A STUDY ON PERFORMANCE EVALUATION OF ICICI AND

SBI USING FUNDAMENTAL AND TECHNICAL ANALYSIS

1.1 INTRODUCTION With the economy surging, things are getting better in the Banking Industry. There
are plenty of changes occurs daily. According to Reserve bank of India’s banking review of 2004 – 2005
there was a notable pick up in demand from industry for investments and a surge in exports. Evidently,
the industry’s focus now is on scaling up both domestically and in markets abroad, widening the product
and services port folio, and better using technology to make banking more accessible and efficient.

Most of researcher’s conclusion is, Whether or not the sectors actually opens up in 2009, banks should
use that as an opportunity to get their growth strategies in place. Not Just through organic growth, but
growth through mergers and acquisition. What India need is not a large number of small banks, but a
small number of large banks.

As the RBI’s deputy Governor, V.Leeladhar, said at Indian Banking Associations Jan 31 Seminar on
“Indian Banks and the Global change” there is growing realization that the ability to cope with possible
downside risks would depend among others on the soundness of the financial system and the strength
of Individual participation”.

India is still cagey about foreign investments in banks. Though a dramatic changes sweeping through the
industry for some years now in the rise of India’s Public sector bank and private sector still it should fuel
its grow to open up eyes towards open market.

In this scenario, While we look at the sensex breach the 10,000 level for the first time it was yet another
sign the India as a market for global liquidity had arrived. When, We start co- relating the Gross
Domestic product (GDP) growth of emerging markets are supposed to reflect the health of the economy
where India emerges as a key player, India is arguably the best placed amongst the entire emerging
market lot.

Form the Investors point of view earning growth, price-earning multiplies and of course the
performance of the economy matters.
1.2 COMPANY PROFILE
The Kotak Mahindra Group
Kotak Mahindra is one of India's leading financial institutions, offering complete financial

solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual

funds, to life insurance, to investment banking, the group caters to the financial needs of individuals

and corporates.

As on December 31, 2006, the group has a net worth of over Rs.3,100 crore, and the AUM

across the group is around Rs. 225 billion and employs over 9,600 employees in its various

businesses. With a presence in 282 cities in India and offices in New York, London, Dubai and

Mauritius, it services a customer base of over around 2.2 million.

The group specializes in offering top class financial services, catering to every segment of

the industry.The various group companies include:

Kotak Mahindra Capital Company Limited

Kotak Mahindra Securities Limited

Kotak Mahindra Inc

Kotak Mahindra (International) Limited

Global Investments Opportunities Fund Limited

Kotak Mahindra (UK) Limited

Kotak Securities Limited

Kotak Mahindra Old Mutual Life Insurance Company Limited

Kotak Mahindra Asset Management Company Limited

Kotak Mahindra Trustee Company Limited

Kotak Mahindra Investments Limited

Kotak Forex Brokerage Limited

Kotak Mahindra Private-Equity Trustee Limited

Kotak Mahindra Prime Limited

Kotak Securities Ltd. is India's leading stock broking house with a market share of around 8.5 %
as on 31st March. Kotak Securities Ltd. has been the largest in IPO distribution.
The accolades that Kotak Securities has been graced with include:

Prime Ranking Award (2003-04)- Largest Distributor of IPO's

Finance Asia Award (2004)- India's best Equity House

Finance Asia Award (2005)-Best Broker In India

Euromoney Award (2005)-Best Equities House In India

Finance Asia Award (2006)- Best Broker In India

Euromoney Award (2006) - Best Provider of Portfolio Management: Equities

The company has a full-fledged research division involved in Macro Economic studies, Sectoral

research and Company Specific Equity Research combined with a strong and well networked sales

force which helps deliver current and up to date market information and news.

Kotak Securities Ltd is also a depository participant with National Securities Depository Limited

(NSDL) and Central Depository Services Limited (CDSL), providing dual benefit services wherein the

investors can use the brokerage services of the company for executing the transactions and the

depository services for settling them.

Kotak Securities has 195 branches servicing more than 2,20,000 customers and a coverage of 231

Cities. Kotaksecurities.com, the online division of Kotak Securities Limited offers Internet Broking

services and also online IPO and Mutual Fund Investments.

Kotak Securities Limited manages assets over 2500 crores of Assets Under Management (AUM)

.The portfolio Management Services provide top class service , catering to the high end of the

market. Portfolio Management from Kotak Securities comes as an answer to those who would like to

grow exponentially on the crest of the stock market ,with the backing of an expert.
1.3 PRODUCT PROFILE
State Bank of India (SBI) has history of more than 200 years of existence. SBI is the largest

commercial bank in India and accounts for approximately 18% of the total Indian banking business

and the group account for 25% of the total Indian banking business. The central bank, Reserve Bank

of India (RBI) is the largest shareholder in the bank with 59.7% stake followed by overseas investors

including GDRs with 19.78% shareholding as on September 06. RBIs stake in the bank is likely to be

transferred to the Government of India (GOI).

SBI has the largest distribution network in India spread across every nook and corner of India. As on
September 06, the bank has 14,061 branches which include 4,755 branches of its associated banks. The
bank also has the largest network of 5,624 ATMs. Since the last 5 years the bank has showed continued
growth in its core business. The total asset size of the bank reported a CAGR of 9.4% during the period
FY01 –FY06 and stood at Rs. 4,938.69 bn as of September 2006. In HIFY07, the bank reported net
interest income (NII) of Rs. 182.14bn, representing a growth fo 2.74% over HIFY06 while the bank
reported a net profit of Rs.19.8bn, registering a decline of 18.67% during the same period. Credit off
take of the bank has been lower than the Indian banking industry during the past few years. The total
credit book of the bank grew at a CAGR of 18.2% over the past years stood at Rs. 2,832.68bn at the end
of September 2006.

1.3.1 THE INDUSTRY GROWTH The industry growth during the same period was around 28% • The
bank’s asset quality has improved over the past few years. Gross NPL of gross loans stood at 3.57% as of
Sep-end 2006 while net NPLs stood at 1.67% The bank has provided for 54.06% of its NPLs as on Sep-
end 2006, which is below the industry average of around 68%

• Total deposits of the bank grew at a CAGR of 94% over the last. ve years to reach Rs3,800.5bn, with
low cost deposits registering an impressive GAGR of 15.4% during the same period. Contribution of low
cost deposit to total deposit during the period too has moved up sharply from 36.3% in FY 01 to over
47.6% in FY06. However, currentand saving account (CASA ) contribution in HIFY07 has declined to
43.65% thereby, signi.cantly increasing cost of funds and hensce margin contraction. On a sequential
basis, margins of the bank declined by 8bps to 3.32

• The capital adepuacy ratio of the bank stood at 12.63% (Tier –I of 8.74% and Tier –II of 3.89 %) at the
end of HIFY07. To augment its CAR to provide a stable platform for further growth, the bank the plans to
raise upto Rs.100bn as subordinate debt during the next few months. The bank also has cushion to raise
RS40bn in the form of hybrid.

1.3.2 BACKGROUND State Bank of India is the largest and one of the oldest commercial bank in India, in
existenxe for more than 200 years. The bank provides a full range of corporate, commercial and retail
banking services in India. Indian central bank namely Reserve Bank of India (RBI)

10

is the major share holder of the bank with 59.7% stake. The bank is capitalized to the extend of Rs.646bn
with the public holding (other than promoters) at 40.3%. SBI has the largest branch and ATM network of
over 14,000 branches (including subsidiaries) Apart form Indian network it also has a network of 73
overses of. ces in 30 countries in all time zones, correspondent relationship with 520 International banks
in 123 countries. In recent past,

SBI has acquired banks in Mauritius, Kenya and Indonesia. The bank had total staff strength of 198,774
as on 31 st March, 2006. Of this, 29.51% are of.cers, 45.19% clerical staff and the remaining 25.30%
were sub-staff. The bank is listed on the Bombay stock Exchange, Kolkata stock Exchange, Chennai Stock
Exchange and Ahmedaoad stockeExchange while its GDRs are listed on the London stock Exchange.
SBI group accounts for around 25% of the total business of the banking industry while it accounts for
35% of the total foreign exchange in India. With this type of strong base, SBI has displayed a continued
performance in the last few years in scaling up its ef. ciencly levels. Net Interest Income of the bank has
witnessed a CAGR of 13.3% during the last years. During the same period, net interest margin (NIM) of
the bank has gone up from as low as as2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%

1.3.3 MANAGEMENT The bank has 14 directors on the Board and is responsible for the management of
the bank’s business. The board in addition to monitoring corporate performance also carries out
functions such as approving the business plan, reviewing and approving the annual budgets and
borrowing limits and axing exposure limits. Mr.O.P.Bhatt is the Chairman of the bank.

Prior to this appointment, Mr.Bhatt was Managing Director at State Bank of Travancore Mr.T.S.
Bhattacharya is the managing Director of the bank and known for hisvast experience in the banking
industry. Recently, the senior management of the bank has been broadened considerably. The Positions
of CFO and the head of treasury have been segregated, and new heads for rural banking and for
corporate development and new business banking have been appointed. The management’s thrust on
growth of the bank in terms of network and size would also ensure encouraging prospects in time to
come.

1.3.4 SHAREHOLDING & LIQUIDITY Reserve Bank of India is the largest shareholder in the bank with
59.7% stake followed by overseas investors including GDRs with 19.78% stake as on September 06. 11

Indian financial institutions held 12.3% while Indian public held Just 8.2% of the stock. RBI is the
monetary authority and having majority shareholding re.ects con.ict of interest. Now the government is
rectifying the above error by transferring RBI’s holding to inself. Post this, SBI will have afurther
headroom to dilute the GOl’s stake from 59.7% to 51.0% Which will further improve its CAR and Tier I
ratio.

Shareholding Pattern of the Bank as on 30th September 2006 Source : SBI As of Sep 2006, SBI the 526.3
mm shares outstanding and going by the actual trading volume, the Stock’s liquidity seems to have
decreased in the past two years. In the first half of FY2007, 93mm shares exchanged hasnds. The daily
share turnover during the year 2006 was 0.22% down from 0.39% witnessed in 2005. But the sentiment
in the sock market improved in the first six months of the current. Scale with the bank clocking further
gains. as of January 12,2007 bank’s market capitalization stood at Rs.643.6bn.

1.3.5 KEY AREAS OF OPERATIONS The business operations of SBI can be broadly classed into the key
income generating areas such as National Banking, International Banking, Corporate Banking, & Treasury
operations.

Key Business Areas of the Bank a) Corporate Banking The corporate banking segment of the bank has
total business of around Rs.1,93bn. SBI has created various Strategic Business Units (SBU) in order to
streamline its operations. a. Leasing b. Project Finance c. Mid Corporate Group b. National Banking The
national banking group has 14 administrative circles encompassing a vast network of 9,177 branches, 4
Sub-of.ces, 12 exchange bureaus, 104 satellite of.ces and 679 12

extension counters, to reach out to customers, even it. the remotest corners of the country. Out of the
total branches, 809 are specialized branches. This group consists of four business group which are
enumerated below:

b.1. Personal Banking SBU b.2. Small & Medium Enterprises b.3. Agricultural Banking c. International
Banking SBI has a network of 73 overseas of.ces in 30 countries in all time zones and correspondent
relationship with 520 international banks in 123 countries. The bank is keen to implement core banking
solution to its international branches also. During FY06, 25 foreign offices were successfully switched
over to Finacle software. SBI has installed ATMs at Male Muscat and Colombo of.ces. In recent years. SBI
has installed ATMs at Male, Muscat and Colombo Of.cex. In recent years, SBI acquired 76% shareholding
in Giro Commercial Bank Limited in Kenya and PT Indomonex Bank Ltd. In Indonesia. The bank
incorporated a company SBI Botswana Lte. at Gaborone.

d. Treasury The bank manages an integrated treasury covering both domestic and foreign exchange
markets. In recent years, the treasury operation of the bank has become more active amidst rising
interest rate scenario, robust credit growth and liquidity constraints. The bank diversified it operations
more actively into alternative revenue streams in order to offset the losses in.xed income portfolio.

Reorganisation of the treasury processes at domestic and global levels is also being undertaken to
leverage on the operational synergy between business units and network, The reoganization seeks to
enhance the efficiencies in use of manpower resources an increase maneuverability of banks operations
in the markets both domestic as well as international.

e. Associates & Subsidiaries The State Bank Group with a network of 14,061 branches including 4,755
branches of its seven Associate Banks dominates the banking industry in India. In addition to banking,
the Group, through its various subsidiaries, provides a whole range of

13

financial services which includes life Insurance, Merchant Banking, Mutual Funds, Credit card, Factoring,
Security trading and primary dealership in the Money Market. e.1. Associates Banks e.2. Non – Banking
Subsidiaries/ Joint Ventures i. SBI life ii. SBI Capital Markets Limited (SBICAP) iii. SBI DFHI LTD iv. SBI
Cards & Payments Services Pvt.Ltd. (SBICSPL) v. SBI Funds Management (P) Ltd. (SBIFMPL)_ f. Human
Resources 1.3.6 STRATEGY AND NEW DEVELOPMENTS Though a publis sector bank, it has set in motion
a series of steps to transform itself into a modern, technology enabled customer-centric, world-class
banking organiztation, meeting best global practices and standards in bankings and service delivery. The
bank has maintained its record of profitability, while adjusting to the changing circumstances and
interest rate environment. Despite intense competition and pressure on spreads it has maintained and
Improved its NIM. Major innovations and initiatives are in the arena of technology, banking products
and processes, service delivery channels and human resource to efficiently serve bank customers across
the globe The bank maintains its drive on the technology front to enhance customer service, increase
productivity, and manage risk better. After having computerized all its branches, it has been moving
swiftly to implement real time on-line banking. As a part of its strategy to stay ahead of the competition,
SBI had increased its benchmark lending rates by 50 basis points to 11.5 percent; this lending rate
increase is dure to the rising cost of funds for banks, which are paying more for deposits as a way of
encouraging investors to save.

1.3.7 ICICI BANK PROFILE ICICI Bank is India’s second-largest bank. It has a network of about 614
branches and extension counters and over 2,200 ATMs. ICICI Bank offers a wide range of banking
products 14

and financial services to corporate and retail customers through a variety of delivery channels and
through its specialized subsidiaries and affiliates in the areas of investment banking, life and non- life
insurance, venture capital and asset management. ICICI Bank set up its international banking group in
fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic banking strengths
to offer products internationally.

ICICI Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore,
Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the
United States, United Arab Emirates, China, South Africa and Bangladesh. Our UK Subsidiary has
established a branch in Belgium. ICICI Bank is the most valuable bank in India in terms of market
capitalization.

ICICI Bank’s equity shares are listed in India on the Bombay stock Exchange and the National Stock
Exchange of India Limited and its American Depositary Receipts ((ADRs) are listed on the New York Stock
Exchange (NYSE). ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and
employees. At June 5, ICICI Bank, with free float market capitalization* of about Rs. 480.00 billion
ranked third amongst all the companies listed on the Indian Stock exchanges. ICICI Bank was originally
promoted in 1994 by ICICI Limited, an Indian financial institution, and was its wholly-owned subsidiary.
ICICI’s shareholding in ICICI Bank was reduced to 46% through a public offering of shares in Indian fiscal
1998, an equity offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank’s acquisition of
Bank of Madura Limited in all-stock, amalgamation in fiscal 2001, and secondary market sales by ICICI to
institutional investors in fiscal 2001 and fiscal 2002.

ICICI was formed in 1955 at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a development financial
institution for providing medium-term and long-term project financing to Indian businesses. In the
1990s, ICICI transformed its business from a development financial institution offering only project
finance to a diversified financial services group offering a wide variety of products and services, both
directly and through a number of subsidiaries an affiliates like ICICI Bank. In 1999, ICICI become the first
Indian company and the first bank or financial institution, from non-Japan Asia to be listed on the NYSE.

15
After consideration of various corporate structuring alternatives in the context of the emerging
competitive scenario in the Indian banking industry, and the move towards universal banking, the
managements of ICII and ICICI Bank formed the view that the merger of ICICI with ICICI Bank would be
the optimal strategic alternative for both entities, and would create the optimal legal structure for the
ICICI group’s universal banking strategy.

The merger would enhance value for ICICI shareholders through the merged entitty’s access to low-cost
deposits, greater opportunities for earning fee-based income and the ability to participate in the
payments system and provide transaction-banking services. The merger would enhance value for ICICI
Bank shareholders through a large capital base and scale of operations, seamless access to ICICI’s strong
corporate relationships built up over five decades, entry into new business segments, hither market
share in various business segments, particularly fee-based services, and access to the vast talent pool of
ICICI hand its subsidiaries. In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the
merger of ICICI Personal Financial Services Limited and ICICI Capital Services Limited, with ICICI Bank

The merger was approved by shareholders of ICICI and ICICI Bank in January 2002, and by the High Court
of Judicature at Mumbai and the Reserve Bank of India in April 2002. Consequent to the merger, the
ICICI group’s financing and banking operations, both wholesale and retail, have been integrated in a
single entity.

*Free float holding excludes all promoter holdings, strategic investments and cross holdings among
public sector entities. ICICI Bank disseminates information on its operation and initiatives on a regular
basis. The ICICI Bank website serves as a key investor awareness facility, a’ lowing stake holders to
access information on ICICI Bank at their convenience. ICICI Bank’s dedicated investor relations personal
play a proactive role in disseminating information to both analysts and investors and respond to specific
queries.

16

CHAPTER 2 2.1 SCOPE OF THE STUDY : The project entitled “A Study on the performance evaluation of
SBI and ICICI based and fundamental and technical analysis” will enable from the investors point of view
to refer the performance of the Banks, their relative growth and thereby decide on to buy or sell the
particular slab. This study will also help to identify the bank that is lagging behind in its performane.

2.2 OBJECTIVES OF THE STUDY: PRIMERY OBJECTIVE • To analyse the various factors which influence the
share price of SBI and ICICI bank SECONDREY OBJECTIVE • To analyze the market value of SBI and ICICI
bank • To offer suggestions and recommendations based on the findings. • To study the performance of
ICICI and SBI 2.3 PERIOD OF THE STUDY: For the purpose of the study 5 years period starting from the
financial year mar 2002 to march 2006 in considered. The year 2005-2006 is chosen as a terminal year
since only upto this period reliable time series data were available for the variables dealt in the study.

2.4 LIMITATIONS OF THE STUDY: • This study is based on the secondary data collected form the kotak
securities. com no other efforts have been made to verify their correctness. • Due to paucity of time
important factors has been analysed and discussed. • The approach to behavior of share price is based
on long time view. 17

• There limitations do not undermine either the scope of the study on the analysis and inference. 2.5
METHODOLOGY DATA COLLECTION Secondary data: All secondary data has been collected from the
kotak securities. The required information are also collected form respective bulletins of RBI, website of
government of India, website of stockcharts.com, Global research study is also adhered.

Analysis Overlook: Fundamental analysis and technical analysis are taken into consideration. Ration
analysis The ratio analysis expresses the relationship of the financial ratios in percentages which are
collected form the Balance sheet and profit and loss account. The key ratios considered of SBI and ICICI
Bank considered includes 1. Investment/deposit (%)

2. Cash / deposit (%)

3. Interest expended / interest earned (%)

4. Other income / total income (%)

5. Operating expenses / total income (%)

6. Interest income / total funds (%)

7. Interest expended / total funds (%)

8. Net interest income / total funds (%)

9. Non interest income / total funds (%)

10. Operating expenses / total funds (%)

11. Profit before provision / total funds (%)

12. Net profit / total funds (%)

18

Technical Analysis It is the process of identifying trend reversal at an earlier stage to formulate the
buying and selling strategy. With the help of several indicators they analysis the relationship between
price – volume and supply-demand for the overall market and the individual stock. Volume is favorable
on the upswing, the number of shares traded is greater than before and on the downside the number of
shares traded dwindles. If it is the other way round, trend reversals can be expected.

2.6 FUNDAMENTAL ANALYSIS INTRODUCTION Fundamental analysis is the study of economic factor
industrial environment and
the factor related to the company. This chapter of fundamental analysis consists of

Economic analysis

Banking industry analysis

Profile of SBI

Profile of ICICI

Ratio analysis of SBI

Ratio analysis of ICICI

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

Industrial analysis growth follow a pattern. This replicates the banking industry monitory policy, CPR,
SLR, and the flow of the industry. Company analysis explains of the profile of SBI and ICICI bank and then
deals with the ratio analysis of both the banks 2.6.1 ECONOMIC ANALYSIS 19

The level of economy has an impact on investment in many ways. If the economic growth rapidly, the
industry can also be expected to show rapid growth and vice versa. When the level of economic activity
is low, stock price are low, and when the level of economic activity is high, the stock price are high
reflecting the prosperous outlook for sales and profit of the firms. Vigorous growth with strong
macroeconomic fundamentals has characterized developments in the Indian economy in 2006-2007 so
far. However, there are some genuine concerns on the inflation front. Growth of 9.0% and 9.2% in2005-
2006 and 2006-2007 shows a positive sign, the surging pattern in agriculture continued with growth
estimated at 6.0% and 2.7% in the two resent year, and services maintained on the industrial segment.
The higher growth trends, particularly in manufacturing boosted sentiments with in the country and
abroad. The overall macro economic fundamentals are robust, particularly with tangible progress
towards fiscal consolidation and a strong balance of payment position. With an up surge in investment,
the outlook is distinctly up beat.

The ratcheting up of growth observed in recent years in reflected in the eleventh five year target of an
average annual growth of 9.0% relative to 8.0% targeted by the tenth plan (2002-2003 to 2006-2007).
Services contributed as much as 68.6% of the overall average growth in GDP in the last five years. The
entire residual contribution came from industry. As a result, in 2006-2007, while the share of agriculture
in GDP decline to 18.5%, the share of industry and service improved to 26.4% and 55.1%, respectively.

SAVINGS AND INVESTMENT The gross domestic savings as a proportion of GDP shows an increasing
trend with the saving ration rising from 26.4 per cent in 2002-03 to 29.7 per cent in 2003-04, 31.1 per
cent in 2004-05 and 32.4 percent in 2005 – 06. The rise in the savings rate in 2005-06 was due to private
corporate and the household sector, which as proportion of GDP, increased by 1.0 percentage point and
0.7 percentage points, and made a negative contribution to the overall saving rate. However, a
redeeming feature of recent years is that the savings of the public sector, which had been negative until
2002-03, was positive for the third successive year in 2005-06. The positive saving of Rs. 71,262 crore in
2005-06 (QE) is largely attributable to the higher savings of non- departmental as well as departmental
enterprises. The Indian economy has shown a sharp rise in the savings rate of the private corporate
sector for tour years. The savings rate for 2005-06, as per the quick estimates, has been placed at 8.1
per cent. The private corporate sector has financed a

20

large part of its investment in the on-going long capex cycle from such retained earnings or savings.As
much as 0.7 percentage point of the 1.3 percentage points increase in gross domestic savings rate
between 2004-05 and 2005 – 06 has come from the household sector. a construction boom with
residential buildings financed from housing loans form banks and the progressive maturing of the
domestic financial markets. While Housing loans from banks has tended to increase household savings
in physical form and depress financial savings, Progressive maturing of the domestic financial markets
has provided shift in the household portfolio in the three years ending in 2005-06. Physical savings as a
proportion GDP has declined steadily from a high of 12.4 percent in 2003-04 to 10.7 per cent in 2005-06.
Financial savings, on the other hand, after declining from 11.3 per cent to 10.2 per cent between 2003-
04 and 2004-05, more than recovered to 11.7 per cent in 2005-06.

The increase in savings rate is what is to be expected with higher growth rate of the economy and a
declining dependency ratio. with the proportion of population in the working age group of 15-64 years
increasing steadily from 62.9 per cent in 2006 to 68.4 per cent in 2026, the demographic dividend in the
form of high savings rate is likely to continue. As the savings rate has gone up, private final consumption
expenditure (PFCE) at current prices as a proportion of GDP, has shown a declining trend particularly
from 2001-02. PFCE as a proportion of GDP declined from 63.1 per cent in 2002-03 to 62.1 per cent in
2003-04, 60.0 per cent in 2004-05, and further to 58.7 per cent in 2005-06. This decline has also been
accompanied by substantial changes in terms of the shares of different commodity groups. In PFCE, the
share of food, beverages and tobacco came down from 43.3 per cent in 2002-03 to 39.4 per cent in
2005-06. The other major items of importance, namely, transport and communication, as a proportion
of PFCE, rose from 15.8 per cent in 2002-03 to 19.1 per cent in 2004-05. Government final consumption
expenditure GFCE), after declining from 11.9 per cent in 2002-03 to 11.0 per cent in 2004-05, increased
to 11.5 per cent of GDP in 2005-2006.

with the rise in the rate of gross domestic savings between 2003- 04 and 2004-05, there was a step up in
the rate of gross domestic capital formation (GDCF) or investment from 28 per cent of GDP to 31.5 per
cent of GDP leading to a savings investment gap or a current account deficit of 0.4 percent of GDP in
2004 – 05 . GDCF at constant prices base: 1999-200) as a proportion of GDP is consistently lower than
the corresponding proportion at current prices. This differential may reflect the greater increase in the
prices of capital goods relative to the general

21
price level, with growing technological sophistication of the production processes in the economy in
general and manufacturing in particular. But, irrespective of the choice of constant or current prices as
the weights, the direction of change from year to year remains unaltered. This may indicate a recent
pick up in fresh investment for creating additional capacity through fixed capital formation, particularly
in the private sector.

GDP growth in India in the post-reform period was driven mostly by Private final consumption
expenditure or PFCE growth. PFCE Contributed more than one half of the growth every year until 2001-
02. After falling below one half in 2002-03, it had again dominated GDP Growth in 2003-04. But this
appears to have undergone a virtuous Transformation with investment rather than private consumption
being he Main source of GDP growth in the latest two years of 2004-05 and 2005- 06 .. Data on
consumption and investment in the national accounts available until 2005-05 show that the 6.8
percentage point contribution of investment to 13.1 per cent growth in GDP at current market prices in
2004-05 exceeded the corresponding contribution of private final consumption expenditure at 6.1
percentage point for the first time in recent years. In terms of contribution to growth of GDP at current
market prices, from the demand side, investment continued to provided the lead during 2004-05 and
2005-6. The percentage point contribution of investment in the growth of GDP at current market prices
of 13.1 per cent and 14.1 per cent in 2004-05 and 2005-06, respectively, were 7.6 per cent and 7.0 per
cent, respectively. With imports growing faster than exports, the external balance continued to have a
negative contribution to GDP growth in recent years.

AGRICULTURE After an annual average of 3.0 per cent in the first five years of the New millennium
starting 2001-02, growth of agriculture at only 2.7 per Cent in 2006-07, on a base of 6.0 per cent growth
in the previous year, is a Cause of concern. Low investment, imbalance in fertilizer use, low seeds
Replacement rate, a distorted incentive system and low post-harvest value Addition continued to be a
drag on the sector’s performance. . with more Than half the population directly depending on this
sector, low Agricultural growth has serious implications for the ‘inclusiveness’ of Growth. Furthermore,
poor agricultural performance, as the current year Has demonstrated, can complicate maintenance of
price stability with Supply-side problems in essential commodities of day-to-day Consumption. The
recent spurt of activity in food processing and Integration of the supply chain from the farm gate to the
consumer’s plate Has the potential of redressing some of the root causes such as low Investment, poor
quality seeds, and little post-harvest processing.

22

Prices of primary commodities, mainly food, have been on the rise In 2006-07 so for. Wheat, pulses,
edible oils, fruits and vegetables, an Condiments and spices have been the major contributors to the
higher Inflation rate of primary articles. Within the primary group, the mineral Subgroup recorded the
highest year-on-year inflation at 18.2 per cent, Followed by food articles at 12.2 per cent and non-food
articles at 12.0Per cent. Food articles have a high weight of 15.4 per cent in the WPI Basket. Including
manufactured products such as sugar and edibleoils, Food articles contributed as much as 27.2 per cent
to overall inflation of6.7 per cent on February 3,2007. Starting with a rate of 3.98 per cent, the in flation
rate in 2006-07 has been on a general upward trend with intermittent decreases. However, average
inflation in the 2 weeks ending on February 3, 2007 remained at 5 per cent.

Government closely monitored prices every week and initiated Measures to enhance domestic
availability of wheat, pulses, sugar and Edible oils by a combination of enhanced imports, export
restrictions and Fiscal concessions. In wheat, State Trading Corporation, the parastatal, tendered
overseas for 55 lakh tonnes of wheat; private trade as permitted to import wheat at zero duty from
September 9; and exports were banned from February 9, 2007. The minimum support price (MSP) of
wheat raised by Rs.50 Per quintal and announced well in advance of the sowing season to bring
additional acreage under wheat. In pulses, imports were allowed at zero duty from June 8, 2006; export
was banned from June 22, 2006; and National Agricultural Cooperative Marketing Federation (NAFED)
purchased urad and moong overseas. Regulation of commodity futures markets was strengthened for
wheat, sugar and pulses; and as a matter of abundant precaution, futures trading was banned in urad
and tur from January 24, 2007. Duty on palm group of oils, which meets more than a half of the
domestic demand –supply shortfall in edible oils, was reduced by 20-22.5 percentage points in a phased
sequence, first in August 2006 and later in January 2007. Further, tariff values of these oils for import
duty assessment were frozen. On January 22. 2007, further duty cuts were announced for Portland
cement, various metals and machinery items. With a firming up of international prices, the impact of
duty-free import of wheat and pulses in rolling the domestic prices back was limited. But such imports
unproved domestic market discipline.

INFLATION with a shortfall in domestic production vis-à-vis domestic demand and hardening of
international prices, prices of primary commodities, mainly food, have been on the rise in 2006- 07 so
far. Wheat, pluses, edible oils, fruits and vegetables, and condiments and spices have been the major
contributors to the higher inflation rate of primary articles.. Within the primary group,

23

the mineral subgroup recorded the highest year-on-year inflation at 18.2 per cent, followed by food
articles at 12.2 per cent and non-food articles at 12.0 per cent. Food articles have a high weight of 15.4
per cent in the WPI basket. Including manufactured products such as sugar and edible oils, food articles
contributed as much as 27.2 per cent to overall inflation of 6.7 per cent on February 3, 2007. Starting
with a rate of 3.98 per cent, the inflation rate in 2006-07 has been on a general upward trend with
intermittent decreases. However, average inflation in the 52 weeks ending on February 3, 2007
remained at 5 per cent. A spurt in inflation like in the current year has been observed in the recent past
in 1997-98, 2000-01, 2003-04, and 2004-05.

FOREIGN IMPACT oil prices The international annual average price of the Indian basket of crude (about
60 per cent of Oman/Dubai and 40 per cent of Brent), after remaining more or less stable in 2002-04 at
around US$27- 28 per barrel, on August 8, 2006. To stop the hemorrhaging of public sector oil
companies’ finances, there was an unavoidable upward revision of retail selling prices of petro- products
on June 6, 2006. The pass –through to consumers was restricted to just 12.5 per cent in a three way
burden sharing arrangement among consumers, Government and oil marketing companies. With the
softening of international petroleum prices, domestic prices of petrol (motor spirit) and high diesel were
reduced by Rs. 2 and Re.1, respectively with effect from November 30, 2006, and again by the same
amounts with effect from February 16, 2007 .

Balance of payment In the balance of payments, in 2005-06 and in the first half of 2006-07, capital flows
more than made up for the current account deficits of US$9.2 billion and US$11.7 billion, respectively,
and resulted in reserve accretion. The current account deficit reflected the large and growing trade
deficit in the last two years. Exports grew fast, but imports grew even faster, reflecting in part the
ongoing investment boom and the high international petroleum price. In 2005-06, imports (in US dollar
terms and customs basis) had grown by 33.8 per cent. In the first nine months of the current year,
imports grew by 36.3 per cent. While petroleum imports continued to grow rapidly, non-oil import
growth decelerated to a moderate 18.7 per cent in the first nine months of the current year, primarily
because of high bullion prices leading to a decline in import balance, after remaining in surplus till 2003-
04, has turned negative since 2004-05. India’s exports (in US dollar terms and customs basis) have been
growing at a high rate of more than 20 per cent since 2002-03. During 205-06, growth of 23.4 per cent,
India’s exports crossed the US$100 billion mark. During 2006-

24

07, after a slow start, exports gained momentum to grow by an estimated 36.3 per cent in the first nine
months to reach US$89.5 billion. Buovancy of exports was driven from major trading partners.

FDI and FII Capital flows into India remained strong. The composition of flows, however, fluctuated from
year to year. In the three-year period, 2002-05, there were large ‘other flows’ (delayed export receipts
and others) accounting for a sizeable proportion of net capital flows. After being outflows in the
previous two years, external assistance and external commercial borrowing (ECBs) –two major debt-
creating flows- picked up in 2004-05. These debt flows, as a proportion of total capital flows, were 25
per cent in 2004-05 and 18 per cent in 2005-06. Foreign investment, as a proportion of capital flows, has
remained in the range of 39.1 per cent to 79.3 per cent in the last four years ending in 2005-06. There
was strong growth in foreign direct investment (FDI) flows (net), with three-quarters of such flows in the
form of equity. The growth rate was 27.4 per cent in 2005-06 followed by 98.4 per cent in April –
September 2006. This was even after gross outflows under FDI with domestic corporate entities seeking
a global presence to harness scale, technology and market access advantages through acquisitions
overseas. FII flows, the dominant variety of portfolio flows, after remaining buoyant until 2005-06,
turned into net outflows in the first half of 2006-07. Fill flows are reported to have turned positive again
in the second half of the current year.

THE CAPITAL MARKET Bullish sentiments in the domestic capital market is foreseen. The BSE sensex,
stock- index of the Bombay Stock Exchange (BSE), rallied from a low 8,929 on June 14, 2006 to an all-
time intra-day high of 14,724 on February 9. 2007. The rally from the 13,000 mark to the 1400 mark in
only 26 trading from the fastest ever climb of 1,000 points. India with a market capitalization of 91.5 per
cent of GDP on January 12, 2007 the strength of the market micro- structure from large retail
participation continued. The positive sentiments were manifest also in most indicators such as resource
mobilized through the primary market. Aggregate mobilization, especially through private placements
and Initial Public Offerings (IPOs), grew by 30.5 per cent to RS. 161,769 crore in calendar year 2006, with
about 6 IPOs every month, on average. Net mobilization of resources by mutual funds increased by
more than four-fold from Rs. 25,454 crore in 2005 to Rs. 1,04,950 crore in 2006. The sharp rise in
mobilization by mutual funds was due to

25

buoyant inflows under both income/debt-oriented schemes and growth/equity oriented schemes. The
negative inflows in 2004 turned positive for the public sector mutual funds in 2005 and accelerated in
2006. other indicators of market sentiments, such as equity returns and price/earnings ratio also
continued to be strong and supportive of growth.

The upbeat mood of the capital markets. Reflecting the improved growth prospects of the economy was
partly also a result of steady progress made on the infrastructure front. Overall index of six core
industries – electricity, coal, crude oil, petroleum refinery products, and cement, registered a growth of
8.3 per cent.

INFRASTRUCTURE On the transport and communication front, railways maintained its nearly double-
light growth in the first nine months of the current year. There was, however, a growth declaration in
cargo handled at major maritime ports (both exports and imports) and airports (exports). The news of
gas discoveries in the Krishna Godavari (KG) basin under New exploration and Licensing Policy (NELP) in
recent months was an encouraging development in the country’s pursuit of reduced impot dependence
in hydrocarbons. Investment requirements for infrastructure during the Eleventh Five Year plan are
estimated to be around US$ 320 billion. While nearly 60 percent of these resources would come from
the public sector and/or through public-private partnership (PPP). The potential benefits expected from
PPP are : cost-effectiveness, higher productivity, accelerated delivery, clear customer focus, enhanced
social service, and recovery of user charges. Further, the additionally of resources that PPP would bring,
along with the ‘value for money’ continues to remain critical. Based on the number of projects that have
been approved or are under consideration, it is estimated that a leveraging of nearly six times could be
achieved through this route.

Services sector growth has continued to be broad-based. Among the three sub-sector of services, ‘trade,
hotels, transport and communication services’ has continued to boost the sector by growing at double-
digit rates for the forth successive year (table 1.2). impressive progress in information technology (IT)
and IT-enabled services, both rail and road traffic, and fast addition to existing stock of telephone
connections, particularly mobile, played a key role in such growth. Growth in financial services
(comprising banking, insurance, real estate and business services), after dipping to 5.6 percent in 2003-
2004 bounced back to 8.7 percent in 2004-05 and 10.9

26

percent in 2005-2006. the momentum has been maintained with a growth of 11.1 percent in 2006-
2007. 2.6.2 INDUSTRY ANALYSIS The lower contribution of industry to GDP growth relative to services in
recent year is partly because of its lower share in GDP, and does not adequately capture the signs of
industrial resurgence.

Growth on industrial sector, from a low of 2.7% in 2001-2002, revived to 7.1% and 7.4% in 2002-2003
and 2003-2004, respectively, and after accelerating to over 9.5% in the next two years, touched 10.0% in
2006-2007.

The growth of industry, as a proportion of the corresponding growth in services, which was78.9% on the
average between 1991-1992 and 1999-2000, improved to 88.7 % in the last seven years.

Within industry, the growth impulses in the sector seem to have spread to manufacturing. Industrial
growth would have been even higher, had it not been for a relatively disappointing performance of the
other two sub-sector, namely mining and quarrying, and electricity, gas and water supply.

Since 1951-1952, industry has never consistently grown at over 7.0% per year for more than three years
in a row before 2004-2005. YoY, manufacturing, accounting to the monthly index of industrial
production (IIP) available until 2006, has been growing at double digit rates every month since march
2006, with the solitary exception of the festive month of October.

The current growth phase shows a sharp rise in the rate of investment in the economy. Investment
reflect a high degree of business optimism. The revival in gross domestic capital formation (GDCF) that
commenced in 2002-2003 has been followed by a sharp rise in the rate of investment in the for four
consecutive years. The earlier statement of GDCF for 2004-2005 of 30.1%, released by CSO in their
advance estimates,

Now stand upgraded to 31.5% in the quick estimates. This sharp increase in the investment rate has
sustained the industrial performance and reinforces the outlook for growth 27

2.6.3 BANKING INDUSTRY ANALYAIS Bank credit has continued to grow at a pace. Sustained Growth of
bank credit was accommodated by acceleration in deposit Growth. Concomitantly, broad many growth
has remained above the Indicative trajectory , reflecting strong demand conditions. Banks’ SLR
Investments, as a proportion of their net demand and time liabilities (NDTL), have declined further from
their end-March 2006 levels. The Reserve Bank continued to modulate market liquidity with the help
ofLAF repo and reverse repos and issuance of securities under the Market Stabilisation Scheme (MSS).
Furthermore, the Reserve Bank raised cash Reserve ratio (CRR) by 50 basis points in two phases with
effect from the Fortnight beginning December 23, 2006

2.7 MONETARY POLICY Broad money (M3) growth, year-on-year (Y-o-Y), accelerated to 20.4 per cent as
on January 5, 2007 from 17.0 per cent t end-march 2006 and 16.0 per cent a year ago. On a fiscal year
basis too, M3 growth during 2006-07 so far (January 5, 2007 over March 31, 2006), at 11.9 per cent, was
higher than that of 8.8 per cent in the corresponding period of 2005- 06 (January 6, 2006 over Apirl1,
2005). Taking into account, inter alia, these trends in monetary aggregates, sustained growth in credit
offtake, and additional absorption of liquidity under the MSS, the Reserve Bank, on December 8, 2006,
decided to increase the CRR by 50 basis points in two stages – 25 basis points each effective the
fortnights, beginning December 23, 2006 and January 6, 2007. Other development in the Domestic
economy impacting upon the decision to increase the CRR Included growth in real GDP, acceleration in
inflation, expectations of the Private corporate sector of higher increase in prices of both inputs and
Outputs, reports of growing strains on domestic capacity utilization, and Challenges emanating from
capital flows and consequent impact on Increasing liquidity.

The increase in the CRR is estimated to have absorbed banks’ resources to the extent of Rs. 13,500
crore. Expansion in the residency- based new monetary aggregate (NM3) – which, inter alia does not
directly reckon non-resident foreign currency deposits such as India Millennium Deposits (IMDs) and
FCNR (B)-was lower than M3, partly Reflecting lower recourse to call/term funding from financial
institutions. Growth in liquidity aggregate L 1 was lower that that in NM3 on account Of decline in postal
deposits.

28

2.8 CRRThe Reserve Bank in its Mid-Term Review of Annual Policy Statement for the year 2006- 07
(October 31, 2006) noted, inter alia, that: “Furthermore, containing inflation expectations in the current
environment and consolidating gains achieved so far in regard to stability would warrant appropriate,
immediate measures and willingness to take recourse to all possible measures in response to evolving
circumstances promptly. The objective is to continue to maintain conditions of stability that contribute
to sustaining the momentum of growth on an enduring basis. Towards this objective, the monetary
policy stance and measures will need to be in a process of careful rebalancing and timely adjustment”.
Subsequent to the announcement of the Mid-term Review, there were a Number of significant
developments, particularly on the domestic front. These included:

1.Real GDP growth at 9.2 per cent during July-September 2006 and 9.1 per cent in the first half of 2006-
07. 2. Continued high growth in non-food bank, acceleration in money supply (M3 ) growth and reserve
money growth and absorption of additional liquidity under the market stabilization scheme(MSS)

3. Increase in WPI inflation, with inflation based on the various consumer price indices being higher than
WPI. 4. As per the RBI s Industrial Outlook survey, a majority of respondents from the private corporate
sector expect higher increase in prices of both inputs and outputs. There were reports of growing strains
on domestic capacity Utilization. There were also reports that expansion of capacity is Underway but the
realization could be constrained over the next two years. A seasonal decline in prices of food articles
could moderate the inflation Pressures but the WPI inflation excluding food articles remains at Elevated
levels. The reduction in prices of petrol and diesel in end- November 2006 will moderate inflation, but
the overall impact on Inflation expectations requires to be monitored and moderated. The External
sector continues to be strong and current account deficit is likely To be close to the trend, and will
continue to be accommodated by net Capital flows. However, it is necessary to recognize the challenges
Emanating from capital flows and consequent impact on increasing Liquidity.

In view of the above, the Reserve Bank, on December 8, 2006, Decided to increase the cash reserve ratio
(CRR) of the scheduled Commercial banks, regional rural banks (RRBs), scheduled state co- Operative
banks and scheduled primary (urban) co-operative banking System
29

by 50 basis points of their net demand and time liabilities NDTL ) In two stages-25 basis points each
effective from fortnights beginning December 23, 2006 and January 6, 2007. As a result of the ncreases
in CRR on liabilities to banking system, an amount of about Rs. 13,500 crore Of resources of banks would
be absorbed,

Amongst its major components, both currency and time deposits Contributed to acceleration in growth
in M3 year-year basis growth in Currency with the public increased from 15.4 per cent as on January
6,2006 to a peak of 19.4 per cent as on October 27, 2006 before moderating to 16.8 per cent as on
January 5, 2007. Acceleration in growth in October 2006 could be partly attributed to the early onset of
festival Season currency demand during the current year.

Growth in aggregate deposits accelerated to 21.1 per cent, y-o-y, as On January 5, 2007 from 16.2 per
cent a year ago, on the back of higher Accretion to time deposits. On a y-o-y basis, growth in demand
deposits (19.2 per cent) as on January 5, 2007 was of a lower order than a year ago (28.7 per cent).
Accertion to time deposits was, however, significantly higher than that in the previous year. Growth in
time deposits of scheduled commercial banks accelerated to 22.9 per cent (y-o-y) as on January 5, 2007
from 15.0 per cent a year ago. This, apart from Acceleration in economic activity, could be attributed to
higher interest Rates on deposits as well as tax benefits. Interest rates on time deposits of 1-3 years
maturity offered by public sector banks increased from a range of 5.75-6.75 per cent in March 2006 to
6.75-8.25 per cent in January 2007. Rates offered by private sector banks on deposits of similar maturity
increased from a range of 5.50-7.75 per cent to 6.75-9.75 per cent over the same period.

Growth in time deposits also appears to have benefited from the Recently introduced tax benefits under
section 80C for deposits with Maturity of five years and above. Concomitantly, with unchanged interest
Rates, postal deposits have witnessed a significant decline since end march 2006. Commercial sector’s
demand for bank credit has continued To remainstrong during 2006-07 so far. On a year-on-year asis,
non-food Credit of scheduled commercial banks (SCBs) registered a growth of 31.2 Per cent as on
January 5, 2007- the same rate as a year ago. On a fiscal Year basis, growth in non-food credit
decelerated marginally to 16.9 per Cent as on January 5, 2007 from 7.5 per cent a year ago. In view of
the Acceleration in deposits, the ncremental credit deposit ratio of SCBs, After remaining above/around
100 per cent for the most part since October 2004, has exhibited some moderation in recent months. As
on January 5, 2007, the incremental redit-deposit ratio was around 93 per Cent (y-o-y) as compared with
108 per cent a

30

year ago scheduled Commercial banks’ food credit has recorded a modest rise (5.9 per cent) During
2006-07 (up to January 5, 2007) reflecting lower order of Procurement of food grains. Disaggregated
data available up to October 2006 show that credit Growth has been largely broad-based. About 34 per
cent of incremental Non-food credit was absorbed by industry, 12 per cent by ‘other Retail loans’. Loans
to commercial real estate, which increased by 84 per Cent, y-o-y, absorbed 5 per cent of incremental
non-food credit. Apart From bank credit, the corporate sector continued to rely on non-bank.
Sources of funds financing their requirement. Resources raised thorough domestic equity issuances
during the first nine months of 2006-2007 (Rs. 23, 843 crore) were more than double of that in the
corresponding period of 2005-2006. After remaining subdued during the second quarter, amounts
raised from the primary market picked up during the third quarter of 2006-2007. Mobilisation of
resources through equity issuances abroad ADRs /DGRs ) during April-December 2006 (Rs. 8,019 crore)
were 55 percent higher than that in the same period of 2005. recouse to external commercial
borrowings (ECBs) during the first half of 2006-2007 was almost double of that in the corresponding
period of 2005-2006, with net disbursement under ECBs increasing from Rs. 17,551 crore during April-
September 2005 to Rs. 34,031 crore during April-September 2006. Mogbilisation theough issuances of
commercial papers during April-December 2006 was more than three times of that a year ago, now
withstanding some sluggishness in the third quarter. Finally, internal sources of funds continued to
provide large financing support to the domestic corporate sector during the first half of 2006-2007.
Profits after tax of select non-financial nongovernment companies during April-September 2006 were
almost 40 percent higher than those in the first half of 2005-2006. Profits after tax during the second
quarter of 2006-2007 were higher than those in each of the five preceding quarters.

In the fiscal year 2006-2007 (up to January 5, 2007), commercial bank’s investments in gifts witnessed a
large expansion of Rs. 43,222 crore in contrast to a decline of Rs. 15,580 crore a year ago, reflecting the
need to meet statutory requirements. On a y-o-y basis, commercial banks’ investments in gilts increased
by 5.6 percent as against a decline of 0.1 percent a year ago. Over the same period, growth in
commercial banks’ NDLT accelerated to 20.7 percent from 18.3 percent a year ago. With incremental
investment in gilts not keeping pace with the high growth in NDLT, commercial bank’s holdings of
Government securities declined to 28.6 percent of their NDLT as on January 5, 2007 fron 31.3 percent at
the end o-March 2006 and 32.6 percent a year ago. Excess SLR investments of SCBs fell to Rs. 96.407
crore as on January 5, 2007 from Rs.

31

1,68,029 crore a year ago. Funds raised through equity issuances in the primary market as well as higher
internal reserves also enabled banks to fund strong credit demand. Reserve Money Reserve money
expanded by 20.0 percent, y-o-y, as on January 19, 2007 as compared with 14.9 percent a year ago.
Adjusted for the first round effect of the hike in the CRR, reserve money growth was 17.4 percent as on
Janurary 29, 2007. Reserve money movements over the course of the year reflected the Reserve Bank’s
market operations. The Reserve Bank’s foreign currency assets (net of revaluation) increased by Rs.
80,166 crore during the fiscal year 2006-2007 (up to January 19, 2007) as compared with an increase of
Rs. 11,185 crore during the corresponding period of the previous year Mirroring the liquidity
management operations through LAF, the Reserve Bank’s holdings of Government securities increased
by Rs. 10,615 crore during 2006- 2007 (up to January 19, 2007) as against an increase of Rs. 27,435 crore
in the corresponding period of 2005-2006. During 2006-2007 so far Central Government deposits with te
Reserve Bank have increased by Rs. 3,615 crore. The Reserve Bank’s net credit to the Centre, thus,
increased by Rs. 6,963 crore during the fiscal year 2006-2007 ( up to January 19, 2007) as against an
increase of Rs. 50, 622 crore during the corresponding period of 2005 –206
2.9 LIQUIDITY MANAGEMENT The Reserve Bank continued to ensure the appropriate liquidity is
maintained in the system so that all legitimate requirements of credit are met, particularly for
productive purposes, consistent with the objective of price and financial stability. Towards this end, the
Reserve Bank continued with its policy of active demand management of liquidity through OMO
including MSS, LAF and CRR, and using all the policy instruments as its disposal flexibly. However.
Liquidity management emerged to be more complex during the past year, with greater variation in
market liquidity, largely reflecting variations in cash balances of the Governments and capital flows.
During the first quarter, unwinding of the Center’s surplus balances with the Reserve Bank’s purchase of
foreign exchange from authorized dealers led to ample liquidity into the banking system. This was
mirrored in an increase in the LAF reverse repo balances.

However, in view of some build-up of Centre’s cash balances with the Reserve Bank during August 2006,
the absorption under LAF reverse repose witnessed some decline during the second quarter. Beginning
mid September 2006, liquidity conditions turned tight on account of

32

advance tax outflows and festival season currency demand. The Reserve Bank injected liquidity through
repo on eight occasions between mid September 2006 and end-October 2006. however, net injection of
liquidity was witnessed only on two occasions (October 20 and October 23, 2006). Liquidity pressures
eased by end-October 2006 following soje decline in Centre’s surplus cash balances. Liquidity conditions
eased during November 2006, partly reflecting market purchases of foreign exchange by the Reserve
Bank. This was mirrored in balances under LAF reverse repos, which increased to Rs. 34.255 crore as on
December 6, 2006. liquidity conditi8ons, however, turned tight from the second week of December
2006 largely due to payments for auctioned Central Government securities, advance tax outflows (with
concomitant increase in the Centre’s surplus cash balances with the Reserve Bank from Rs. 42, 716 crore
as on December 15, 2006 to Rs. 73,634 crore on December 22, 2006), and the increase in the CRR by 501
basis points in two phases. In view of the prevailing liquidity conditions, the Reserve Bank injected
liquidity into the system through repo operations from December 12, 2006.

Average daily net injection of liquidity by the Reserve Bank increased from Rs. 5,615 crore during
December 13-21, 2006 to Rs. 25,585 crore during December 22-29, 2006 in contrast to the average daily
absorption of Rs. 1,262 crore and Rs. 9,937 crore during October 2006 and November 2006,
respectively. Average daily net injection of liquidity by the Reserve Bank moderated to Rs. 10, 814 crore
during January 2007 (up to January 20, 2007), as liquidity pressures eased partly on account of reduction
in the Centre’s balance with the Reserve Bank from Rs. 65,682 crore as on December 29,2006 to Rs.
48,528 crore as on January 19, 2007. Net outstanding balance under LAF repos was Rs. 10,190 crore as
on January 24, 2007.

2.10 INIDAN FINANCIAL SECTOR SWOT ANALYSIS Strengths 1. proven asses quality resilience in past
downturns.

2. Prove management teams, track record

3. Stable industry dynamics

4. Well – established regulatory frame work

5. Stable / low NPL formation rates.

33

Opportunities 1. Improving secular GDP growth prospectus

2. Establishment of special economic zone likely to promote further industrialization

3. Years, if not decades, of catch-up economics – low per capita income, educated work

force.

4. Rapid financial deepening, i.e. loan growth as multiple of nominal GDP growth.

5. Rising consumer spending, consumer credit business.

6. Rising corporate capex, investments

7. M&A optimality. Key issues/swing factors 1. Liquidity : Deposit growth sustaining momentum and
loan growth moderating to 25% from the current level of 30% 2. Policy risks: Moderating in inflation
outlook. Potential for further tightening in the short term. Our echonomist believes that the risk is less.

3. Interest rate outlook some headwind from policy rate hike but won,t be a shock factor.

4. Loan growth : Moderation needed more for maintaining industry dynamics.

5. Reduction in reserve requirements: key swing factor for liquidity and hence for sustaining

growth momentum. Key risk factors 1. “Running on empty’ in terms of liquidity

2. Tightening in global liquidity may trickle down to Inida

3. Potentially hawkish RBI stant on inflation/monetary policy

4. potential rise in long bond yields, MTM risk for banks

5. potential for valuation pullback, should earnings delivery disappoint expectations.

Weakness, Key challenges 1. Continued crowding out effect form Govt. budget deficit, combained with
accelerating private credit demands 2. Ownership restrictions 3. Constraints on state- owned banks
micro including HR, staff cut, branch cut constraints. 34

2.11 BUDGET 2007-2008 OVERVIEW BUDGET 2007-2008 Improvement in GDP growth rate from 7.5% in
2004-2005 to 9% in 2006-2007; average growth rate in the three ears of the UPA Government at 8.6%
growth target for the Tenth Plan of 8% will be nearly achieved; during three year period, acceleration in
growth rate inmanufacturing from 8.7% to 9.1% and further to 11.3% and in services sector from 9.6%
to 9.8% and further to 11.2%. average growth in agriculture during Tenth Plan estimated at 2.3%

Income and Savings :per capita income in 2005-2006, in real terms, increased by 7.4%, savings rate
estimated at 32.4% and investment rate at 33.8%. Inflation :Growth in bank credit, year on year, by
29.6% expansion in money supply (M3) by 21.3% foreign exchange reserves at US$ 180 billion; pressure
on domestic pri8ces by global commodity prices; and supply constraints in some essential commodities
– consequently, average inflation in 2006-2007 estimated at between 5.2 and 5.4% vis-à-vis 4.4% last
year.

In 2006-2007, additional irrigation potential of 2,400,000 hectares to be created; until December 2006
drinking water provided to 55,512 habitation, 12,198 kilometers of rural roads completed and 783,000
rural houses constructed with 914,000 houses under construction; 19,758 villages covered so far under
the Rajiv Gandhi Grameen Vidyutikaran Yojana; 15,054 villages provided with telephone against target
of 20, 000 villages, and balance to be covered by the end of the year.

ELEVENTH FIVE YEAR PLAN Objectives :“Faster and more Inclusive Growth”, growth rate of
approximately 10% by the end of plan period; growth of 4% in the agriculture sector, faster employment
creation, reducing disparities across regions and ensuring access to basic physical infrastructure and
health and education services to all.

AGRICULTURE Farm credit : Target of Rs. 225,000 crore for 2007-2008 with an addition of 50 lakh new
farmers to the banking system; provision of Rs. 1,677 crore for 2% interest subvention for short-tem
crop loans; a special plan being implemented over a period of three years in 31 especially distressed
districts in four states involving a total amount of Rs. 16,979 crore; of this, about Rs. 12,400 crore to be
on water related schemes; special plan includes a scheme with proposed provision of Rs. 153 crore for
induction of high yielding milch animals and related activities.

35

Mission for Pulses : Integrated Oilseeds, oil palm, Pulses and Maize Development programme to be
expanded with sharper focus on scaling up the production of breeder, foundation and certified seeds;
Government to fund the expansion of Indian Institute of Pulses Research, Kanpur, and offer the other
producers a capital grant or concessional financing to double production of certified seeds within a
period of three years.
Plantation Sector :Financial mechanisms for re-plantation and rejuvenation to be put in place for coffee,
rubber, spices, cashew and coconut. Accelerated Irrigation Benefit Programme :35 projects likely to be
completed in 2006-2007 and additional irrigation potential of 900,000 hectares to be created; outlay to
be increased from Rs. 7,121 crore to Rs. 11,000 crore including grant component to State Governments
of Rs. 3,580 crore, an increase from Rs. 2,350 crore. Rainfed Area

Development Programme:Proposed allocation of Rs. 100 crore for the new Rainfed Area Development
Programme. Water Resources Management : Restoring Water Bodies : World Bank loan agreement
signed with TamilNadu for Rs. 2,182 crore to resore 5,763 water bodies having a command area of
400,000 hectares; agreement for Andhra Pradesh expected to be concluded in March 2007 to cover
3000 water bodies with a command area of 250,000 hectares.

Extension System :New programme to be drawn up that will replicate earlier Training and Visit (T&V)
programme; Agriculture Technology Management Agency (ATMA) now in place in 262 districts to be
extended to another 300 districts; provision for ATMA to increase from Rs. 50 crore to Rs. 230 crore.

Fertiliser Subsidies :Based on study to be conducted, a pilot programme to be implemented for

delivering subsidy directly to farmer. Agricultural Insurance :National Agricultural Insurance Scheme to
be continued for Kharif and Rabi 2007-2008 with a provision of Rs. 500 crore; a weather based crop
insurance scheme to be started by Agricultural Insurance Corporation on a pilot basis as an alternative
to NAIS allocation of Rs. 100 crore to be made in 2007-2008

36

INVESTMENT : Gross domestic capital formation in 2005-2006 grew by 23.7 percent in April-January,
2006-2007, foreign direct investment amounted to US $ 12.5 billion and outpaced portfolio investment
of US$ 6.8 billion;

Central Public Sector To invest Rs. 165,053 crore through internal and extra budgetary resources in
2007-2008; Government to provide equity support of Rs. 16,361 crore and loans of Rs. 2,970 crore.
INFRASTRUCTURE : Power :Seven more Ultra Mega Power Projects under process and at least two to be
awarded by July, 2007; other initiatives include facilitating setting up of merchant power plants by
private developers and private participation in transmission projects; Accelerated Power Development
and Reforms being restructured to cover all district headquarters and town with a population of more
than 501,000; budgetary support for APDRP to increase from Rs. 650 crore to Rs. 800 crore; Rajiv Gandhi
Grameen Vidyutikaran Yojana; allocation to increase from Rs. 3,000 crore to Rs. 3,983 crore.

Coal :26 coal blocks with reserves of 8,581million tones and four lignite blocks with reserves of 755
million tones allotted to Government companies and approved end users; definition of specific end use
to be enlarged to include underground coal gasification and coal liquefaction. National Highways
;Provision for National Highway Development Programme to increase from Rs. 9,945 crore to Rs. 10,667
crore; road-cum rail bridge at Bogibee, Assam, over Brahmaputra, to be taken up as an national project.
Public Private Partnership and Vialibility Gap Funding : Revolving fund with a corpus of Rs. 100 crore to
be set up to quicken project preparation; fund to contribute upto 75% of preparatory expenditure in the
form of interest free loan to be recovered from the successful bidder.

INDUSTRY Petroleum and Naural Gas :162 production contracts awarded; investment of Rs. 97,000 crore
made in exploration; 23 coal bed methane blocks awarded for exploration. 37

Textiles :Provision for Scheme for Integrated Textiles Parks to increase from Rs. 189 crore to Rs. 425
crore; echnology Upgradation Fund scheme to continue with provision of Rs. 911 crore. Handlooms :
Additional 100-150 clusters to be taken up in 2007-2008; health insurance scheme to be extended to
more weavers and also to be enlarge to include ancillary workers; allocation for the sector to be
enhanced from Rs. 241 crore to Rs 321 crore. Small & Medium Enterprises :Increase in outstanding
credit from Rs. 135,200 crore to Rs. 173, 460 crore at end December 2006. Coir Industry :Scheme for
modernization and technology upgradation with special emphasis to major coir producing States
announced with a proposed provision of Rs. 22.50 crore. SERVICE SECTOR Foreign Trade :Merchandise
exports expected to cross US $ 125 billion by the end of the current fiscal. Tourism ;Provision for tourist
infrastructure to increase from Rs. 423 crore to Rs. 520 crore. FINANCIAL SECTOR Banking :Under
Differential Rate of Interest scheme providing finance at a rate of 4% to weaker sections of the
community engaged in gainful occupations, limit of loan to be raised from Rs. 6,500 to Rs. 15,000 and
limit of housing loan to be raised from Rs. 5,000 to Rs. 20,000 per beneficiary.

Regional Rural Banks :To open at least one branch in 80 uncovered districts in 2007-2008 \;
Securitisation and Reconstruction of Financial Assets and Enforcement of Securitisation of Interest
(SARFAESH) Act to be extended to loans advanced by RRBs; to be permitted to accept NRE/FCNR
deposits; and those which have a negative net worth to be recapitalized.

Housing Loans :National Housing Bank to introduce ‘reverse mortgage’ under which a senior citizen who
is owner of a hose can avail of a monthly stream of income against mortgage of his/her house, while
remaining the owner and occupying the house throughout his/her lifetime, without repayment or
servicing of the loan; regulations to be put in place to allow creation of mortgage guarantee companies.

38

Insurance :Exclusive health insurance scheme for senior citizens offered by National Insurance
Company; other three public sector insurance companies to offer a similar product to senior citizens;
Micro Financial Sector (Development and Regulation) Bill and a comprehensive Bill to amen insurance
laws to be introduced in Budget Session.

Financial Inclusion : A Financial Inclusion Fund to be established with NABARD for meeting cost of
development and promotional interventions; a Financial Inclusion Technology Fund to be also
established to meet costs of technology adoption; each fund to have an overall corpus of Rs. 500 crore,
with initial funding to be contributed by Government. RBI and NABARD.

Capital Markets :PAN to be made sole identification number for all participants in securities market with
an alpha-numeric prefix or suffix to distinguish a particular kind of account; idea of self Regulating
Organisations (SRO) to be taken forward for different market participants under regulations to be made
by SEBI; mutual funds to be permitted to launch and operate dedicated infrastructure funds; individuals
to be permitted to invest in overseas securities through Indian mutual funds; short selling settled by
delivery, and securities lending and borrowing to facilitate deliver, by institutions to be allowed;
enabling mechanism to be put in place to permit Indian companies to unlock a part of their holdings in
group companies for meeting their financing requirements by issue of Exchangable Bonds

Innovative Financing for Infrastructure :Funds from National Small Savings Fund may also now be
borrowed by India Infrastructure Finance Company Limited; suggestions of Deepak Parekh Committee to
be examined for establishment of two wholly owned overseas subsidiaries of IIFCL with objectives to (i)
borrow funds form RBI and lend to Indian companies implementing infrastructure projects in India, or to
co-finance their ECBs for such projects, solely for capital expenditure outside India; and (ii) borrow funds
from the RBI, invest such funds in highly reated collateral securities and provide ‘credit wrap’ insurance
to infrastructure projects in India for raising resources in international markets.

SOLUTION OVERVIEW One of the biggest challenges for Financial was ensuring straight through
processing (STP) of most of the financial transactions. With the ICICI group having several 39

companies under its umbrella, Financial needed to seamlessly integrate with multiple applications such
as credit cards, mutual funds, brokerage, call center and data were housing systems. Another key
challenge was managing transaction volumes.

ICICI Bank, underwent a phase of organic and inorganic growth, first by acquiring Bank of Madura
followed by a reverse merger of the bank with its parent organization, ICICI Limited. The Scalable and
open systems based architecture, enable Finance to successfully manage the resultant increase in
transaction levels from 400,000 transactions a day in 2000 to nearly 201 million by 2005 with an
associated growth in peak volumes by 5.5 times. With Financial, the bank currently has the ability to
process 0.27 million cheques per day and manage 7000 concurrent users.

Over the years, the strategic partnership between ICICI Bank and Infosys that started in 1994 has grown
stronger and the close collaboration has resulted in many innovations. For instantance, in 1997, it was
the first bank in India to offer Internet Banking with Finacle’s e- banking solution and established itself as
a leader in the Internet and eCommerce space. The bank followed it up with offering several e-
Commerce services like Bill Payments, Funds Transfers and Corporate Banking over the net. The Internet
is a critical element of ICICI Bank’s award winning multi-channel strategy that is one of the main engines
of growth for the bank. Between 2000 and 2004, the bank has been able to successfully move over 70
percent of routine banking transactions from the branch to the other delivery channels, thus increasing
overall efficiency. Currently, only 25 percent of all transactions take place through branches and 75
percent through other deliver channels. This reduction in routine transactions through the branch has
enable ICICI Bank to aggressively use its branch network as customer acquisition units. On an average,
ICICI Bank adds 300,000 customers as month, which is among the highest in the world.

2.12 SECURE BANKING ICICI Secure online banking experience • It strives provide a secure banking
environment, provided the customers. • Do not share their User Ids, passwords, cards, card numbers on
PINs with anyone, NOR from their consequent unauthorized use. • ICICI Bank employs a range of
security features for its Online Banking services. 40

• Firewall (Virtual electronic fence that prevents unauthorized access to the ICICI Bank server) • Verisign
Digital Certificate • Two levels of passwords for executing Financial Transactions • Secured Funds
Transfer & Bill Payment. 2.13 KEY RATIOS RATIO ANALYSIS [SBI] The financial statements of the company
reveal the needed information for the investor to make investment decision. The ratio analysis helps the
investor to study the individual parameters like profitability, liquidity leverage and the value of the
stock. 2.13.1 (A) INTERPRETATION SBI-RATIO ANALYSIS • Net interest incoming growth is due to Low
cost deposits which helped the bank in containing its costs of funds. During 2006, low cost deposit grew
by 19.3% on a year basis which helped contain the cost of funds.

• Interest expenses, to the interest income ratio declined consistently from 63.29% in 2004 to 57% in
2005. • The bank would sustain Net interest income ratio and can marginally improve on it because of
its resource mobilization power and cost control measure.. • Credit off take of the bank has been lower
than the Indian banking industry. • Not interest income’s key contributor is the other income. • Other
income includes the fees and commission income. Incomes from foreign exchange transactions are also
recorded. • The ratio of non-interest income is on the decline trend excepting the year 2004. because its
growth was not adequate enough to work the increase in the total funds. 41

• During 2005-2006, there has been a significant decline in profits from trading in investments to Rs. 5.9
bn compared to Rs. 17.75 bn in the previous. • Investment/deposit ratio was on the declining trend
excepting the year Mar 2004. • The reduction in investment ratio was mainly due to deployment of
funds under advances. The increase in investment during Mar 2004 was at 18.62% while increase in
deposit was at 9.6%

• SBI group is continuously losing their market share in deposits since the opening up of the banking
sector to their private counterparts. • Operating expenses by 6% over the previous years (Mar 2005)
which shows a decline (69%). • Employee expenses, which always contributed substantial chunk of the
total operating expenses, also grew. It is also note worthy that the bank has total staff strength of
1,98,774 as on 31st Mar 2006. As of SBI launched VRS scheme, natural retirement, which shows
reduction in, staff accounts nearly 5000 employees.

• A sizeable increase of operating expenses is being notices. • RONW is very much declined to an extent
of (12.3%) from March 2005-March 2005- March 2006, because of the stagnant net profit ratio. • High
investment is made in core banking facilities • New technology products coupled with quick turn around
time (TAT) have enabled mid- corporate group to increase its business substantially. • New department
growth in every branch by introducing new technologies with computerized improvement. 2.13.2 (A)
INTERPRETATION ICICI – RATIO ANALYSIS • Net Interest Income / Total funds has increased primarily
reflecting an increase of the average volume of Interest learning assets. 42

• In Feb 2006, In accordance with RBI guidelines for Accounting for securitization of standard assets,
ICICI accounts for any loss arising on Securitization immediately at the time of sale and the
profit/premium arising on account of securitization is amortized over the life of the asset.
• All direct marketing agency expenses, on automobile loans and other retail loans are reported
separately under “Not interest expense”. These commissions are expended and not amortized over the
live of the loan.

• Interest income/total funds have increased from 6.39% to 6.56% in the end, 2006 is primarily due to
an Increase in the average Interest earning assets. This is due to the increase in allowances (626) in spite
of prime leading rate increase by 225 basic points in the period of 2005-2006, benchmark rate for
floating home loans has increased by 150 points in the same period.

• Interest expenses has increase during 2005-2006 is primarily due to an increase of 55.2% in average
interest-bearing liabilities to Rs. 2354.7 billion in the six-months period ended sep 30, 2006.

• Cost of funds to 6.3% from 1511.3 billion in 2005 and an increase of 50 basic points in the six month
period ended sep 30, 2006 from 5.8% in the six month period ended sep 30, 2006.

• Total deposits increased consequence to the general increases in interest rates reflecting a tight
systemic liquidity scenario and increase in deposit rates for retail and other customers in Fiscal 2006.

• Non interest has increased and is stable during 2005-2006 due to increase in commission, exchange
and brokerage and a 12.5% increase in other income, offset, in part by a 22.5% decline in house income,
due to growth in retail banking fee income arising form retail assets like home loans and credit cards and
retail liability product income like account servicing charges, increase in transaction banking fee and fee
income.

• Other income decreased comparatively [25.41(2004) 27.33 (2005) 26.72 (2006)] which includes the
unrealized gain/loss on certain derivative transaction. The lower capital gain is a result of the sharp fall
in the equity markets in May 2006 and adverse conditions in the debt markets.

43

• Operating expenses increases are primarily due to the increased volume of business, primarily in retail
banking and includes maintenance of ATMs, credit card related expenses; call centre expenses and
technology expenses.

• The number of branches excluding foreign branch and OBVSL and extension counter increased to 614
at March 31, 2006 from 562 at March 31,2005. • The number of savings deposit and deposits from
outside India has increased to a good extent. • Provisions and contingencies (excluding provisions for
tax) increases in primarily due to the significantly higher level of amortization of premium on
government securities in fiscal 2006, investments in government securities and lower level of writ backs
in fiscal 2006.

• With effect from the quarter ended Dec 31, 2005 RBI increased the requirement of general
provisioning on standard loans (excluding loans to agriculture sector and small and medicines
enterprises) to 0.40% compared to 0.25% applicable till September 30, 2005. in accordance with this,
the bank has made general provision of Rs. 3.39 billion in fiscal 2006.
• Operating profit before provision and tax ratio increase of 2.23% form 2.09% (2005) is primarily due to
increase in net interest income, increase in fee income increase in treasury income and of operating
expenses.

• Employee expenses have been increased primarily due to the number of employees. But her profit per
employee is being decreased (1,99,853) March 2006 to (1,115,157) March 2005 to the extent 10.52%
decreasing trend is foreseen.

44

CHAPTER 3 3.1 TECHINICAL ANALYSIS OF ICICI AND SBIN 3.1.a. ICICI BANK OutlookI would recommend a
buy only above 830 on close basis. The level of 920 is crucial since the short term Bullish trend will be
confirmed, only if the price sustains above 920. Major support for the stock is at 800. If the stock slips
below this support level, we can see further levels of 730 – 630 – 597.

The continuation pattern negates immediate bearish momentum on the stock and it’s advisable to buy
at declines. Short term investor can initiate a buy above 920 with a target of 995 – 1055. At present the
stock trades in the Indecisive zone on intraday basis.

The above targets are fixed based on leading Indicator Analysis and the trend following. Indicator
Analysis: Moving Average (14 Day) is on positive note and RSI started moving towards North. Since
Moving averages being a lagging indicator, it has considered secondary in Analysis.
The above chart is the weekly chart for ICICI BANK. 45

4.2 SBIN Outlook

The weekly pattern suggest a short term bullishness on the stock with a price target of 1300. The current
level is crucial for the stock to hold the support of 885. A close below 885 could drag the stock towards
south to the target zone of 660.

At current levels, there could be greater chances of bounce back from 885. This could become a
complete head and shoulder pattern in coming months. If that proves to be successful, it is advisable to
unwind all long positions at the right shoulder top (1330-1350)

Indicator Analysis: Moving Average (14 Day) is on positive note and RSI started moving towards North.
Since Moving averages being a lagging indicator, it has considered secondary in Analysis. 46

3.2. FINDINGS • ICICI and SBI credit deposit ratio is on the side though ICICI banks shows a little
decreasing trend to the exten of 2.24 % Over mar2005 _ mar 2006 • Both the bank investment deposit
ratio is on the declining trend • Both the banks has shown better utilization of cash portfolio • ICICI bank
Interest expences to interest earned remains the same Over 2 Years whereas SBI shows reduction •
Other Income ratio remains fluctuation in both the banks • Operating expences to total income shows a
decresing trend in ICICI bank whereas it was on the rising side in SBI • Interest income to total funds
shows rising mode in ICICI whereas In SBI more or less it remains at the level; • The ratio of interest
expences to total funds shows an increase in • Value in ICICI Bank whereas in SBI interest expences
shows a • Rising mode • The ratio of Non Interest income remains the same for ICICI for The past 2
Years whereas in SBI at shows a decline • The stock witness some selling pressure in the coming days in
• ICICI Bank whereas the stock witnessed a huge selling pressure •From the top and bounced back from
the major support of 800 • The continuation pattern negates immediate bearish momentum on the
stock and it’s advisable to buy at declines. Short term investor can initiate a buy above 920 with a target
of 995 – 1055.

47

3.3. SUGGESTIONS 3.3.a. ICICI BANK: 1. Best play in a buoyant environment – Favorable macro, buoyant
Market – related revenues and a benign environment for asset quality. • ICICI –as a player focused on
maintaining and /or improving Market share in key business segments, particularly retail lending- Will, in
our view, benefit immensely form a positive operating Environment.

• ICICI is viewed as it is benefited from the procyclicality effect of The economic cycle as its borrowers in
the legacy project financing Activity witnessed their debt servicing ability increasing considerably. It is
believed that the profitability of this segment has improved as a Result of lower loan loss provisions and
lower taxable rates of Income from this source. Expectations is on the procyclical benefit To continue
and hence profitability of legacy lending to be sustained At levels seen earlier.

• Market related revenues is believed to contribute 14% - 15% to ICICIB’s operating revenues and have
boosted its preprovision RoAA. Buoyant environment to sustain the contribution from market -related
revenues is expected and hence the operating profitability.

2. Pricing power in consumer financing segment profitability Against potential shocks. • ICICIB enjoys a
dominant market position across customer Categories in retail lending. The strong market position and
robust Demand for consumer financing vests significant pricing power With ICICIB is believed either by
allowing a hike in lending rats, Negotiating higher subvention form manufacturers of cutting Distribution
costs.

• Strong pricing power and a balance sheet that is significantly Biased towards retail lending buffers
ICICB’s profitability from Potential shocks in the bank’s funding cost. • ICICB has an adverse mismatch
profile between assets and Liabilities. High volatility in interest rates could adversely effect Profitability
in the short term; however, as the back book gets Reprised at new lending rates upon maturity, the
bank’s NIM will Likely show improvement. This phenomenon to play out through FY1002E and FY2009E
is expected.

48

3. In line with consensus, but we recommend buy ICICIB for growth Reasons and not for the relative
valuation appeal. It is not so much about ICICIB versus HSFC or HDFCB, but about Their respective
operating metrics and growth conditions. Market Has rewarded both strategies: ICICIB’s broad-based
strategy allows capturing value across the Value chain in a customer segment; and ICICIB, like other
large players in the private sector, enjoys Favorable conditions arising from a restrictive
regulatory/policy Environment towards new entrants and foreign banks and slow Pace of reforms for
state-owned banks is believed.

4. Increasing contribution from strategic investments – Yet another driver • The value accruing from
subsidiaries to be 17% of ICICIB’s Current market capitization. This to rise to 20% of ICICIB’s target Price
over the next 12 months is expected with banking and life Insurance being the key drivers.

• The life insurance business of ICICIB has been incurring losses On an accounting basis due to continued
investment in expznding The sacle and scope of the business. The life insurance business is Believed in
creating wealth for its shareholders through market Share gains, increasing penetration of life insurance
and improving operating efficiency.

• The asset management and venture capital fund of ICICB makes A negligible contribution currently;
however, these businesses is Believed to hold significant upside potential as they achieve scale
Economies.

3.3.b. SBI 1. Potential headwind to price performance from loss of market share and weaker RoAA • SBI’
has been losing market share, both in terms of loans and Deposits, for quite some time. But , the extent
of loss over the Past 18 months has been staggering, particularly for deposits (2.2%)

•In a bid to protect its profitability, SBI has embarked on a Selective growth strategy. But given the
bank’s spread and size, would be difficult to pursue a 49

selective growth strategy unless It reconciles to a significant loss a market share over time. • Challenges
are compounded by weaker profitability. The Expectoration is the core operating profits to rebound past
Y2004 levels in FY2008 E. Non recurring revenues and costs masked this condition in FY2005 and
FY2006.

• SBI’s size and potential to improve efficiency may sway Consensus opinion; the deep value inherent
makes the Investment case compelling . Although there is potential to Improve

performance, it remains unrealized thus far. Convinced Size and potential is convincing. 2.limited upside
to growth expectations in the medium term Believe SBI’s growth will remain volatile. Lack of exceptional
Income/cost elements and need to raise loan loss provisions from Very low levels will likely cause
volatility in earnings growth Through FY2009E, in our view.

The forecast says12% CAGR in net profit through FY2009E, However, on YoY basis, significant volatility in
net profit Growth is expected The estimates are below that of consensus for FY2009E and FY2009E by
10%. Consensus is overestimating revenues by Either assuming higher loan growth or NIM. The latter is
more Likely that the former, in research view.
Significant downward revision to consensus estimates for Operating revenues and profits over the past
12 months. Consensus appears to be positive about excess liquidity that SBI Has reserve holding are
significantly higher than minimum Required level. SBI would likely utilize the excess liquidity over The
next 12 months. Excess liquidity provides upside only in the Short term is viewed.

3. Value inherent, but catalysts limited Investors will maintain a growth bias in the Indian market.
Growth expectations for SBI are below that of consensus (21% CAGR through FY2009E versus consensus
15% CAGR) is Believed

News flow about reduction of government holding in SBI to 15% And amendment to the SBI subsidiary
act could be potential short- Term catalysts. However, the focus of the market will be on Earnings is
believed., there are no catalysts to drive earnings Strongly is viewed.

50

4. Reforms could be a trigger-assigning a low probability. • SBI is viewed as it will need flexibility in
reorganizing its Distribution network and human resources. As long as the • Constraints remain, it will
be at a disadvantage to peers in the Private sector is believed •There have a few incremental changes
such as introduction of Voluntary retirement scheme for employees. However, there Changes tend to
drain the productive resources rather than Eliminating redundancy is viewed. • The RBI has chalked out
a roadmap for opening up the sector to Foreign banks in 2009. Should this come to fruition, it will leave
State-owned banks, including SBIS, significantly disadvantages as We except to see consolidation within
the private sector.

51 3.4. CONCLUSION This study on investment decision is conducted by analyzing and Comparing ICICI
Bank and SBI based on fundamental analysis and Technical Analysis. This indicates that, the key driver of
stock performance of ICICI Bank shows an Increasing trend where as underperformance of SBIS hows a
decreasing trend besides its high potential.

The initial investment summary cover with a Buy rating to ICICI Bank and a sell rating to SBI based on
strategic investment using the Analysis. 52 3.5. BIBLIOGRAPHY Books •Punithiavathy pandian, “Security
Analysis and portfolio Management” Vikas Publishing House Pvt. Ltd • Book of Readings, “Security
Analysis”, ICFAI university Reports • Report on Kotak Securities research on the ICICI Bank and SBI •
Report on “Indian Economic Survey 2006-2007” • Goldmen sachs Global Investment Reasearch Journal •
Ernst and Young, “India’s Best Banks”, The financial express • Sanjoy Narayan “Indian’s Best Banks –
KPMG Survey” Website: www.rbi.org.in

www.gov.in

www.stockcharts.com

www.nseindia.com