Pest Analysis of Banking Industry

LOVELY PROFESSIONAL UNIVERSITY Assignment-2 (Online) School of Business Name of the faculty member: Akashdeep Joshi Course Code: MGN 303 Environment Class: BBA, Semester:

Course Title: Business 5th

Section: Q1411

Batch: 2015-2018

Max. Marks: 30

Date of Allotment: 24-09-2016 10-2016

Date of Submission: 14-

Important Note: 1. Date of Submission of written report online: 14-10-2016 2. It is an individual Assignment to be uploaded online individually. 3. No two Students have the same company if they are having same sector so kindly see the whole document and let it verified with the other person with the same sector. 4. Sector may be same but not the company S. No

Roll No.

Objectives of Academic Activity

Topic Details

Evaluation Parameters

Expected outcomes

1

All students (Individual Assignment)

To enhance the conceptual as well as analytical skills of the student

Students are required to choose one organization each from the assigned industry by the faculty. They are required to do (external)environmental analysis and give examples from the selected organization related to application of the environmental analysis. Based on the analysis of various sources of information, student needs to submit report about the environmental factors

Introduction of the industry & company: 5 marks

This academic tasks focus on the following: Students will able to understand the practical aspects regarding how to analyze the external environment for a company by having information from various

Environmental analysis 10 marks, Examples from the organization 10 marks Reference: 5 marks

affecting the business operation.

sources.

The Banking Industry The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks. The Indian banking sector’s assets reached US$ 1.8 trillion in 2014 from US$ 1.3 trillion in 2010, out of which 70 per cent came from the public sector. Total lending increased at a compound annual growth rate (CAGR) of 20.7 per cent and total deposits at 19.7 per cent, during 2007-14. Total asset size of banking sector assets is expected to increase to US$ 28.5 trillion by 2025. Deposits have grown at a CAGR of 13.6 per cent during 2005–15 to an estimated US$ 1.48 trillion in 2015. Indian banks are concentrating on embracing integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II. According to RBI, majority of the banks already meet capital requirements of Basel III, which has a deadline of March 31, 2019. Rising incomes are expected to enhance the need for banking services in rural areas and therefore drive the growth of the sector; programmes like MNREGA have helped in increasing rural income aided by the recent Jan Dhan Yojana. The Reserve Bank of India (RBI) has relaxed its branch licensing policy, thereby allowing banks (which meet certain financial parameters) to set-up new branches, without prior approval from RBI. It has emphasized the need to focus on spreading the reach of banking services to the un-banked population of India.

About ICICI Bank ICICI Bank (Industrial Credit and Investment Corporation of India) was established in 1994 by ICICI Limited (an Indian Financial Institution) with Headquarter in Mumbai, India. In terms of market capitalization, ICICI is the 3rd largest bank in India (2016) and largest private sector bank in India. With total assets worth $ 109 Billion (as on 31st March 2016), the bank have broad customer base who are served through extensive network of 4450 branches and 13995 ATMs and is having its presence in 19 countries (including India). With its subsidiaries, the bank offers wide range of banking and financial product and services that includes retail as well as corporate banking,

insurance venture capital, corporate finance, private equity, etc. The share of ICICI is listed on BSE as well as NSE. ICICI is the first Indian bank to be listed on NYSE.

External Analysis

Political Environment Political environment of any country totally affects all the sectors of that country and banking is no exception. With favorable and stable political environment, the banking sector is able to mobilize funds more efficiently then otherwise. The unstable political environment risks the ability to screen the good from the bad, creating credit risks for the bank. It also affects the investment due to future uncertainty. One must note that the political instability of the country affect directly the banking sector in India Weakness in Indian political system affects the economic flexibility. Bureaucracy, poor administration, and power hamper the flexibility of India’s policy-making framework. Alliance politics results into delayed decision making and implementations due to diversified interest of different political group and come to an agreement. Despite of all this, there are high hopes with respect to the steps that government can take to boost up the economy and the banking sector. Monetary policy of RBI has been restrictive over last couple of years with more intervention by RBI into money market. This was because of inflationary pressure that the economy was facing. Inflation was a major concern which remained into double digit because of increasing food and fuel prices and later due to manufacturing sector. RBI has made many changes into repo and reverse repo rate to control inflation and ease the pressure. Currently RBI cut the rate by 25 basis points that made the bank rate at 6.25% and SLR at 20.75 % which will help the banks to flow more liquidity in the market.

Economic Environment India's economic flexibility is blocked by its weak economic structure, with very low per capita GDP. However, this risk is partially covered with the growth prospectus that India has and with its characteristic of being a well-diversified economy. It is clear that the

fiscal deficit limits the government’s ability to stimulate growth by fiscal policies. Further, Indian economy is into expansion mode together with private sector growth. The Indian private sector has not taken the benefit of India’s absolute credit growth. The increase in private sector credit has been very minimal over last few years. With the limitation of fund raising options in India, banks have provided important role in financing private sector. The fiscal deficit is also concern for the Indian economy, however the demand growth will offset the current account deficit to certain extent that occurs majorly because of the oil prices. There is high credit risk in Indian banking sector owing to the not-so-developed legal framework that results into delayed payments and lower recovery. As per the March quarter data of 2015-16, the total pile of PSB bad loans has grown Rs 3.09 lakh crore to Rs 5.8 lakh crore in the last one year alone. As per S&P reviews on Indian Banking, Indian banking regulations are at par with world standards. RBI has taken notable steps to ensure feasible risk-return ratio of banks. ICICI Bank’s net profit contracted 76 per cent to Rs.702 crores for the quarter ended 31 March 2016, the lowest quarterly profit in a decade, due to a sharp rise in bad loans. The gross NPA ratio, as on end March was 5.82 per cent as compared with 3.78 per cent a year ago while net NPA ratio was 2.98 per cent compared with 1.61 per cent. The bank created a contingency reserve of Rs.3,600 crores for unexpected future provisioning and benefitted from deferred tax credit of Rs.2,199 crores. The bank has also sold loans of Rs.700 crores to asset reconstruction companies. The net profit also include sum received of Rs.2,100 crores by selling part of its stake in life and general insurance arm.

Social Environment India has been on growth track and banking being an vital part of economy it has to adjust itself so as to compliment and supplement the growth of the economy. Despite enormous growth, Indian rural segment have largely deprived with the basic banking facility. Rural market, where fortune lies for any sector, has largely remained untapped. Farmers and small businessman have to take loans from local vendors. The tech-savvy consumer provides opportunity as well as poses challenges in the banking system. The consumers are looking for electronic modes of fund transfer along with the personal touch and experience. In the information age, the young generation keep themselves updated and make informed decision. They now take their own decision and manage their own finances well.

ICICI Bank will be spending Rs 200 crores on social sector projects this fiscal and meet the mandatory two per cent CSR spend norms. The bank will be spending almost Rs 100 crores on skill development. The bank has already trained 60,000 underprivileged people in 13 specifically identified skill-sets, and is targeting to take the number to 100,000 in the next 15 months

Technological environment With the technological advancement, banking has seen vital changes in operations and has now focused on customer centric approach, universal banking, ATMs, internet banking, interactive kiosks, core banking, ERP, etc. and improved efficiency and productivity. Banks are now focusing on cashless, paperless and hassle-free working. As per KPMG, non-cash payment comprised of 91% in value terms compared to 88% in 2010. Also, the payments made through cheques have also come down. Establishment of computers, internet connectivity, RTGS and NEFT, MICR Cheques, ECS were all significant milestones in past decade. The continuous advancement in technology changed the way the bank interacts with consumer. Now, we have the virtual banking concept to roll out in market wherein the products or services are available only on electronic modes and these are competitively and attractively priced so as to invite customer to non-branch banking world, thereby reducing costs. With digitalization of transactions, wireless transfer of funds, paper less culture, etc. the banks have opportunity of improving the overall productivity, reduce cost and provide better customer service. In a move that could revolutionize trade financing, ICICI Bank has settled an export transaction in minutes as against the usual three days using a custommade blockchain network with Middle Eastern counterpart, Emirates NBD. This was the first blockchain-based trade payment in India and the bank is now talking to others to grow the network. ICICI has joined the ranks of a few global institutions that are pioneers in this field. ICICI Bank has used this new technology for transferring money as well as trade documents relating to purchase order, invoice, shipping & insurance, electronically in real time. The bank has co-created the network with EdgeVerve Systems, an Infosys arm. The usage of blockchain technology simplifies the process and makes it almost instant—to only a few minutes. This is in contrast to the current process which involves a complex and lengthy paper trail that requires international shipping and courier

Legal Environment India’s legal structure is progressing and possesses some important weaknesses. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, have enhanced the legal framework, though the processes are still onerous. This act empowers financial institutions and banks to sell off the underlying assets without court involvements, thereby reducing lengthy legal processes and creates the balance of power between creditor and banks and refining the credit discipline. The Credit Information Bureau (India) Ltd. was incorporated in 2000 to provide credit related information on commercial and consumer borrowers to financial institutions, thereby helping them to take informed credit decisions. Such information is vital to ensure the credit discipline. There has been improvement in regulatory framework with respect to the recovery process of consumer loans after the complaints of immoral techniques used by recovery agents popped up. This had wide-spread impact on loan recoveries, resulting increased NPLs (Non-Performing Loans). However, banks have devised mechanism for recovery processes and checked their wrong doings. ICICI Bank has set up a team to improve monitoring of credit and provide early warning of loans going bad after a sharp rise in non-performing assets (NPAs) in the last fiscal year. The bank has built a credit-monitoring group for wholesale banking customers which will monitor loans on a day-to-day basis (and) develop predictive models for early warning in the financial system .

References 1. 4-traders, (2013), “ICICI offers 24x7 banking facility”, http://www.4-traders.com/ICICIBANK-LIMITED-9058868/news/ICICI-offers-24X7-banking-facility-17544771/ 2. BMS, (2013), “Unorganised Money Market – Indigeneous Banking”, http://www.bms.co.in/unorganised-money-market-indigeneous-banking/, accessed on 10/03/2014

3. Gktoday, (2011), “Number of Branches and ATMs”, http://www.gktoday.in/number-ofbranches-and-atms/, accessed on 10/03/2014

4. Icici bank, (2014), “About Us”, http://www.icicibank.com/aboutus/about-us.html, accessed on 10/03/2014 5. ICICI Bank (2013), “Awards-13”, http://www.icicibank.com/aboutus/awards13.html,accessed on 13/03/2014

6. IIPPE, (2011), “The Impacts of Political Instability on Banking Development and Operational Efficiencies”, http://www.iippe.org/wiki/images/0/05/CONF_FINANCE_Huang.pdf, accessed on 10/03/2014 7. Indiainfoline, (2013), “ICICI Bank limited”,http://www.indiainfoline.com/Markets/Company/Background/CompanyProfile/ICICI-Bank-Ltd/532174, accessed on 10/03/2014

8. Infosys, (2013), “Banking in India: Evolution in Technology”, http://www.infosys.com/finacle/solutions/thought-papers/Documents/banking-in-Indiaevolution-in-technology.pdf, accessed on 11/03/2014 9. Mohapatra, S, (2012), “Case Studies in Strategic Management: A Practical Approach”, Pearson Education India

10. Times of India, ( 2013), “ICICI Bank opens 15 new rural branches in MP”, http://timesofindia.indiatimes.com/business/india-business/ICICI-Bank-opens-15-newrural-branches-in-MP/articleshow/21683512.cms, accessed on 10/03/2014 11. Times of India, (2013), “How technology is changing Indian banking sector”, http://timesofindia.indiatimes.com/how-technology-is-changing-indian-bankingsector/articleshow/18225529.cms, accessed on 11/03/2014

12. Standard and poors, (2012), “Banking Industry Country Risk Assessment: India”, http://www.standardandpoors.com/ratings/articles/en/us/? articleType=HTML&assetID=1245328840680, accessed on 11/03/2014

13. http://economictimes.indiatimes.com/industry/banking/finance/banking/icici-bank-setsup-top-team-to-track-loans-sound-npa-alert/articleshow/53460243.cms 14. http://www.livemint.com/Industry/R8qnQJ3Is2LAYtqt6oQeTN/ICICI-Bank-executesIndias-first-transaction-on-blockchain.html