financial institutions in india

Chapter 1

Introduction

1.1 Background of the Study

The United States and the world economy are grappling with a severe financial crisis. India has so far avoided a banking or financial crisis of the proportions witnessed in the United States and some other economies. However, there are definite indications of a recession in the Indian economy, especially in its industrial sector. India can obviously take comfort in the fact that the global financial troubles have not, so far, triggered a major banking crisis in India, as they did in the UK and a number of other countries. Whereas banks in the UK and Europe were exposed heavily to the mortgage-backed securities offered by the US financial system, banks in India have avoided such exposure.

The largest economy, India, is relatively more exposed to the contagion effects of global financial markets through adverse effects on capital flows from portfolio and direct foreign investments, and also through exposure of domestic financial institutions to troubled international financial institutions and to contractsincluding derivativesthat have undergone large value changes. The evidence so far shows significant losses in the stock market and a reduction in the flow of foreign capital. Yet these risks are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management that will likely allow India to ride the crisis without destabilizing the financial sector. When the crisis first broke internationally, within India there was much talk of how the Indian economy is less likely to be affected and how the Indian financial sector will be relatively immune to the winds from the international financial implosion. But it is clear that important elements of the balance of payments and the domestic financial sector have been affected. There are significant implications for domestic banking, which are already reflected in the credit crunch that has dramatically affected access to credit especially for small and medium enterprises. There are effects on some important macroeconomic prices - in particular the exchange rate. And there are direct and indirect effects on employment, with falling export employment generating negative multiplier effects.

The current global financial crisis was caused primarily and fundamentally by extended structural global macro economic imbalances. These global imbalances were reflected in current account surpluses of China, Asia and EMEs and current account deficits of the USA, in particular. These large and persistent imbalances represented "unearned" prosperity for deficit reserve currency countries and "unshared" prosperity for surplus countries. Such a global economic order was inherently unsustainable and unstable from the word go. In other words, the only sustainable and durable global economic growth model would be where growth and prosperity are both "earned" and "shared". In fact, the whole thing can be likened to cosmic balance/equilibrium/harmony where stars, suns, planets, all orbit within the inviolable discipline of their elliptical orbits which do not permit deviant behavior beyond the shortest and the longest distance from the suns and stars of the orbiting planets! Any deviant behavior/conduct, inconsistent with the cosmic harmonious balance and equilibrium, will invite and inflict extremely retributive backlash; the more severe and prolonged the disequilibrium and imbalance, the more wrenching and excruciating will be the resulting pain as is currently being experienced.

The economic slowdown of the advanced countries which started around mid-2007, as a result of sub-prime crisis in USA, led to the spread of economic crisis across the globe. Many hegemonic financial institutions like Lehman Brothers or Washington Mutual or General Motors collapsed and several became bankrupt in this crisis. According to the current available assessment of the IMF, the global economy is projected to contract by 1.4 per cent in 2009.Even as recently as six months ago, there was a view that the fallout of the crisis will remain confined only to the financial sector of advanced economies and at the most there would be a shallow effect on emerging economies like India. These expectations, as it now turns out, have been belied. The contagion has traversed from the financial to the real sector; and it now looks like the recession will be deeper and the recovery longer than earlier anticipated. Many economists are now predicting that this 'Great Recession' of 2008-09 will be the worst global recession since the 1930s.

1.2 Problem Statement

Indeed, it's now common to hear the assertion that the world economy changed on 15 September 2008. Certainly, there can be no doubt that the bankruptcy of Lehman Brothers heralded a sharp intensification of the global financial crisis - now so ubiquitous it has its own acronym, the GFC. This in turn has called forth an unprecedented policy response, including the effective nationalization of large parts of several OECD economies' financial systems and a massive splurge of public sector money. It's also glaringly apparent that the financial carnage is going take a heavy toll on global economic activity in the near future. But has the crisis produced a fundamental change in the long-term trajectory of the international economy? Are the changing facts of the global economy - plummeting growth, soaring risk aversion, collapsing commodity prices, vanishing business and consumer confidence, and a massive expansion in the role of government in the economy - so significant that we also have to change our minds about the fundamental ways in which the world will now work?

There is, at least in some quarters, dismay that India has been hit by the crisis. This dismay stems from two arguments. The first argument goes as follows. The Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets. In fact, our banks continue to remain safe and healthy. So, the enigma is how can India be caught up in a crisis when it has nothing much to do with any of the maladies that are at the core of the crisis. The second reason for dismay is that India's recent growth has been driven predominantly by domestic consumption and domestic investment. External demand, as measured by merchandise exports, accounts for less than 15 per cent of our GDP. The question then is, even if there is a global downturn, why should India be affected when its dependence on external demand is so limited?

The answer to both the above frequently-asked questions lies in globalisation. First, India's integration into the world economy over the last decade has been remarkably rapid. Integration into the world implies more than just exports. Going by the common measure of globalisation, India's two-way trade (merchandise exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 40.6 per cent in 2008-09. Second, India's financial integration with the world has been as deep as India's trade globalisation, if not deeper. If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 112.4 per cent in 2008-09.

The present financial crises are more widespread than previous ones, as countries financial systems are deeper connected into each other now than before. The current crisis began in United States when the subprime mortgages defaulted. Financial institutions, which are the key intermediaries in the financial system, faced a systematic risk that froze and decreased the capital in the real economy. The subprime mortgages were designed with an interest payment, whereby the mortgagees were planning to refinance to avoid increased mortgages rates (Acharya and Philippo, 2009).

The lending and mortgage system in the U.S. and rest of the world has gone through significant changes during previous decades - the old system where banks used balance-sheet money to lend has been replaced with a system where mortgages are securitized, i.e. transformed into financial instruments, and sold to investors. The process of securitizing mortgages includes a long chain of intermediaries and the risk of the mortgages thus becomes transferred far away from the actual source. To provide safety, the mortgage instruments were hedged with either credit derivatives or by companies specialized in insuring financial instruments, e.g. monoline insurers, further increasing the distance between the asset (e.g. mortgage) and the investor. Investment banks and other institutions used short-term funding to finance long-term positions in assets and were highly leveraged - a phenomenon that is pro-cyclical, as asset prices boom, leverage is increased. The use of repurchase agreements, repos, was common and could finance up to approximately 25% of investment banks balance sheets. Short-term repos are refunded daily making them highly reliant on functioning money markets. As long as the world experienced a booming economy with low interest rates and liquid funding markets the system functioned smoothly - but as mortgage holders in the U.S. started to default on their mortgages it sent shockwaves through the entire global financial chain.

The impact of the global crisis on India can broadly be divided into three different aspects: (1) the immediate direct impact on its financial sector; (2) an indirect impact on economic activities; and (3) potential long-term geopolitical implications. Fortunately, India, like most of the emerging economies, was lucky to avoid the first round of adverse affects because its banks were not overly exposed to subprime lending. Only one of the larger private sector banks, the ICICI, was partly exposed but it managed to counter the crisis through a strong balance sheet and timely government action. The banking sector as whole maintained a healthy balance sheet and, over the third quarter of 2008 -a nightmare for many big financial institutions around the world-, India's banks reported encouraging results and witnessed an impressive jump in their profitability.

1.3 Purpose

The aim of this study is to at first acquire and present the necessary knowledge regarding characteristics of financial crises from specific literary theories on the crises. In addition, we will use these literary theories to select economic indicators that will explain the repercussion on the Indian economy as a result of the current financial crisis and its impact on the banking sector. The purpose of this dissertation is to analyze the development and growth of HDFC Bank Ltd during the year 2008 and 2009. We aim to make a broader analysis of the bank and hold an external point of view. The intention is to find the factors adding value to the bank, in terms of products and business advantages. This dissertation is to sort out the key factors behind a successful bank and a highly valued brand in banking industry.

1.4 Research questions

  • What characterizes a financial crisis according to the literature chosen?
  • How has HDFC Bank in the current financial crisis enabled to defend a competitive composition within the banking industry?
  • Will the success continue in the foreseeable future?

Chapter 2

Literature Review

2.1 Reviewing the Global Financial Crisis

Researcher Charles P. Kindleberger (2005) argued that all financial crises follow a certain pattern which proceeds as follows; it starts with an economic displacement of some kind, a displacement large enough to affect the current investment environment and that alters the profitability opportunities between different business sectors. Brunnermeier (2008) argues that most investors prefer assets with short maturities since such assets, for example, allows investors to withdraw funds at short notice should they need to. Gorton (2008) argues that the lack of information deriving from the securitization process was one of the main factors behind the crisis. As a response to Gorton (2008), Holmstrm (2008) argues that it is partial information transparency that is the problem - complete transparency or complete lack of transparency increases liquidity. Hellwig (2009) stresses the importance of mark-to-market valuation which made institutions exposed to systemic risk that has little to do with the intrinsic value or solvency of debtors and instead relies upon the functioning (or malfunctioning) of the financial system.

We shall in this section review statements credited to informed sources on the financial meltdown.

  • The US government has bailed out Citigroup Inc. agreeing to shoulder most of the potential losses on $306 billion of high risk assets and inject $20 billion of new capital in its biggest rescuer of a bank yet. Citigroup's rescuer marks the latest government effort to contain a widening financial meltdown that has caused the disappearance or bankruptcies of companies including Bear Stearns Cues, Lehman Brother Holding Inc. and Washington Mutual Inc. (Donald, 2008).
  • The price of oil per barrel has moved from $48.20 barrel which is the lowest price so far since three years to a bit over $50pb. The OPEC ministers have an emergency meeting which failed to produce any agreement among them. Most oil ministers played the self interest game and were considering what was best to their individual countries since after this report, oil per barrel had moved below $47.
  • As noted by Ayankola (2008:18), unfortunately for the OPEC, the world economic crisis is showing no sign of easing off. The United State, the biggest economy in the world and the biggest consumer of oil, is witnessing a huge drop in demand because of the financial meltdown and president elect, Barrack Obama, is already talking about seeking for alternative energy. In Europe, the situation is also not any better. Many of the European economies are also on the brink of recession with demand for crude oil dropping sharply. China and India which are the two economic power blocks among the Asia tigers are not left out as crude oil demand had also dropped.
  • Kuwait is a prosperous country by all standards of assessment but she is not left out of the financial crisis. Wiggles worth (2008:38) reported that despite Kuwait being one of the richest countries in the world due to its ownership of 10 percent of global oil reserves, she has been unsettled by the financial crisis. Investors and traders from the middle classes have demonstrated against the government while politicians are threatening to grill the Prime Minister in parliament on a series of controversies. Kuwait is the only Gulf country to have been forced to publicly bail out a bank after Gulf Bank lost $1.4bm (#933m, $1.1bn) in derivative trading.
  • Citigroup incorporated facing the threat of a breakup or sale, received $306 billion of US government guarantees for trouble mortgage and toxic assists to stabilize the bank after its stock fall 60 percent last week. Citigroup also will get a $20 billion cash injection from the treasury department, adding to the $25 billion the company received last month (October) under the trouble assets relief programmed. In return for him cash and guarantee, the government will get $27 billion of preferred shares paying 8 percent divided. Citigroup rose as much as 41% in German trading on Monday November 24, 2008 (Global Business, 2008:36).
  • Barrack Obama unveils an economic team steeped in fighting crisis and likely to push for an unprecedented government role in reviving growth and stabilizing the financial system (global business, 2008:39).
  • In the property and environment section of daily champion (2008:32), it was noted that the financial crunch had eventually hit Dubai. Quoting the Architects Journal, the report noted that "architects and developers in Dubai are freezing recruitment and making redundancies as the emirate's real estate market begins to crumble. "Similarly, in the Dubai financial market, the general stock index had fallen from a high of 6, 315 earlier this year to just 2, 1012 yesterday (November 26, 2008).
  • Gordon brown (Prime Minister of Britain) had warned that the world is facing "the first truly global financial crisis (Gordon Brown, Msthaba, July 4, 2008). Gordon further positioned that both the World Bank and UN were out of date and should be reformed to tackle the emerging problems.
  • The economic problems afflicting many countries suffering recession have been blamed on the sub-prime mortgage crisis in the US that has led to plunging property prices and billions in losses by banks.
  • The devastating financial flu that has sent the American economy reeling is contagious, making the rest of the world look sick too. Stock markets on Monday plugged from Tokyo to New York to Frankfurt as the economy suffered a global crisis of confidence driven mainly by fear that the $700 billion bailout of the US financial industry won't be enough to cure its ills (Goering, 2008).
  • Germany on Sunday announced it was guaranteeing bank deposits to stave off collapse of the country's biggest mortgage firm, less than two weeks after the country's finance minister declared his country had sound fundamentals and wasn't vulnerable to a US style crisis.
  • Ireland, Denmark, Greece and Iceland Similarly have promised to back saving in recent days all in an effort to reassure domestic consumers that the banking isn't collapsing.
  • Khan (2008:25) blamed the current global meltdown to the exuberance of the developed economies which was largely credit based without the requisite regulation to control the current spin-off.

The world situation as far as this global financial crisis is concerned is very fluid. Changed take place at enormous speed thus making definite statements and projections very difficult. The instances cited above point to the fact that most developed countries have been affected and are being affected by the global crisis.

2.2 Impact of Global Financial Crisis on India

The contagion of the crisis has spread to India through three major channels - the financial channel, the real channel, and importantly, as happens in all financial crises, the confidence channel.

India's financial markets - equity markets, money markets, forex markets and credit markets - had all come under pressure from a number of directions. First, as a consequence of the global liquidity squeeze, Indian banks and corporates found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual funds putting redemption pressure on the mutual funds and down the line on non-banking financial companies (NBFCs) where the MFs had invested a significant portion of their funds. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. Second, the forex market came under pressure because of reversal of capital flows as part of the global deleveraging process. Simultaneously, corporates were converting the funds raised locally into foreign currency to meet their external obligations. Both these factors put downward pressure on the rupee. Third, the Reserve Bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening. Rupee-US$ rate moved up from 40.25 during 2007-08 to 45.92 during 2008-09 and 48.65 during April 01-July 21, 2009 (Misra, 2009).

So far the real sector is concerned, the transmission of the global cues to the domestic economy has been quite straight forward - through the slump in demand for exports. The United States, European Union and the Middle East, which account for three quarters of India's goods and services trade, are in a synchronized down turn. Exports from India started experiencing negative growth from October 2008, a trend which has continued till May 2009, latest month for which data is available. During 2008-09, exports from India rose by 3.6 per cent in US$ terms compared to 28.9 per cent growth in the previous year. Service export growth is also likely to slow in the near term as the recession deepens and financial services firms - traditionally large users of outsourcing services - are restructured. Net capital inflows, which increased sharply to 9.2 per cent of GDP (US$ 108 bn) in 2007-08 from 1.9 per cent of GDP in 2000-01, witnessed a sharp decline to 0.8 per cent of GDP (US$ 9.2 bn) during 2008-09. FDI and NRI deposits witnessed a surge over their previous year's level. Portfolio investment declined to outflow of US$ 15.0 billion in 2008-09 from net inflow of US$ 29.6 billion inflow during 2007-08. The current account deficit stood at US$ 29.8 billion (2.6 per cent of GDP) in 2008-09 as against US$ 17.0 billion (1.5 per cent of GDP) during 2007-08. The CAD was driven mainly by a sharp slowdown in exports and imports growth outpacing the growth in exports led to a widening of trade deficit to US$ 119.4 billion (or 10.3 per cent of GDP) in 2008-09 from US$ 91.6 billion (or 7.8 per cent of GDP) in 2007-08 (Jha, 2008).

Has the present global crisis affected India's domestic economy? To answer this it is necessary to look at current macroeconomic fundamentals. Latest RBI estimates place India's growth rate during 2008-09 at 7.7 per cent. Most other estimates also place GDP growth for the year in the range of 7-8%. During the first quarter of 2008-09 (April-June) Indian economy grew at 7.9 per cent, though growth is expected to slow down in the subsequent quarters as the slowdown takes hold. The first indication has already come from the index of industrial production (IIP). According to latest data, the IIP grew 4.8% in September 2008 as against 7% in the corresponding period last year. The cumulative growth during April-September 2008 was only 4.9% as against 9.5% during the corresponding period in previous year. While the September figure is an improvement over the dismal growth of 1.3% recorded for August 2008, it is too early to see it as a recovery from the previous low.

Chapter 3

Company Description

3.1 Company Profile

The Housing Development Corporation (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The Bank was incorporated in August 1994 in the mane of 'HDFC' Bank Limited' with its registered office in Mumbai, India. HDFC Bank commenced operations as a scheduled commercial Bank in January 1995. The Bank currently has a nationwide network of 1416 Branches and 3382 ATM's in 550 Indian towns and cities.

3.2 Financial Results Update

HDFC Bank disclosed a substantial rise in standalone net profit for the quarter ended June 2009, helped by healthy growth in total income and higher operating margin. During the quarter, the profit of the bank rose 30.53% to Rs 6,061.10 million from Rs 4,643.50 million in the same quarter last year. Interest earned for the quarter rose 13.02% to Rs 40,931 million, while total income for the quarter rose 21.86% to Rs 51,367.50 million, when compared with the prior year period. EPS for the quarter rose 30.05% to Rs 14.22, when compared with the prior year period.

Net interest income (interest earned less interest expended) for the quarter ended June 30, 2009 was Rs 18,555.80 million, driven by average asset growth of 10.5% and net interest margin (NIM) of 4.1%. Other income (non-interest revenue) registered strong y-o-y growth of 75.9% to Rs 10,436.50 million for quarter ended June 30, 2009. The largest contributor to the `other income was fees and commissions of Rs 6,490 million, up 27% over corresponding quarter ended June 30, 2008.

During the quarter, the operating expenses grew by a modest 7.1% yoy, while sequentially it showed a decline of 1.1% QoQ primarily driven by just 3.5% growth in employee expenditure. The branch utilization has also improved during the quarter with cost/asset ratio at 3.0% as against 3.3% in most of FY09.The bank witnessed substantial improvement in operating profit margin of 520 bps over previous year period to 29.56%. Operating profit for the quarter ended June 30, 2009 grew by 47.8% to Rs 15,186.50 million over the corresponding quarter of the previous year.

Source: Firstcall India Equity Advisors , Company Research Publications, 2009

3.3 Advances & Deposits Growth

The Bank's total balance sheet size increased by Rs.175,164 million to touch Rs.18,61,150 million as of June 30, 2009. Total deposits were Rs.14,57,320 million, up from Rs.13,09,180 million as of June 30, 2008. With Savings account deposits at Rs.384,890 million and Current account deposits at Rs.270,260 million, the CASA mix was at 45% of total deposits as at June 30, 2009. Gross advances as at June 30, 2009 were Rs.10,52,880 million, an increase of 7.7% over June 30, 2008 and of 5.0% over March 31, 2009. Retail loans at Rs.611,300 million were 58.1% of gross advances.

3.3.1 Segment wise Revenue

3.3.2 Branch & ATM Network

As of June 30, 2009, the bank`s distribution network was 1,416 branches and 3,382 ATMs in 550 cities as against 1,229 branches and 2,526 ATMs in 444 cities as of June 30, 2008.

3.3.3 Slashes lending rate to 15.75%

HDFC Bank, country`s second largest private sector lender today slashed benchmark lending rate by 25 basis points to 15.75%. Benchmark Prime Lending Rate has been reduced to 15.75% per annum with effect from July 20, 2009.

3.3.4 Slashes deposit rates by up to 0.25%

HDFC has slashed its deposit rates by up to 0.25% across various maturities with effect from June 19, 2009. Even the HDFC Bank, promoted by the company, has also reduced its deposit rates by up to 0.25%. This reduction is in line with the market trends and taking into account the developments happening in the market in the recent past.

3.3.5 Allotment of Equity Shares under ESOS

The Investor Grievance (Share) Committee of the Bank have approved allotment of 5,22,522 equity shares to the employees of the Bank pursuant to exercise of options under its Employees Stock Option Schemes (ESOS). Increases floor level for savings accounts HDFC Bank has increased the floor level for balances in savings accounts. Now those opening new accounts in metro branches of the bank will have to maintain minimum average balances of Rs 10,000 each in their savings accounts against Rs 5,000 earlier. For semi-urban areas, the minimum balance for new customers has been raised Rs 5,000. The old limits would continue to apply for existing customers.

3.3.6 Bank Muscat sells 81% equity

Bank Muscat has sold 81% of its stake in HDFC Bank and has received around Rs 5.07 billion pre-tax profits from the sale. Further, Bank Muscat said that the remaining balance in HDFC bank is held in depository form and the bank will consider further disposals over time subject to market conditions.

3.3.7 Bank issues Rs 7.97 bn worth debentures

HDFC Bank has issued on private placement basis unsecured, nonconvertible, redeemable subordinated bonds aggregating to Rs 7.97 billion in the nature of debentures towards Tier-II capital.

3.3.8 LIC raises stake in HDFC Bank to 7.10%

Life Insurance Corporation of India (LIC) has hiked its stake to 7.10% in HDFC Bank after purchasing shares in the open market. LIC has purchased over 89.17 lakh shares representing 2.09% stake in the company. Prior to the above mentioned acquisition, LIC held 5.01% stake, while now it holds over 30.2 million shares representing 7.10% stake in the bank.

3.3.9 Issue of Bonds

HDFC Bank has issued on a private placement basis unsecured, nonconvertible, redeemable subordinated bonds in the nature of debentures towards tier - II capital as with upper tier - II bonds for an amount aggregating Rs 2000 million and lower tier - II bonds for an amount aggregating Rs 1500 million.

3.3.10 FY09 Performance

For the year ended March 31, 2009, the Bank earned total income of Rs.196229 million as against Rs.123982 million in the previous year. Net revenues (net interest income plus other income) for the year ended March 31, 2009 were Rs.107118 million, up 42.6% over Rs.75110 million for the year ended March 31, 2008. Net Profit for year ended March 31, 2009 was Rs.22449 million, up 41.2%, over the corresponding year ended March 31, 2008. The Bank's total balance sheet size increased by 37.6% from Rs.1331770 million as of March 31, 2008 to Rs.1832710 million as of March 31, 2009. Total deposits were Rs.1428120 million, an increase of 41.7% from March 31, 2008. With savings account deposits of Rs.349150 million and current account deposits at Rs.284450 million, the CASA mix was at around 44.4% of total deposits as at March 31, 2009. Gross advances as at March 31, 2009 were Rs.1002390 million, an increase of 48.3% over March 31, 2008. The Bank's total customer assets (including advances, corporate debentures, investments in securitized paper, etc.) were Rs.1004360 million as of March 31, 2009. Retail loans at Rs.611540 million were up 55.5% over March 31, 2008 and now form 61% of gross advances. The Board of Directors recommended an enhanced dividend of 100% for the year ended March 31, 2009, as against 85% for the previous year.

3.4 Key Concerns

  • The banking industry is very competitive and the ability of banks to grow depends on their ability to compete effectively.
  • Banking in India is a heavily regulated industry and material changes in the regulations could adversely affect Banks business.
  • Exchange rate fluctuations may have an impact on banks financial performance.
  • A slowdown in economic growth in India could cause banks business to suffer.
  • The introduction of technology in banking operations has also imposed greater responsibility to protect against various information security threats and to ensure wider assurance of safeguard of the interest of customers.
  • Implementation of Basel II requires higher capital.

CHAPTER 4

RESEARCH DESIGN AND METHODOLOGY

4.1 Introduction

This chapter focuses on how the research questions of this study were investigated by referring to the sample group of respondents used in the study, the procedure that was followed for conducting this study and the measuring instruments used. Statistical analysis was conducted in conjunction with the literature review undertaken.

4.2 Research Design

Since we used a qualitative approach in our research, which is connected to small-scale studies, we have chosen to conduct a case study. Saunders et.al (2003) states that a case study is appropriate when using small-scale studies, since it is only focused on one few research units and therefore results in deep and detailed information. A case study is also characterized by emphasing the importance of the special rather than the general, relations or processes rather than results, a holistic view point rather than individual factors, natural rather than artificial environments and finally it uses multiple sources rather than one research method. One pro with a case study as a research strategy is that it makes possible to use different methods depending on the circumstances surrounding the situation. The most critical con is that the researcher has to show the similarity with other cases to avoid accusations regarding the reliability of the results.

For the purpose of the study a non-probability sampling design in the form of a convenience sampling method was adopted and considered to be appropriate to gather the data. The rationale for using this sampling method was due to the respondents being easily accessible, their availability, as well as it being less time consuming and inexpensive to gather the research information.

A non-probability sampling design was used, based on the method of convenience. Non-probability sampling does not involve elements of randomisation and not each potential respondent has an equal chance of participating in the research. Some of the advantages of utilising a non-probability sample lie in the fact that it is cost-effective and less time consuming. However, its associated shortcomings relate to its restricted generalisability, particularly in lieu of the higher chances of sampling errors (Sekaran, 2003). However, to overcome restrictions with respect to generalisability, Sekaran (2003) maintains that it is advisable to use larger samples.

Rosnow and Rosenthal (1996) have outlined the advantages of using questionnaires as follows:

  • It can be administered to large numbers of individuals,
  • The method also allows anonymity and
  • It is relatively more economical to use.

The major drawbacks of using questionnaires are however, outlined by Bless and Higson- Smith (1995):

  • the response rate for questionnaires tend to be low;
  • the literacy levels of respondents are not known to the researcher in advance; and
  • the researcher runs the risk of receiving incomplete questionnaires that will have to be discarded.

4.2.1 Population and Sample

HDFC Bank Ltd, the company used in the present study accommodates 100-150 employees in their head office at Mumbai, India. A population is considered to be any group of people, events, or things that are of interest to the researchers and that they wish to investigate (Sekaran, 2000). A sample is a subset of the population in question and consists of a selection of members from the particular population (Sekaran, 2000). Sampling is described as the selection of a proportion of the total number of units of interest for the ultimate reason of being able to draw general conclusions about the total number of units (Parasuraman, 1986).

The population targeted in this study included all employees of HDFC Bank at Head Office, Mumbai (N=150) spanning across all the departments of the company in India. All employees were solicited to partake in the study. Thus, two hundred (150) questionnaires were administered of which one hundred fourteen only (114) were returned, yielding a 76% response rate. According to Sekaran (2000), a response rate of thirty percent(30%) is regarded as acceptable for most research purposes.

4.2.2 Procedure

Data were collected from HDFC Bank, a leading private sector bank in India. To evoke an interest in the study, six members of senior management i.e. the general manager, the sales manager, the accounts manager, the HR manager and two line managers were initially informed via e-mail about the purpose and objectives of the study and when the study would be conducted, the confidentiality, anonymity and voluntary nature of the study was also addressed, and assurance given that the information would only to be used for research purposes.

Data was collected mainly by self-administered paper questionnaire and web-based questionnaire. Web-based questionnaires provide anonymity to respondents; increase the convenience of answering for respondents; and decrease the error of imputing the data of paper questionnaires.

4.3 Survey Instrument

Descriptive design was used for this study- to describe the assessment of global recession on the profitability and attitude of the employees of HDFC bank Ltd by using a questionnaire. It addressed three major concerns of this research: how HDFC Bank in the current financial crisis enabled to defend a competitive position within the banking industry and the reason for choosing to continue to work in HDFC Bank Ltd and will the success continue in the foreseeable future.

In the questionnarie, respondents were asked to rate the activities which the bank placed emphasis during the year prior to the recession on the five-point Likert scale phrased as numbered 1 (1 = not emphasized at all ) to 3 (given average emphasis) to 5 (given great emphasis). The Likert scale is the method most commonly used by researchers, and proved to yield more consistent results than some of the other methods. This is why the scale was selected for this study.

4.4 Validity and Reliability

The reliability of the Likert scale is good, because of the greater range of possible answers to one item. In a Likert scale, five response categories are provided, namely "strongly agree", "agree", "uncertain", "disagree" and "strongly disagree". A value ranging from five for "strongly agree" to one for "strongly disagree" is awarded to each category. Although the Likert scale also has its disadvantages, Oppenheim (2000:195), indicate that the Likert scale is the most popular scaling procedure in use.

Where applicable, visual summaries of data will be provided. In this regard Swetnam (1998:670) asserts that bar charts and graphs are preferred because they are visually attractive, can be interpreted easily, and are effective visual aids.

Mouton (2001:276) maintains that the aim of a research design is to plan and structure a given research project such that the validity of the research findings is maximised. In consideration of this requirement, the research approach to be adopted in this research will be quantitative, that is, data will be obtained in the form of scores, which will be tabulated and analysed (Swetnam, 1998:669-670).

According to Easterby-Smith (2002), expressions like validity and reliability were originally used in quantitative science. These two concepts are used to discuss the trustworthiness of the research that has been done. It is essential to underline these elements when an investigation has been performed since it shows an understanding of possible lacks and faults of a study. These concepts can also be applied in qualitative research, where the researcher is committed to provide a faithful description of others' understandings and opinions (Easterby-Smith et al., 2002).

Validity refers to how exactly a scientific investigation is carried out and how accurate the instruments and methods are, according to the purpose of the study. To study what you really intended to study and nothing else. The instrument is a key factor in scientific investigations that will inflict upon the purpose of the study if it is not constructed in an adequate way. To prevent this, many instruments such as questionnaires are tested to verify that they measure what they are supposed to do. This can also be done for qualitative studies and by using the following question: "Has the researcher achieved full access to the knowledge and meanings of the informants?" (Easterby-Smith et al., 2002).

Reliability is a common word used in scientific literature. Its meaning and purpose is to describe how trustworthy the collected data is and the methods by which they have been collected. A high level of reliability cannot exist if the validity is low. Accurate measuring is necessary to achieve high reliability. To determine the reliability the following question can be of use: "Will similar observations be made by different researchers on different occasions?" (Easterby-Smith et al., 2002).

4.5 Data Analysis

All data received from the questionnaires were read into a spreadsheet format and Microsoft Office Excel was used to analyze the data. The statistical tools used in this study were means, frequency counts, percentages, and means and standard deviations. The analysis of the survey results combined with the statistical applications allowed for the researcher to draw conclusions regarding to the objectives of the study.

4.6 Limitations of Study

Limitations of the research were as follows:

1. When comparing the total number of employees in the HDFC Bank Ltd all over India, the number of respondents (N = 114), this was a small number. For this reason, the results of this study might not apply to the total population.

The survey questionnaires were administered to employees in HDFC Bank Ltd. The results of the study might only be generally applied to employees in HDFC Bank Ltd or banking industry in India.

  • Because of the unequal sample returns of male and female respondents, there was not equal gender representation.
  • In performing my investigation, I contacted a limited number of HDFC Bank Ltd managers in Mumbai. I relied on the support of the management of HDFC Bank Ltd to distribute and collect the questionnaires we sent to them. This is a limitation though we do not have complete control of the data collection or any bias that might have occurred during the data collection. There might have been a higher amount of non-responding participants due to failure to follow or instructions.
  • The timeframe has been limited during the study period and have therefore been a limitation to our study. With more time and preparations I could have performed a wider study.
  • Performing an empirical study usually needs funds for producing questionnaires, pay for postal services etc. This study has also been limited by these costs to some extent. A wider investigation would require more funding.
  • Other limitation with this empirical study is that the area of financial meltdown is a complicated and divers arena. Our small study cannot possibly cover all aspects of the area of global crisis.
  • 4.7 Summary

    Research is seen as a systematic process where variables which may influence outcomes, are controlled as far as possible. It is thus important for all researchers to follow set scientific procedures in ensuring credible results.

    In this chapter, the research methodology followed was discussed with reference to the research strategy, the questionnaire, statistical methods, and reliability. This chapter thus formed the background to the following chapter where interpretations were made.

    Chapter 5

    Data Analysis

    5.1 Demographic information with regard to sample characteristics

    The biographical information of the 114 employees who participated in the study is presented in tabular format and explained by means of frequencies and percentages.

    4.2 Descriptive Statistics

    Q.1 Do you think India is affected by the global recession?

    From Fig 5.1 it is seen that majority of the respondents (80%) did not feel that India was affected by the global recession. Only 18% of the respondents felt that India was affected by global recession and 2% of the respondents didn't know.

    Q.2 Do you think profitability of HDFC Bank has been affected by the "financial meltdown"?

    From Fig 5.2 it is that nearly 91% of the respondents strongly felt that 91% of the respondents didn't feel that profitability of HDFC Bank LTd was affected by the phenomenon of financial meltdown. 8% of the respondents felt that profitability of HDFC Bank Ltd was affected by global recession and only 1% didn't know.

    Q.3 What according to you are the strengths of your organization?

    From Fig 5.3 it is seen that 62% of the respondents felt that expanding market reach was the biggest strength of HDFC Bank Ltd ollowed by robust business performance (27%) and merger with centurion Bank of Punjab(11%).

    HDFC's geographical reach and market penetration have expanded at a very fast pace over the last few years. In the seven years ended on March 31, 2008, the bank expanded its operations from 131 branches and 207 ATMs in 53 cities to 761 branches and 1,977 ATMs in 327 cities. During the same five years, HDFC's customer base grew from 0.9 million customers to 9.6 million customers. Increasingly, HDFC has focused on semi urban and under penetrated markets with about 54% of its branches located outside the top nine cities of India. The bank has a significant presence in the merchant business with the total number of point-of-sale (POS) terminals installed by the bank at over 46,000 locations. HDFC's expanding geographic reach and market penetration would enable the bank to increase its market share and thus fuel its profitability.

    In February 2008, HDFC Bank approved the acquisition of Centurion Bank of Punjab (CBoP) for INR95,100 million in the largest merger in the financial sector in India. However, the merged entity would still be two-fifth the size of the country's second largest lender, ICICI Bank. CBoP shareholders got one share of HDFC Bank for every 29 shares held by them. The merger with CBoP is considerably value-accretive as it provides the bank with a materially expanded branch/customer franchise. The merger adds 400 branches to HDFC Bank and would potentially enable the bank to double its balance sheet size by 2010.

    By 2010, HDFC Bank expects CBoP's branches to scale up to the efficiency and productivity levels of HDFC Bank. The merger adds value as new branch licenses may not always come in the desired mix and the presence of existing customers provides an additional advantage. CBoP has a larger presence in the north and south regions of India, and post the merger, HDFC Bank's presence would expand its presence. Thus, HDFC Bank can now effectively leverage this network of CBoP to generate higher CASA (ratio of current and saving deposits to total deposits) per branch. This makes HDFC Bank the largest private bank in terms of branches and makes up for two years of branch licensing, even under benign regulatory dispositions on branches.

    In FY2007-08, HDFC Bank's advances grew 35% y-o-y to INR634,270 million, with retail advances growing 39% y-o-y and wholesale advances growing 30% y-o-y deposits grew 48% y-o-y to INR1,007,690 million, with the CASA ratio remaining strong at around 54.5%. The Bank continued to manage its balance sheet growth and profitability astutely, once again going slow in the fourth quarter of the financial year, unlike most other banks. As a result, in spite of the credit/deposit ratio declining to 63%, NIMs (as reported by the Bank) improved by about 10bp sequentially, allowing the Bank to post 47% y-o-y growth in Net Interest Income (NII).

    The Bank's non-interest income grew 39% y-o-y, though sequentially it declined due to lower treasury gains in 4QFY2008. Core fee Income comprising 89% of non-interest income, grew 38% y-o-y to INR4900 million. Income from the forex business came in 19% lower sequentially.The Bank refrained from disclosing specific details about its forex business.

    The Bank delivered a y-o-y net profit growth of 37% to Rs4, 710 million (Rs3,440 million) in line with estimates and driven by robust core performance. Return on equity (ROE) was lower at 17.7% for FY2008 and is expected to further decline due to the merger with Centurion Bank of Punjab and further equity dilution pursuant to preferential allotment to HDFC. Pertinently, the Bank's Return on assets (ROA) continues to be superior at 1.4% and is expected to remain at those levels going ahead also. The Bank's robust performance lifted its stock price from $64.45 at the end of FY07 to $98.24 at the end of FY08.

    Q.4 What according to you are the weakness of your organization?

    From Fig 5.4 it is seen that 60% of the respondents feel that derivates exposure and increasing provisions is the biggest weakness of HDFC Bank Ltd and 40% of the respondents felt that rising non-performing loans (NPLs) was the weakness that gripped HDFC Bank Ltd.

    The bank's volume of non-performing loans (NPLs) has increased in recent years. Over the period 2004-2006, HDFC's NPLs increased at a CAGR of 141.9% to reach INR1,578.9 million ($35.5 million).This has resulted in an increase in the bank's NPL ratio (ratio of net non-performing customer assets as a percentage of net customer assets) from 0.2% in 2004 to 0.4% in 2006. As of March 31, 2008, the Bank's ratio of gross nonperforming loans (NPLs) to total customer assets was 1.29%. Net non-performing loans (gross nonperforming assets less specific loan loss provisions, interest in suspense and ECGC claims received) were 0.42% of customer assets as of March 31, 2008. The ratio of Net NPLs to Net Advances rose from 0.43% at the end of FY07 to 0.47% at the end of FY08. HDFC Bank's asset quality considerably deteriorated with the acquisition of CBoP.

    Specially, the asset quality issues of CBoP in personal loans and 2 Wheelers portfolio compounds HDFC Bank's NPA issues. Increasing NPL's indicates that the bank expects greater number of delinquencies on the loans made, which indicates scope for improving credit risk management.

    For the FY2008, HDFC Bank made a provisioning of INR 1,727 million for multiple contingencies, including around INR1000 million for a possible hit on account of domestic derivatives exposure.

    The Bank maintains that it has no exposure in any instruments like collateralized debt obligations and credit linked notes. However, the Bank has been dragged to court by a few customers over derivatives consequent to that it also has set aside a small sum for litigation.

    Provisions and contingencies for the Jan-March 2008 quarter stood at INR 4,651 million (vs INR 2,671 million in Jan-March, 2007), comprising specific provisions for non-performing assets and general provisions for standard assets of INR 2,930 million and provisions for tax, legal and other contingencies of INR 1,727 million. While derivatives exposure increases the risk profile and contingent losses, higher provisioning is eating into the profits of the bank.

    Q.5 What according to you are the opportunities available for your organization?

    From Fig 5.5 it is seen that 55% of the respondents feel that untapped rural market is the greatest opportnity of HDFC Bank Ltd, 25% of the respondents said that domestic remittance market is a good opportunity for HDFC Bank Ltd and 20% of the respondents felt that the growing Indian Banking Industry is the biggest opportunity for HDFC Bank Ltd.

    The rural credit market (comprising farmers, traders, entrepreneurs and other rural households) in India is relatively untapped. According to industry estimates, about 80% of the rural households in India at the end of 2004 had no access to formal lending. About 46% of these used informal lending channels, 24% of which resorted to unregulated money lenders. These unregulated money lenders charge astronomical interest rates on their loans which reflect that there is scope for cheaper and more formal lending in the rural credit market. The rural economy accounts for more than two-thirds of India's population and has great untapped potential.

    The bank has relationships with over 25 microfinance institutions and has provided financing where the end beneficiaries exceed 300,000 households. The bank has introduced products addressing the needs of this sector including the Kisan Gold Card. Also, it has undertaken rural supply chain initiatives and commodity finance covering the entire agriculture financing cycle in the last few years. These initiatives position HDFC to tap opportunities from this sector and realize greater revenues going forward.

    The value of the global remittance industry is around $318 billion in 2007. According to World Bank, India is the world's largest recipient of remittances, with over a receipt of over $27 billion in 2007. To tap the opportunities in the remittance market in India, the bank has been expanding its offerings. The bank provides online remittance of funds from the US, the UK, Singapore and Europe to about 1,300 locations across India. Additionally, HDFC has built partnerships with exchange houses in the Middle East, a major region and source of remittances for India over the last few years. In June 2008, Qatar National Bank (QNB) joined hands with HDFC Bank to offer Indian expatriates a range of products and services, including fast online remittance of money. Called 'QNB-HDFC Bank NRI Services, the product has been designed to offer NRIs in Qatar and their families back home a range of products and services covering various aspects of their financial needs. The dual account can be used to remit money in Indian rupees online from a QNB account to an HDFC Bank account. These offerings strengthen the bank's capabilities to realize revenues from growing remittance market.

    The burgeoning economy, surging foreign investment, financial sector reforms and a favorable demographic profile has led to the Indian banking industry emerging as one of the fastest growing in the world. The industry's business grew at a CAGR of 20% from $471.11 billion as of March 2002 to $1175.61 billion by March 2007. Significantly, the newly licensed private sector business has grown almost twice (1.75 times) as that of banking industry as a whole, leading to their share in total banking business increasing from 9 per cent in 2001-02 to 16 per cent in 2006-07.

    Aggregate bank deposits of banks increased by $129.26 billion (22.1%) at the end of March 2007 over the corresponding in 2006. It further increased by 21.2% to $161.47 billion as at end-March 2008 over the corresponding period in 2007.While aggregate demand deposits increased by 19.2%, aggregate time deposits increased by 21.6% in the same period, indicating migration from small savings schemes of the Government.

    Similarly, aggregate deposits of the scheduled commercial banks (SCB) grew by 17.8% and 24.6% in 2005-06 and 2006-07. In 2007-08, aggregate deposits of SCBs have increased by 22.2% in absolute terms to $136.55 billion, against $118.30 billion in 2006-07. Simultaneously, loans and advances of SCBs rose by over 30% (i.e. 33.2% in 2004-05, 31.8% in 2005-06 and 30.6% in 2006-07) in the last three financial years, underpinned by the robust macroeconomic performance. The growth has continued in the current fiscal with non-food credit by SCBs increasing by 22.3%, year-on-year, as on March 31, 2008.

    This boom in the banking industry has propelled nine Indian banks to the list of top 50 Asian Banks, as per this year's Asian Banker 300 report. Similarly, seven Indian microfinance institutions find place in Forbes list of World's Top 50 Microfinance Institutions. Despite such impressive performance, the potential for further growth is huge considering the fact that India has second largest financially excluded households (about 135 million) in the world. In fact, according to Boston Consulting Group, India is the fastest growing incremental revenue pool in the world. As one of the leading private sector banks in the domestic banking industry, HDFC is well poised to gain from the positive market outlook.

    Q.6 What according to you are the threats that your organization may have to face in this global financial crisis?

    From Fig 5.7 it is seen that 65% of the respondents felt that increasing interest rates in India is a potential threat to HDFC Bank Ltd and 35% of the respondents identified intense competition as a threat to HDFC Bank Ltd.

    In the Indian banking sector consolidation is likely to gain prominence in the near future. Despite the liberalization process, state- owned banks dominate the industry, accounting for three- quarter of bank assets. The consolidation process in recent years has primarily been confined to a few mergers in the private sector segment, although some recent consolidation in the state- owned segment is evident as well.

    In July 2008, State Bank of India (SBI) simultaneously opened 101 branches across India. With this, the SBI's network of Branches touched 10486, reaching the remotest areas of the country. SBI plans to add 2000 branches during fy2008-09 out of which more than 1000 branches are marked for semi-urban and rural areas. SBI aims to reach its banking services to 1,00,000 unbanked villages by 2010. Moreover, according to SBI's chairman O.P. Bhatt , the merger of the State Bank of India (SBI) and the State Bank of Saurashtra (SBS) is awaiting the final approval from the finance ministry.

    Moreover, banks in India have also been looking for cross-border mergers. According to a new survey conducted by consultancy major PriceWaterhouseCoopers (PwC), about 28% of Indian financial services firms expect to buy stakes in European groups in the next five years and the same percentage intend to enter North America. As a result, HDFC Bank could face increased competition in India. Intense competition could adversely affect the margins of the bank.

    In June 2008, the Reserve Bank of India lifted the repurchase rate by 0.5% point to 8.5% and adjusted the cash-reserve ratio by a similar margin to 8.75 percent. This was the biggest move since 2000. The surge in crude-oil prices that pushed inflation to a 13-year high was the prime reason behind the increase in interest rates. Higher fuel prices accounted for most of the 11.05% wholesale rate of inflation during the first week of June 2008. As of July 2008, wholesale rate of inflation is well above 11.6%. The central bank may raise interest rates by an additional quarter percentage point in the July 29 policy meeting. Rising interest rates may cool-off the demand for bank credit. Housing loans, auto loans and corporate loans are expected to be hit hard in the quarters to come. This could affect HDFC Bank's loan off-take and profit margins.

    Q.7 Which of the following are the most important growth measures that you use to assess the growth of your bank?

    From Fig 5.7 it is seen that 23% of the respondents identified that operating profit is the most important growth measure that should be used to assess the growth of a bank, followed by increase in customer base and nearly 39% of the respondents voted for the profit parameter as an important measure to assess the growth of bank.

    Q.8 Did your bank's attitude towards staff and recruitment change during this recession?

    From Fig 5.9 it is seen that 79% of the respondents felt that attitude of Management towards the Staff did not change due to the impact of Recession. 9% of the respondents said that the attitude of management changed and 12% didn't think lik that.

    Q.9 Which of the following barriers for growth are the most prominent that your bank has experienced during the current economic recession?

    From Fig 5.9 it is seen that 28% of the respondents identified constraining government regulation and communication, followed by 14% weak power position, 13% adverse financial and economic conditions and 11% incompetent management practices.

    Q.10 What makes you continue your job in this organization?

    From Fig 5.10 it is seen that 40% of the respondents said that compensation and monetary rewards was the most motivating factors for contuining in HDFC Bank followed by 21% who found potential growth in the bank.

    Changes in the firms' emphasis on marketing and business activities were measured through Likert-type scale inquires. The respondents were asked to indicate the extent to which 11 different marketing activitives were emphasized "in the year prior to the recession" The activities appeared in the questionnaire with the numbers 1 through 5 corresponding to a natural progression from "no emphasis to "great emphasis". Emphasis scales have been used before in the literature (Dess and Robinson 1984; Hatfield and Pearce 1994). The questions broadly covered the key decision variable in marketing (price, promotion, distribution, and product) used in previous research (Carpenter 1987; Kotler 1991; Robinson 1985). The following table 5.9 contains the full text of the questions and the mean responses.

    Chapter 6

    Discussion and Conclusion

    6.1 Volatility in Global Financial Markets

    Financial market is an economic institution which allows for the intermediation of capital between households and firms. Broadly, it has the following roles:

    • Determines the price of various securities
    • Providing the ability to transfer ownership of a security from one economic agent to another, which is called providing liquidity
    • Providing the ability to manage and transfer risks involved in holding these securities

    The turmoil and volatility in financial markets started in the mid of 2007 but it began showing its repercussions after August 2008. The recent financial crisis has led to the fall of major financial institutions such as DSP Merrill Lynch, Lehman Brothers and AIG. Investors across the world are panic driven due to the current financial crisis. They are demanding comprehensive strategy which will mitigate the volatility and ensure that their capital is safe and protected. It is an agreed fact that regulators do play a critical role in bringing down the volatility and they have taken timely measures. But investors are also required to take essential precautions to ensure their portfolios are separated from volatility shocks. Development of financial markets has brought new challenges for each and every participant in the financial market. One of the major challenges faced by all the participants is nothing but volatility in the financial markets. Volatility could be the result of the actions of one of the four participants - investors, issuers, intermediaries and regulators.

    Volatility is the reflection of risk which measures the degree of change and speed of change in the value of assets. Each market participant plays an active role in mitigating the volatility in the financial arena. Increased volatility brings down the confidence of the investors in the financial markets. Volatility impairs the financial markets as well as effects the growth of the economy. In order to mitigate the volatility risk, the investors could classify their assets into risk free and risky assets. The most risk free assets are T-Bills. Though the individual investor cannot invest in T-bills directly, through alternative route of money market, funds can offer similar risk return payoffs. The equity market has seen the highest volatility due to sub-prime crisis. The bond market gives comparatively stable returns. In equity markets, the investors can classify their assets across the diversified sectors or across size such as large cap, mid cap and small cap stocks. The risk and return of each of them will vary hence it is necessary to make a tradeoff between required return and risk appetite.

    6.2 Increased Integration of Global Financial Markets

    Financial markets all over the world have witnessed growing integration within as well as across boundaries, boosted by deregulation, globalisation and advances in information technology. Capital has become more accessible resource across the border as nations are increasingly relying on savings of other nations to increase their own nation's domestic savings. Technological developments in electronic payment and communication systems have reduced the arbitrage opportunities across financial centers, thereby increasing the cross border accessibility of funds. Financial markets integration revolves around various factors such as policy initiatives, structure and growth of financial intermediaries/markets, organic linkages among market participants and the preference of investors for financial instruments. Depending on where financial transactions are taking place among participants within a country's geographic boundary or across the border, market segments are divided into national or international. Generally, money and credit market segments, which involve the participation of banks and other financial institutions operating within a country's boundary, are national in character. On the other hand, foreign exchange markets dealing with cross-border transactions and stock markets with cross-listings of securities and participation of foreign institutional investors are international in nature.

    Financial markets differ in terms of credit and liquidity. For instance, money market instruments are more liquid, while bonds in the capital markets are less liquid. Financial markets differ in terms of economic nature of instruments catering to various needs of economic agents. Financial markets are differentiated in terms of risk profile of instruments such as government bonds, which do not involve default and credit risks, and corporate bonds, which are comparatively more risky in nature. Integration of market segments thus reflects an investor's attitude towards risk and the trade-off between risk and return on assets. Market participants in different financial markets could be different such as banks, non-banking financial institutions, including mutual funds, insurance companies, mortgage institutions and specialized long-term financial institutions. Global integration refers to the opening up of domestic markets and institutions to the borderless flow of capital and financial services by removing barriers such as capital controls and withholding taxes. As the financial sector moves towards greater integration with international financial markets, interim solutions have to be found to enhance efficiency e.g. easing of barriers to entry for domestically owned new private banks, insurance and pension companies.

    6.3 Increasing Regulatory Supervision

    Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI) are the apex authorities in financial regulation. They also take care of the economic growth of the country in sync with financial regulation. These apex authorities make sure that their regulatory measures will ensure the fair practice in the financial institutions and financial transactions which takes place across the border as well as within the country. Their objective is to make the Indian banking sector more competent, efficient, sound and dynamic. The focus of the Reserve Bank's policy initiatives is on strengthening corporate governance practices in banks and improving customer service. The Financial Regulatory Services Division provides technical expertise in areas of financial regulation, solvency regulation, financial reporting, statutory accounting, capital adequacy (risk-based capital), accounting, examinations, reinsurance, investments and international insurance issues to regulators. Due to the rapid change in the financial sector, the regulatory authorities across the countries have been discussing how to deal with the ongoing financial crisis. During the last decade, there has been a broadening and deepening of financial markets. Several new instruments and products have been introduced. Existing sectors have been opened to new private players. Over the past few years, the sector has also witnessed substantial progress in regulation and supervision. Financial intermediaries have gradually moved to internationally acceptable norms for income recognition, asset classification, and provisioning and capital adequacy.

    6.4 Changing Investor Needs

    Customers' needs are changing really fast today. Service providers in cut-throat market need to clearly differentiate themselves by evidencing to their customers what value they can create. The service providers need to show how they leave their customers better equipped with personalized financial products and services. Changes in the financial services has brought transformation in banking and financial services technology, changes in the interest rate, and changes in the designing of the products and services, economic activity as well as increased competition in the financial services suppliers. Banks are increasingly finding that the most viable way of differentiating themselves will be to successfully manage customer relationships and enhance the overall customer experience. The boom and bust market cycle has created a wealth affect and reverse wealth affect that will dramatically reshape investor expectations. Most investors are better informed, attentive, and more demanding of high quality services. In uncertain market conditions, investors may migrate towards collaborative relationships with the established brands and proven performers. A financial services company wants to be first to market with new products to meet the "emerging needs" of affluent customers.

    6.5 Containing/Reducing the Cost of Administration

    The financial services sector has been a pioneer in outsourcing non-core, and more recently core processes to achieve cost savings in competitive business environment. The fast-paced changes in the financial services industry enforce market leaders to look for business process enhancement and cost advantages, without losing focus on core activities. Today's financial firms function within a highly competitive environment where end-users increasingly demand extraordinary services on a global scale, more sophisticated business models, and faster, real-time communication across multiple mediums for comprehensive financial information. The ongoing sub-prime crisis will enable the financial institution to offshore more work to reduce the cost. The financial services industry, comprised of banking, capital markets and insurance, is the leading adopter of Off shoring services and accounts for 40 to 45% of worldwide global sourcing. High-tech savvy and private banks are now demanding more branch licenses from the banking regulator RBI to penetrate areas where banking is low. The branch banking transformation is taking place because it can provide extended hours of services as well as cost reduction/cost control. Technology deployment is another area wherein the financial services are ready to spend more on infrastructure development since it proves to be highly efficient method in cost savings. At the same time, it enables interconnectivity in inter-banking and intra-banking methodologies.

    6.6 Areas for Future Research

    The thesis has mainly focused on the financial performance of HDFC Bank Ltd and not of its competitors. Was competition among the peers affected by the global recession is an interesting area to explore. This study focused only on HDFC Bank whereas an attempt can be made to get in-depth knowledge of the financial sector through proper research, which can be useful in developing of financial business in India. The information researched can be used as measure to open a financial based business in India.

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