultation with the Reserve Bank, the Government could

appoint a person of its choice as Chairman even if the Bank did not approve of him.

Business description

The Bank's principal activities are to provide commercial banking services which include

merchant banking, direct finance, infrastructure finance, venture capital fund, advisory,

trusteeship, forex, treasury and other related financial services. The Bank has 463 branches

and 263 extension counters throughout India.

Vision and values

Vision 2015

To be the preferred financial solutions provider excelling in customer delivery through

insight, empowered employees and smart use of technology

Core Values

Customer Centricity Ethics Transparency Teamwork Ownership

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CSR of the company

Axis Bank has set up a Trust the Axis Bank Foundation (ABF)t o channel its philanthropic

initiatives. The Foundation has committed itself to participate in various socially relevant

endeavours with a special focus on poverty alleviation, providing sustainable livelihoods,

education of the underprivileged, healthcare, sanitation etc. The Bank contributes up to one

per cent of its net profit annually to the Foundation under its CSR initiatives.

The Foundation aims to provide one million sustainable livelihoods to the underprivileged in

some of the most backward regions of the country in the next five years, with 60% of the

beneficiaries being women. The Foundation nurtures / supports NGOs working in the areas of

education health and development of underprivileged and special children.

The Foundation also supports various projects to impart vocational training to the

underprivileged youth. The Foundation supports the Lifeline Foundation for providing high

level trauma care and rural medical relief in the states of Maharashtra, Kerala, Gujarat and

Rajasthan. The Foundation also supports projects in skill development, water harvesting and

low-cost agricultural practices to enhance farm yield.

Board of Directors

Name Designation

Dr. Adarsh Kishore Chairman

Mrs. Shikha Sharma MD and CEO

Mr. K N Prithiviraj Director

Mr. V R Kundinya Director

Mr. S B Mathur Director

Mr. Prasad Menon Director

Mr. Rabindranath Bhattacharya Director

Mr. Samir Barua Director

Mr. A K Dasgupta Director

Mr. Som Mittal Director

Mrs. Ireena Vittal Director

Mr. V Srinivasan ED, Corporate Banking

Mr. Somnath Sengupta ED, Corporate Centre

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Shareholding pattern (As on March 31, 2012):

Sr. No. Shareholder/Category No. of shares held % shareholding

A Promoters

1 SUUTI 97,224,373 22.76

2 LIFE INSURANCE

CORPORATION OF

INDIA

37,868,816 8.87

3 GENERAL

INSURANCE

CORPORATION OF

INDIA

7,050,000 1.65

4 THE NEW INDIA

ASSURANCE

COMPANY LIMITED

3,786,078 0.89

5 NATIONAL

INSURANCE

COMPANY LIMITED

3,287,000 0.77

6 THE ORIENTAL

INSURANCE

COMPANY LIMITED

1,380,312 0.32

7 UNITED INDIA

INSURANCE

COMPANY LIMITED

1,171,373 0.27

Total promoter

shareholding A

151,767,952 35.53

B Domestic

shareholders

8 Indian FIs and Banks 6,021,923 1.41

9 Indian MFs 18,108,421 4.24

10 Indian bodies corporate 31,560,234 7.39

11 Indian residents 32,212,279 7.54

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Total domestic

shareholding B

87,902,857 20.58

C Foreign shareholders

12 FIIs 148,775,084 34.8313 FDI (GDR) 37,731,208 8.83

14 Foreign Bodies - DR 36,401 0.01

15 Foreign Banks/Foreign

Employees

36,089 0.01

16 Foreign Nationals 100 0

17 NRIs 905,942 0.21

Total Foreignshareholding C

187,484,824 43.89

Total - A+B+C 427,155,633 100

%

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CHAPTER - 2 BASEL II

BASEL II accord proposes getting rid of the old risk weighted categories that treated all

corporate borrowers the same replacing them with limited number of categories into which

borrowers would be assigned based on assigned credit system. Greater use of internal credit

system has been allowed in standardized and advance scheme, against the use of external

rating. The new proposals avoid sole reliance on the capital adequacy benchmarks and

explicitly recognize the importance of supervisory review and market discipline in

maintaining sound financial system. Basel II compliance and risk management in bank go

hand in hand. The industry is gearing up to implement the standard. Under the current

system, the balance sheet items are assigned prescribed ratio (at present 9%) on the aggregate

of the risk weighted assets and other assets on ongoing basis.

Basel II aims to build on solid foundation of prudent capital regulation, supervision, and

market discipline and to further risk and financial stability. Implementation of new

framework will require substantial commitment on the part of field functionaries.

Objective of Basel II

To strengthen international banking system

Bank must attain solvency relative to their risk profile Supervisor should review each banks own risk assessment and capital strategies Bank should maintain excess of minimum capital Regulators would intervene at an early stage Possibility of rewarding banks with better risk management systems Each bank has suitable risk management framework and the expected level of capital

The benefits of the Basel II

Improved risk management Business expansion and better allocation of resources More rational pricing Higher credit rating Lower capital charges

Grater transparency Stronger competitive position

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An overview of the Basel II accord is as under

Pillar 1

Minimum capital Requirement

Pillar 2

Supervisory Review

Pillar 3

Market Discipline

1. Capital for credit risk Standardised approach International Rating based

approach

o Foundation

o Advance

2. Capital for market risk

Standardised methodo Maturity methodo Duration method

3. Capital for operational risk Basic indicator approach Standarised approach Advance measurement

approach

1. Evaluation risk

assessment

2. Ensure soundness and

integrity of banks

internal process to

assess the adequacy

of capital

3. Ensure maintenanceof minimum capital

4. Prescribed

differential capital

where necessary i.e.

where internal

processes are slack

1. Enhance disclosure

2. Core disclosure and

supplementary

disclosure

3. Semi annually

submission

Key Concepts of Basel II

Threats posed by risk asset held by the banks are to be counter balanced not only through

holding prescribe minimum capital but also be supplemented by effective supervisory

review of capital adequacy plus accepted market discipline implying public disclosure.

These constitute the three pillars of the Basel II accord. The underlying implication of the new accord is greater risk sensitive, it embodies three

principles of flexibility, menu of approaches and incentives for better risk management.

Banks with advanced risk management tools would be permitted to use their own internal

credit system for evaluating credit risk by process of internal based rating (IRB)

approach. The use of this approach will subject to approval by the supervisory based on

standards established by the committee.

The new accord intends to cover all types of risks to which banks are exposed in additionto credit risk.

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Basel II accord

Pillar 1 Specifies new standards for minimum capital requirements along with the

methodology for assigning risk weights on the basis of credit risk + market risk +

operational risk

Pillar 2 Enlarges the role of banking supervisors give them power to review the banks

risk management system.

Pillar 3 Defines standards and requirements for higher disclosure by banks on capital

adequacy, asst quality and other risk management processes.

THE THREE PILLAR APPROACH

The capital framework proposed in the New Basel Accord consists of three pillars, each of

which reinforces the other. The first pillar establishes the way to quantify the minimum

capital requirements, in complemented with two qualitative pillars, concerned with

organizing the regulators supervision and establishing market discipline through public

disclosure of the way that banks implement the Accord. Determination of minimum capital

requirements remain the main part of the agreement, but the proposed methods are more risk

sensitive and reflect more closely the current situation on financial markets.

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First Pillar: Minimum Capital Requirement

The first pillar establishes a way to quantify the minimum capital requirements. While the

new framework retains both existing capital definition and minimal capital ratio of 8% some

major changes have been introduced in measurement of the risks. The main objective of

Pillar I is to introduce greater risk sensitivity in the design of capital adequacy ratios and,

therefore, more flexibility in the computation of bank s individual risk. This will lead to

better pricing of Risks.

Capital Adequacy Ratio signifies the amount of regulatory capital to be maintained by a bank

to account for various risks inherent in the banking system.

The Capital Adequacy ratio is measured as:

Total Regulatory Capital (unchanged) = Banks Capital (minimum 8%)

Credit Risk + Market Risk +Operational Risk

Regulatory capital is defined as the minimum capital, banks are required to hold by theregulator, i.e.The amount of capital a bank must have. It is the summation of Tier I andTier II capital.

CREDIT RISK

STANDARIZEDAPPROACH

INTERNALRATING BASED

APPROACH

FOUNDATIONIRB

ADVANCE

IRB

SECURITIZATIONAPPROACH

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1. Credit Risk

The changes proposed to the measurement of credit risk are considered to have most

far reaching implications. Basel II envisages two alternative ways of measuring credit

risk.

The Standardized Approach

The standardized approach is conceptually the same as the present Accord, but more risk

sensitive. The bank allocates a risk-weight to each of its assets and off-balance-sheet

positions and produces a sum of risk weighted asset values. Individual risk weights currently

depend on the board category of borrower (i.e sovereigns, banks or corporate). Under the new

Accord, the risk weights are to be refined by reference to a rating provided by an external

credit assessment institution that meets strict standards.

The internal Ratings Based Approach (IRB)

Under the IRB approach, distinct analytical frameworks will be provided fro different types

of loan exposures. The framework allows for both a foundation method in which a bank

estimate the probability of default associated with each borrower, and the supervisors will

supply the other inputs and an advanced IRB approach, in which a bank will be permitted to

supply other necessary inputs as well. Under both the foundation and advanced IRB

approaches, the range of risk weights will be far more diverse than those in the standardized

approach, resulting in greater risk sensitivity

The Risk Components include measures of:

Probability of default (PD) Loss Given default (LGD)

Exposure at default (EAD) Effective Maturity (M)

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Proposed Risk weight Scale: Mapping Process:

Credit

Assessment

AAA to

AA-

A+ to A- BBB to

BBB-

BB+ to B- Below B- Unrated

Sovereign

(Govt.

central

banks)

0% 20% 50% 100% 150% 100%

Claims on

the banks

Option 1 20% 50% 100% 100% 150% 100%

Option 2a 20% 50% 50% 1005 150% 50%Option 2b 205 20% 20% 505 150% 20%

Corporate 20% 100% +0 150% 100%

Option 1 =Risk weights based on risk weight of the country

Option 2a = Risk weight based on assessment of individual Bank.

Option 2b = Risk weight based on assessment of individual banks with claim of original

maturity of less tan 6 months

Retail Portfolio = 75%

Claims secured by residential property = 35%

NPAS = If specific provision is less than 20% = 150%

If specific provision is more than 20% = 100%

2. Operational Risk:

Basel II Accord set a capital requirement for operational risk. It defines operational

risk as the risk of direct or indir ect loss resulting from inadequate or failed internal

processes, people and systems or from external events. Banks will be able to choose

between three ways of calculating the capital charge for operational risk the Basic

Indicator Approach, the Standardized Approach and the advanced measurement

Approaches.

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The Second Pillar: Supervisory Review Process

The supervisory review process requires supervisors to ensure that each bank has sound

internal processes in place to assess the adequacy of its capital based on a thorough

evaluation of its risks. Supervisors would be responsible for evaluating how well banks are

assessing their capital adequacy needs relative to their risks. This internal process would then

be subject to supervisory review and intervention, where appropriate.

The Third Pillar: Market Discipline

The third pillar of the new framework aims to bolster market discipline through enhanced

disclosure by banks. Effective disclosure is essential to ensure that market participants can

better underst and banks risk profiles and the adequacy of their capital positions. The newframework sets out disclosure requirements and recommendations in several areas, including

the way a bank calculates its capital adequacy and its risk assessment methods. The core set

of disclosure recommendations applies to all banks, with more detailed requirements for

supervisory recognition of internal methodologies from credit risk, credit risk mitigation

techniques and asset securitization.

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CHAPTER - 3 LITERATURE REVIEW

A review of literature is a critical analysis of a segment of published body of knowledge. This

studies and latest update on Banking Sector has been a base for this research.

2.1 Are Indian banks up to these challenges? (September 13, 2012

Outlook Arena)

What came first, the chicken or the egg? Philosophers have been debating this question for years and

the answer still remains a mystery. A similar but no less challenging question is unfolding in

the Indian banking sector currently. Can the banking system grow without signals that GDP growth

is improving? Or should banks continue lending to try and stimulate the economy? Well, the usual

thumb rule is that banking sector growth is 2.5 x GDP growths. So if the economy is growing at 7%,

the banking space should grow by around 17-18%. But, now with India seeing a number of GDP

growth downgrades, this figure for credit growth can have a wide range.

We recently attended an event hosted at the Indian Merchant's Chamber on the "Current Trends and

the Unfolding Banking Scenario". Mr Krishna Kumar, Managing Director & Group Executive of

National Banking and Whole Time Director of State Bank of India (SBI) was the speaker at the

event. According to him, with Europe in a debt crisis and the US stagnating, India continues to remaina growth driver. It has favourable demographics and a number of infrastructure and retail lending

opportunities. However, there are a number of challenges on the ground that needs to be addressed,

especially by the financial services sector.

Four pillars of focus for banks:

Basel III: The Basel III requirements will be a new challenge for Indian banks to meet. As

per these international regulations, banks need to maintain a minimum total capital (including

a capital conservation buffer) of 11.5% of risk weighted assets by FY18. As per RBI

estimates, Indian banks would require additional capital of Rs 5 trillion to meet Basel-III

norms by March 31, 2018. These projections are based on the conservative assumption that

banks will show a uniform growth of 20% per year. Public sector banks will need an infusion

from the government, their majority shareholder. Reserve Bank of India (RBI) Governor D

Subbarao, stated that the Center would need to infuse Rs 900 billion in PSU banks in order to

maintain its current shareholding after the new norms come into force. If it is willing to

reduce its stake in these banks to 51%, the burden may come down to Rs 700 billion. But,

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this is still a tough task for a government facing twin deficits. Indian banks are currently

adequately capitalized (FY12 CRAR - 14.3%). However as they grow in size more capital

would be required.

Asset quality deteriorating: The economic slowdown, elevated interest rates and mass

restructurings of state electricity boards (SEBs) and airlines all caused asset quality to sharply

deteriorate for the banking sector. State run banks were the worst affected in this regard. The

gross Non Performing Assets (NPAs) of the public sector banks (PSBs) increased sharply to

3.2% of gross advances at the end of FY12 from 2.3% at the end of FY11. In net terms, their

ratio went up to 1.5% from 1% over the same period as can be seen in the chart below. Agri,

SME and MSME accounts are seeing stress. Plus the iron and steel, mining, and textile

sectors have all been seeing pressure in making their interest payments.

Source: RBI Annual report

What is worrying is that the restructured standard advances of the PSBs increased to 5.7% of

gross advances by at the end of FY12 from 4.2% a year ago. If macro stress remains in the

system this year, the RBI expects the gross NPA ratios for all banks to increase to 3.7-4.1% atthe end of FY13 from 2.9% at the end of FY12. The ability to maintain good asset quality in

a tough environment will really separate the men from the boys in the banking space.

Falling Net Interest Margins (NIMs): NIMs are a measure of operating profitability of a

bank. On account of higher cost of funds, NIMs reported a decline in FY12. Banking NIMs

thus decreased from 3.14% in FY11 to 3.07% in FY12. This was on account of slower CASA

accretion and higher growth in term deposits (FDs). This growth in FDs was on account of

higher deposit rates in the system on the back of RBI's monetary tightening. Accordingly

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Return on Equity of banks posted a slight decline from 13.7% to 13.6% during the same

period and the Return on Assets stayed constant at 1.1%. However, in the long run the

banking sector's NIMs are expected to normalize. According to a report by the Boston

Consulting Group (BCG) the Indian banking sector's NIMs are expected to reduce to 2% by

2020.

Financial Inclusion: It is indeed unfortunate to note that in India 40-45% of the rural

populace does not have access to banking channels. Thus they are forced to borrow from

moneylenders at usurious rates. Microfinance Institutions (MFIs) were established to help

plug the gap; however they were also impacted by adverse regulations in Andhra Pradesh in

2011 and still haven't fully recovered. But yet, the need for the penetration of formal banking

into smaller townships cannot be underscored. India also fares poorly in respect of creditcards, outstanding mortgage, health insurance, adult origination of new loans, mobile

banking, etc. The new challenge for banks would be to cover villages with a population

below 2,000 as well as to expand the scope of the business correspondent model.

Conclusion

Well going forward the banking sector is expected to have a tough time managing 18-20%

credit growth in light of slowing GDP growth. Plus containing gross NPAs below 2% will

also be a huge challenge as it is an issue affecting the economy at large. Certain large

industries such as mining, textile, iron and steel, power, airlines etc are all seeing stress.

However on the retail front auto and home loans are seeing robust growth.

Infrastructure financing also remains a challenge as the country needs to build new roads,

ports, airports, etc and repair its aging ones. This requires investments that need to come from

the banking space. A new structure needs to be put in place to address the issue of sectoral

caps, risk averseness and asset liability mismatches. A few other challenges could be the

issue of new banking licenses and the advent of competition. Consolidation in the space mayalso be required as there are a number of smaller banks in the system. SBI has already

merged three of its associate banks, with 5 still remaining to be merged.

Technology is also said to be the way forward with India seeing a mobile and internet

revolution and more traditional banks need to accept the same. Human resources is also

another challenge as 40-50% of PSU banking staff is expected to retire over the next few

years. Plus attrition in the banking sector used to be low with staff staying in the same bank for their entire career. Stickiness is however low among new employees, thus the realignment

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of HR policies along with employee needs is required. But while there are a lot of challenges

on the ground we believe that the banking sector can meet them head-on as they have done in

the past. We hope to see a fresh face of banking in India.

2.2 Banking Sector Analysis Report (November 6, 2012 Sector Info

equitymaster.com)

The global financial system is still far away from a full recovery on account of a slowdown in

the US economy, the soft landing in China and the Euro debt crisis. The Indian banking

sector has been relatively well shielded by the central bank and has managed to sail through

most of the crisis. But, currently in light of slowing domestic GDP growth, persistent

inflation, asset quality concerns and elevated interest rates, the investment cycle has beenwavering in the country.

The cost of borrowings was higher on account of the various monetary tightening measures

undertaken by the central bank. People preferred to park their funds in higher yielding fixed

deposits rather than current or savings account (CASA). CASA accretion slowed for most

banks which led to a higher cost of funds. The savings bank account rate was deregulated by

the RBI, however most banks continue to hold the rate at 4%.

Apart from streamlining their processes through technology initiatives such as ATMs,

telephone banking, online banking and web based products, banks also resorted to cross

selling of financial products such as credit cards, mutual funds and insurance policies to

augment their fee based income. They are also looking at various financial inclusion

initiatives in order to spread the use of financial services among Indias large unbanked

population.

Financial year 2012

The RBI had to revise its target for credit growth in FY12 a number of times given the

external environment. From starting off with a prediction of 19% credit growth in May 2011,

the central bank brought this estimate down to 16% in January 2012. Finally non-food credit

growth came in at around 17% in FY12 compared to 21.5% in FY11. Against a backdrop of

GDP growth deceleration, weak IIP data and persistent inflation banks became more risk

averse to lending credit. This deceleration also reflects banks risk a version in face of rising

NPAs and increased leverage of corporate balance sheets.

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Credit growth decelerated across all bank groups during 2011-12 ranging between 16.3% in

the case of public sector banks and 19.7% for private sector banks. The comparable figures

for the previous year were 21% and 24.7% respectively.

The RBIs has not yet rolled back its aggressive interest rate policy and rates continue to be

elevated. The repo rate currently stands at 8%, with the reverse repo rate at 7%. While

inflation continues to remain high the RBI has refrained from any further hikes in order to

address the slowdown in growth. It may ease rates once inflation comes under control.

Growth on the deposit front however remained relatively low coming in at around 13% YoY

in FY12; this was as against an RBI target of 17%. Fixed deposits saw good growth, while

demand deposits saw a deceleration on lower yields. The outstanding credit-deposit ratio rose

from 74.5% FY11 to 76.7% in FY12.

Source: RBI

In the retail portfolio, while home loans grew by 12% YoY, while vehicle loans grew by

20%. Overall other personal loans enjoye d a much smaller growth of 8% YoY due to banksreluctance towards uncollateralized credit. Credit card outstanding grew by 13% YoY.

Indian banks, however, saw lower levels of money supply, and deposits as a percentage of

GDP in FY12 as compared to that in FY11 on account of the uncertain economic

environment. However credit as a % of GDP was higher as GDP growth slowed.

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Source: RBI

Most private sector banks had a relatively better outing in FY12. Increased pricing power

helped some of these banks sustain their net interest margins. Plus they were also able to

sustain their asset quality.

Net non performing assets (NPAs) in the system increased from 0.9% in FY11 to 1.2% in

FY12. However for PSU banks this ratio increased from 1% in FY11 to 1.5% in FY12.

Increased provisioning affected the profitability of the banks in question.

Prospects

Basel III is a new challenge that banks in India and overseas will have to surmount. It will be

a challenge to deploy the same safely and profitably in the event of persistence of economic

slowdown. The government was able to re-capitalize a few PSU banks in FY12, including the

much needed infusion for State Bank of India. According to RBI estimates, Indian banks

would require additional capital of Rs 5 trillion to meet Basel-III norms by March 31, 2018.

In 2011-12, agriculture loan target was Rs 4.5 trillion, and Rs 4.8 trillion was disbursed. For

2012-13, the target has been set at Rs 5.8 trillion. Financial inclusion initiatives also need to

be taken care of as India fares very poorly on this regard as half the population does not have

access to banking services.

New banking licenses are expected to be issued by the RBI to private sector players.

However, these licenses will only be awarded to certain players meeting strict requirements

on the capital, exposures, and corporate governance front. Lots of players including NBFCs,industrial houses, microfinance companies etc are all vying for this coveted license. There

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has so far been no progress on this issue since the RBI issued draft guidelines in August

2011.

However, growth is still a concern for the banking sector in FY12 on account of a sustained

slowdown in the economy as well as reduced demand for credit on account of the current

high interest rate environment. The central bank expects credit growth to come in at 17%,

with deposit growth at 16% for FY13. Asset quality concerns are also an issue especially in

the power, textile, and mining space.

In the year 2012-13 so far, there has been a easing of liquidity and monetary conditions. The

policy rate was cut by 0.5% in April. In addition there has been liquidity infusions through

open market operations export credit refinance. The 1% Statutory Liquidity Ratio (SLR)

reduction in August and the further 25 bps cut in the CRR is expected to further ease liquidity

and encourage banks to increase loans and advances. The SLR and CRR stand at 23% and

4.25% respectively currently .

2.3 Economic Survey 2011-12: Banking system to become stronger (March

16, 2012 By K R Kamath, Chairman, Punjab National Bank)

The Economic Survey notes that the Indian Banking System has successfully passed throughthe various phases of reforms and has also faced the stress tests posed by the global financial

turmoil in the recent past.

This suggests that the Indian financial system has become even stronger. The financials of the

banking system have grown in size as well as in quality. There were some important reforms

also along in the year such as the deregulation of interest rates on Saving Bank Deposits

and NRE deposits.

The banks have complied with the regulatory requirements and also been proactive in

adopting to the changes which are coming their way in the emerging banking space, both in

domestic and international fronts.

The Economic Survey tabled by the government also notes that the banking system has

become more transparent with the adaptation of the base rate method of setting interest rates

on loans which has also helped in better transmission of monetary policy to the ultimate

consumer of banking services. (Under the base rate system, each bank has to set its base rateto which all the lending is supposed to be benchmarked.

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Bank loans cannot be priced below this rate. In the earlier system of benchmark prime

lending rate, banks would provide bulk of the loans below this rate.) The Survey notes that

the Indian banking system is intensively linked to the global financial market but at the same

time because of the prudent regulation it has been insulated from the risks emanating from

global turmoil etc.

The Euro area affected financial markets for the greater part of the year, with the contagion of

Greece's sovereign debt problem spreading to India and other economies by way of higher

than-normal levels of volatility.

The survey projects scenario for the banks to remain prepared to tackle issues like risk and

liquidity management and enhancing skills for proactively identifying these situations. It

notes the pursuance of Financial Stability and Development Council (FSDC) for greater

stability and inters regulatory coordination in India.

There are various emerging strong pillars in the shape of new institutions that find mention in

the survey eg Financial Action Task Force, Financial Sector Legislative Reforms

Commission. These we feel will certainly add to the strength of our banking system.

In the analysis contained in the Survey what emerges is that the Banking System in our

country has undergone transformation from being a conduit of resources for the economic

development of the country to the role of leading the economy in global financial space with

greater confidence.

To conclude, the adaptability of Indian Banking System and its preparedness to meet the

emerging challenges is getting proved once again as it braves the current scenario of

moderation in growth, higher inflation and emanating global threats from Euro debt crisis and

low US economic growth.

The resilience will improve further with the new capital regime under Basel III that will

include deleveraging, creating capital conservation buffer and counter cyclical capital

requirements. The environment will be more demanding with the already enhanced external

commercial borrowing limits and more liberalization awaited to boost FDI and Infrastructure

development in the country. The journey is challenging yet interesting with the expansionary

agenda before the financial system.

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2.4 A bright future for Indian banking (December 25, 2012 Mahua

Venkatesh and Zehra Kazmi, Hindustan Times)

A decade ago, transferring money from your account to a family member's would have meant

a visit to the nearest bank branch, a long queue and a few days-long wait. Today, you can use

your mobile phone to make the same transaction instantly.

Innovations such as automatic bill payment, cash transfer through mobile phones and online

banking have ensured that customers no longer have to make pilgrimages to bank branches.

Passbook entries have been replaced by hassle-free e-statements; ATMs facilitate easy

withdrawals and payments.

Most importantly, banks have been able to ensure that all these transactions are safe and

secure. Banking in India has rapidly innovated to keep up with the times. Banks today are

competing heavily with each other, offering low rates on housing loans, credit cards to

anyone who answers those annoying tele-marketers and freebies for existing customers. So,

how do they stack up against each other?

The HT-MaRS Bank and Credit Card Satisfaction Survey 2012 ranked banks according to

customers' satisfaction across various categories. According to the results, India's second-

largest private bank, HDFC, emerged as the winner, dethroning 2010's champion, Axis Bank

(which slipped to third place). ICICI Bank moved up one place from the previous survey to

the second position. Though private sector banks may have got the top spots, ahead of public

sector ones, when it comes to satisfying consumers, the top 10 list features more state-owned

banks. Bank of Baroda bested the mammoth State Bank of India, improving drastically from

its 12th position in 2010 by landing the fourth position over-all, becoming the best

government-run bank.

The survey ranked banks across five parameters, namely account opening, bank staff, branch

facilities, turnaround time and account-related services. Each parameter had various attributes

on which customers were asked to score their banks.

Compared to 2010, there has been a marked increase in over-all satisfaction scores. Indian

Bank, Indian Overseas Bank and Canara Bank fell out of the top ten while relative newbies

such as Kotak Mahindra Bank and Yes Bank, which featured nowhere in the 2010 list have

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inched into the results. Results vary from town to town, but residents of Chandigarh seem the

most satisfied with their banks, stamping their approval with a high score of 829 points.

Changes ahead

The contours of the banking industry in India is set to change in the coming years with

Parliament passing the much awaited Banking Laws Amendment Bill last week. The passage

of the bill paves the way for the Reserve Bank of India to come out with final guidelines on

issuing new bank licenses. This not only means more banks, but the style of operation is also

expected to be different, with the upgradation of technology.

At present, over 70% of the market lies with the public sector banks but the government is

now geared up to open the sector to more foreign players while setting up new private banksin the country which would help in bringing more people under the banking net. Several

business houses including Aditya Birla Group, the Tatas and Reliance have evinced interest

in entering the Indian banking space. Besides the corporate houses, even non-banking

financial corporations can now convert themselves into full-fledged banks.

While allowing more banks to be set up, to encourage healthy competition in the market, the

government could also look at consolidating the public sector banks with a view to creating

mega-banking entities which could face up to stiff competition from others.

Evolution

The government under late Prime Minister Indira Gandhi nationalised 14 commercial banks

in 1969. The second dose of nationalisation happened in 1980 when 6 more commercial

banks were nationalised. The move, according to the government then, was to provide more

control of credit delivery. In 1993, the government merged New Bank of India with Punjab

National Bank. The Narasimha Rao government in the 1990s embarked on a policy of

liberalisation, providing licenses to several private banks, which came to be known as the

new generation banks. With liberalisation and changing economic dynamics in the country,

the UPA government is now keen to open up the sector to more private and foreign players.

"The dynamics were different pre-liberalisation and they are very different today and we

must move with the times," a senior finance ministry official, who did not wish to be

identified, said.

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2.5 Axis Bank Q3 net up 22% at Rs 1,347 crore (January 15, 2013

Business Today)

Private sector lender Axis Bank has reported 22 per cent increase in net profit at Rs 1,347.22

crore for third quarter ended December 31, 2012.

The bank had posted a net profit of Rs 1,102.27 crore for the same quarter of last financial

year, it said in a filing to the Bombay Stock Exchange.

Total income of the bank increased to Rs 8,580.30 crore during the October-December

quarter, from Rs 7,206.77 crore in the year-ago period.

For the first nine months of 2012-13, the bank has clocked 22 per cent rise in net profit, to Rs3,624.28 crore, from Rs 2,964.94 crore in the same period of the previous fiscal.

The bank reported a total income of Rs 24,678.96 crore in the first three quarters, compared

to Rs 19,766.93 crore in the same period last financial year.

The perusal of the review reveals that the Banking sector and axis bank has grown over the

years. Banking sector has potential for growth but there are few barriers also so the growth

of the sector is going to be stagnant.

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CHAPTER - 4 VALUATION

Financials of AXIS Bank

Balance Sheet

March 2012 March 2011 March 2010

12 months 12 months 12 months

Capital and Liabilities: In Rs. crore

Total Share Capital 413.20 410.55 405.17

Equity Share Capital 413.20 410.55 405.17

Share Application Money 0.00 0.00 0.00

Preference Share Capital 0.00 0.00 0.00

Interest Contribution Settler 0.00 0.00 0.00

Preference Share Application Money 0.00 0.00 0.00

Employee Stock Option 0.00 0.00 0.17

Reserves 22,268.51 18,484.06 15,583.76

Revaluation Reserves 0.00 0.00 0.00

Net Worth 22,681.71 18,894.61 15,989.10

Deposits 219,987.68 189,166.43 141,278.66

Borrowings 34,071.67 26,267.88 17,169.55

Total Debt 254,059.35 215,434.31 158,448.21

Minority Interest 0.00 0.00 0.00

Policy Holders Funds 0.00 0.00 0.00

Group Share in Joint Venture 0.00 0.00 0.00

Other Liabilities & Provisions 8,675.44 8,237.73 6,149.35

Total Liabilities 285,416.50 242,566.65 180,586.66

Assets

Cash & Balances with RBI 10,702.92 13,886.16 9,473.88

Balance with Banks, Money at Call 3,231.31 7,522.49 5,734.54

Advances 169,759.54 142,407.83 104,343.12

Investments 92,921.44 71,787.55 55,876.55

Gross Block 3,612.76 3,455.94 2,127.60

Accumulated Depreciation 1,408.44 1,185.99 948.99

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Net Block 2,204.32 2,269.95 1,178.61

Capital Work In Progress 79.82 22.96 57.38

Other Assets 6,517.16 4,669.70 3,922.59

Minority Interest 0.00 0.00 0.00Group Share in Joint Venture 0.00 0.00 0.00

Total Assets 285,416.51 242,566.64 180,586.67

Contingent Liabilities 449,977.02 429,071.06 301,742.05

Bills for collection 64,895.87 57,400.80 35,756.32

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Profit and Loss Statement

March 2012 March 2011 March 2010

12 months 12 months 12 months

In Rs. crore

Income

Interest Earned 21,994.90 15,154.86 11,639.05

Other Income 5,487.19 4,671.45 3,964.21

Total Income 27,482.09 19,826.31 15,603.26

Expenditure

Interest expended 13,969.18 8,588.61 6,632.63

Employee Cost 2,254.02 1,745.80 1,359.79

Selling and Admin Expenses 2,503.60 2,426.88 2,455.85

Depreciation 348.15 293.69 237.87

Miscellaneous Expenses 4,188.63 3,426.66 2,438.98

Preoperative Exp Capitalised 0.00 0.00 0.00

Operating Expenses 6,960.32 5,815.60 5,119.43

Provisions & Contingencies 2,334.08 2,077.43 1,373.06

Total Expenses 23,263.58 16,481.64 13,125.12

Net Profit for the Year 4,218.51 3,344.67 2,478.14

Minority Interest 0.00 0.00 0.00

Share Of P/L Of Associates -1.27 4.77 0.00

Net P/L After Minority Interest &

Share Of Associates4,219.78 3,339.91 2,478.14

Extraordinary Items 0.00 0.00 0.00

Profit brought forward 4,864.45 3,371.63 2,328.95

Total 9,082.96 6,716.30 4,807.09

Preference Dividend 0.00 0.00 0.00

Equity Dividend 770.26 670.48 567.47

Corporate Dividend Tax 0.00 0.00 0.00

Per share data (annualised)

Earning Per Share (Rs) 102.09 81.47 61.16

Equity Dividend (%) 0.00 0.00 0.00

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Book Value (Rs) 548.92 460.26 394.60

Appropriations

Transfer to Statutory Reserves 1,112.46 836.95 867.43

Transfer to Other Reserves 1.06 339.66 0.56Proposed Dividend/Transfer to Govt. 770.26 670.48 567.47

Balance c/f to Balance Sheet 7,200.45 4,864.45 3,371.63

Total 9,084.23 6,711.54 4,807.09

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Book Value

Book value = Total assets Total liabilities* / Number of outstanding shares

*(Total Debt + Other Liabilities & Provisions)

Book value as on March 31, 2012 = 285,416.51 - 262,734.79 / 41.32

= 548.92

Book value as on March 31, 2011 = 242,566.64 - 223,672.04 / 41.055

= 460.26

Book value as on March 31, 2010 = 180,586.67 - 164,597.56 / 40.52

= 394.60

Linkages between Book Value and Market Value

Calculation of regression coefficient

Year Market

Value

Book

Value

X- X =

X

Y- Y =

Y

X^2 Y^2 X*Y

2010 1169.10 394.6 -70.45 -73.33 4963.20 5376.80 5165.86

2011 1403.65 460.26 164.10 -7.67 26928.81 58.78 -1258.10

2012 1145.90 548.92 -93.65 80.