International banking practices

S u b m i t t e d t o :
D r . s a n j a y b h u s h a n
F a c u l t y o f s o c i a l
s c i e n c e
D E I , A g r a - 2 8 2 0 0 5
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INTERNATIONAL
BANKING PRACTICES,
GROWTH AND
PROSPECTS: A
COMPARATIVE ANALYSIS
OF SBI AND ICICI BANK
Case study report

International banking as intermediation activity that falls into one of the following categories.
The extension of credit by a bank headquartered in a particular country to residents of
another country can occur via: (i) cross-border lending; (ii) local lending by affiliates
established in the foreign country; or (iii) lending booked by an affiliate established in a third
country (eg. an international financial centre). In addition, the BIS international banking
statistics on a residency basis include the extension of credit by a bank headquartered in a
particular country to residents of the same country but in a foreign currency. The underlying
financial instruments could be loans, deposits or securities as well as derivatives contracts and
contingent facilities.
Trends in international banking
Banking has played an integral part in international economic integration throughout history.
Yet the internationalisation of banking has preceded more by fits and starts than in a steady
progression. International banking underwent waves of strong expansion in the second half
of the 19th century and between 1960 and 1990. Most recently, it underwent a major
transformation after the wave of financial liberalisation in the early 1980s.
The discussion in this section is in three parts. First, a working definition of international
banking is provided. Second, major developments in the size, form and geographical
distribution of international banking activities from 1980 to 2009 are documented. Third, the
interaction between bank- and market-based international intermediation is reviewed.
Major trends in the historical evolution of international banking
Economic historians distinguish three “waves” that led to the development of modern
international banking. The first wave, which started in the 1830s, was spurred by the
underwriting securities business performed in the second half of the 19th century by
JPMorgan, Lehman Brothers and Goldman Sachs. These firms helped finance US railroads, as
well as states and municipalities, by selling the underwritten securities in London to
European investors. The second wave, starting in the 1960s and lasting three decades, was
mainly related to international banking transactions among developed countries. The third
wave began in the second half of the 1990s. Like the first wave, it was associated with a
concentration of branches and subsidiaries in developing countries. In comparison with
earlier waves, it has been more oriented towards retail business
Factors driving the internationalisation of banking
The internationalisation of banking reflects strategic management decisions. As at all private
firms, a bank’s main objective is to maximise shareholder value, often proxied by return on
equity. Banks that are successful in doing so have (i) maximised profits, via either an
efficient management of costs or an increased volume of activities, and (ii) chosen a level of
leverage that is optimal from the standpoint of equity holders. These firm-level decisions may be
seen as the proximate drivers of expansion and contraction in international activities.
This section focuses on potential ultimate drivers: those aspects of the political, economic,
regulatory and technological environment that affect (directly or indirectly) the conditions for
profit maximisation. The section first discusses macro drivers – distinguishing between global

developments and developments in banks’ home and host countries – and then turns to
micro drivers that are related to bank-level efficiency considerations.
The results of a survey on 34 internationally active European banks – reported in ECB (2008)
indicate that international expansion is mainly driven by the pursuit of new business
opportunities, by higher profit margins and by incentives to follow existing customers abroad.
Economies of scale and scope seem to play a smaller role. These results are broadly in line
with those documented in the literature reviewed in this section.
Conditions in home countries
The profit-maximising strategy behind banks’ international activities is affected by, inter alia,
economic developments and the regulatory environment in the home country. Thus, it should
come as no surprise that the literature has identified relationships between domestic
economic, financial and regulatory conditions and the size and form of banks’ business
abroad.
Conditions in home countries have helped explain different both structural and transitory
features of international banking.
Economic growth prospects and financial and political stability considerations
As with any component of their business model, banks expand internationally in a way that
allows them to find an optimal balance between return and risk. Thus, in order to satisfy
investors’ demand for a higher return on equity, banks tend to extend lending to countries
that offer a high expected economic growth. In addition, revenue maximisation motives draw
banks towards countries with a liberal, relatively developed and not too concentrated financial
system.
Empirical studies of risk management practices in international banking have found that
macroeconomic and financial stability in host countries is an important driver for the extent
and form of foreign bank lending. Currency risk has proven to be a key factor of cross-border
banking, in both mature and emerging economies.
Effects of international banking
As international banking evolved over the years, the international dimension of financial
stability increased in importance and economic agents gained access to a broader range of
financial services. This section starts with a discussion of how the cross-border expansion of
banking activities has affected the riskiness of individual banks and the financial system as a
whole. It then turns to a discussion of the impact of international banking on economic
integration and growth.
International expansion can affect the risk profile and resilience of individual banks through
risk diversification, competition and efficiency gains. The geographic diversification of a
bank’s counterparties often translates into a diversification of its exposures, which reduces the
riskiness of its aggregate portfolio. However, research has found that banks that enjoy
diversification benefits tend to build riskier portfolios in order to realise higher returns.
As far as their impact on a bank’s riskiness is concerned, competition and efficiency gains
have been often analysed jointly. Competition in the financial sector induces banks to exploit the
risk-return frontier along its international dimension. From the perspective of the global

system, the internationalisation of banking influences cross-border risk-sharing. Enhanced
risk-sharing is generally beneficial for financial stability. The ability to assess and manage
cross-border risks also determines whether foreign banks alleviate or add to local strains during
a crisis.
International banking has had a favourable impact on economic growth and efficiency
through five important channels First, by introducing new financial products and services
and improving the use of new technologies in host countries, cross- border entry has led to
improvements in the quality of financial intermediation. This effect has been particularly
pronounced in emerging market countries. Second, foreign banks are likely to exert pressure
to improve the overall regulatory and supervisory frameworks. In various countries, foreign
banks have often been catalysts of important reform processes that ultimately enhanced the
growth potential and efficiency of host economies. Third, international banking has fostered
allocative efficiency. Most directly, this is accomplished by removing distortions created by
an overly concentrated system. Fourth, the entry of foreign banks sets in motion competitive
forces in the host country. One of the consequences is pressure on local firms to use existing
resources more effectively. Another effect is a lower cost of financial intermediation, as
measured by bank margins, spreads and overhead costs (Fries and Taci (2005), Martinez
Peria and Mody (2004)). This effect appears to exist whether foreign entry is de novo or by
acquisition, although it is stronger in the former case. Fifth, reliance on lending from foreign
banks also carries risks, foreign banks cut lending to a greater extent than domestic banks in a
financial crisis.
Introduction about Indian banking sector
Banking Sector plays an important role in economic development of a country. The
banking system of India is featured by a large network of bank branches, serving many kinds
of financial services of the people. The State Bank of India, popularly known as SBI is one
of the leading bank of public sector in India. SBI has 14 Local Head Offices and 57 Zonal
Offices located at important cities throughout the country. ICICI Bank is second largest and
leading bank of private sector in India. The Bank has 2,533 branches and 6,800 ATMs in India.
The purpose of the study is to see the growth of SBI and ICICI Bank, public sector and private
sector respectively. The research is descriptive and analytical in nature. The data used for the
study was entirely secondary in nature. The present study is conducted to
compare the growth of SBI and ICICI Bank on the basis of ratios such as credit
deposit, net profit margin etc. The period of study taken is from the year 2007-08 to 2011-12.
The study found that SBI is performing well and financially sound than ICICI Bank but in
context of deposits and expenditure ICICI bank has better managing efficiency than SBI.
An efficient banking system is recognized as basic requirement for the economic development
of any economy. Banks mobilize the savings of community into productive channels. The
banking system of India is featured by a large network of bank branches, serving many kinds
of financial needs of the people.
State Bank of India (SBI) is a multinational banking and financial services company based in
India. It is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As
at December 2012, it had assets of US$501 billion and 15,003 branches, including 157 foreign
offices making it the largest banking and financial services company in India by assests

The State Bank of India, popularly known as SBI is one of the leading banks in India. The bank
traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of
the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of
Madras merged into the other two presidency banks—Bank of Calcutta and Bank of Bombay—
to form the Imperial Bank of India, which in turn became the State Bank of India.
The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank
of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government
took over the stake held by the Reserve Bank of India. SBI has been ranked 285th in
the Fortune Global 500 rankings of the world's biggest corporations for the year 2012.
SBI provides a range of banking products through its network of branches in India and
overseas, including products aimed at non-resident Indians (NRIs). SBI has 14 regional hubs
and 57 Zonal Offices that are located at important cities throughout the country.
SBI is a regional banking behemoth and has 20% market share in deposits and loans among
Indian commercial banks.The State Bank of India was named the 29th most reputed company
in the world according to Forbes 2009 rankings and was the only bank featured in the "top 10
brands of India" list in an annual survey conducted by Brand Finance and The Economic
Times in 2010.
International banking services of State Bank of India are delivered for the benefit of its Indian
customers, non-resident Indians, foreign entities and banks through a network
of 180offices/branches in 34 countries as on 30th
Jan 2013, spread over all time zones. The
network is augmented by a cluster of Overseas and NRI branches within India and
correspondent links with over 483 banks, the world over. Bank's Joint Ventures and Subsidiaries
abroad further underline the Bank's international presence.
The services include corporate lending, loan syndications, merchant banking, handling Letters
of Credit and Guarantees, short-term financing, collection of clean and documentary credits and
remittances.
ICICI
ICICI Bank is India's second-largest bank with total assets of Rs. 4,736.47 billion (US$ 93 billion)
at March 31, 2012 and profit after tax Rs. 64.65 billion (US$ 1,271 million) for the year ended
March 31, 2012. The Bank has a network of 3,100 branches and 10,486 ATMs in India, and has
a presence in 19 countries, including India.
ICICI Bank offers a wide range of banking products and financial services to corporate and retail
customers through a variety of delivery channels and through its specialised subsidiaries in the
areas of investment banking, life and non-life insurance, venture capital and asset management.
The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in
United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar and Dubai International
Finance Centre and representative offices in United Arab Emirates, China, South Africa,
Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established branches in
Belgium and Germany.
ICICI Bank's equity shares are listed in India on 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).
FINDINGS AND CONCLUSIONS
The study found that the mean of Credit Deposit Ratio in ICICI was higher (89.302 %) than
in SBI (76.184%). This shows that ICICI Bank has created more loan assets from its
deposits as compared to SBI. The share of interest expenses in total expenses higher in
ICICI (63.36 %) as compare to SBI (59.99 %) and the proportion of interest income to
total income was higher in case of SBI(84.49 % ) as compared to ICICI (78.84%), which
shows that people prefer ICICI to invest their savings and SBI to take loans & advances. The
ratio of other income to total income was relatively higher in ICICI (21.44 %) as compared
to SBI (15.22 %). The Net Profit Margin of ICICI is higher (14.37 %) whereas in SBI it
was (10.99 %), which shows that ICICI has shown comparatively better operational
efficiency than SBI. The growth rate of net profit is 73.97% in SBI which is higher than
ICICI which is 55.49%. This shows that SBI performed well as compared to ICICI. The
mean value of total income was higher in SBI (87,598.58) as compared to that in ICICI
(37,282.114). Net worth ratio was also higher in SBI (14.11 %) than ICICI (8.87 %), which
revealed that SBI has utilized its resources more efficiently as compared to ICICI.
The mean value of total expenditure was higher in SBI (Rs. 78,784.06 crores) as
compared to that in ICICI (Rs.32,570.61) and the combined growth rate of expenditure was
negative (-1.47%) in the case of ICICI whereas in SBI it is 111.52%. Deposits in SBI were
continuously increased. However deposits in ICICI were decreased (with a declining trend) till
2009-10 but these were increased in the subsequent years. In case of SBI Advances were
continuously increased (with a decreasing trend) with the combined growth rate of (108.16
%), However Advances in ICICI were decreased (with a declining trend) till 2009-10 but
these were increased thereafter with combined growth rate of (12.45 %). It shows that
ICICI has suffered with funds or avoid providing advances through 2007-08 to 2009-10.
Hence, on the basis of the above study or analysis banking customer has more trust on
the public sector banks(SBI) as compared to private sector banks(ICICI).
Reflections on the future of international banking
The recent crisis highlighted deficiencies in the way many international banks conducted their
business and managed financial risks. It also exposed gaps in the regulatory environment.
The rapid transmission of shocks across the global financial system through internationally
active banks, together with the concurrent macroeconomic problems, has prompted calls for
improvements to these banks’ business models that will strengthen their risk and liquidity
management. These calls have led to a reassessment of the balance between the financial
stability risks and the economic benefits associated with international banking.
From a long-term perspective, international banking has contributed to world economic
progress. The internationalisation of banking has closely tracked the growth in international
trade for long periods in the past, suggesting that real and financial globalisation are closely
intertwined. International banking has been an important driver of global integration and
economic development, supporting the efficiency of multinational firms and helping to exploit the

growth potential of both developed and emerging market economies. In addition, the
establishment of local operations by foreign banks has often enhanced the effectiveness of
emerging market financial systems.
Against this backdrop, the long-term trend towards the internationalisation of banking can be
expected to continue. However, as its major drivers evolve, its overall pace and patterns are
likely to differ from the past, posing challenges for authorities in their efforts to shape the
future financial system.
One development that is likely to affect international banking in the future relates to
international trade and multinational production. International banking should continue to
expand alongside the expansion of trade and multinational production activity. The location of
such activities could move more towards emerging market economies, especially areas
exhibiting the most economic dynamism. This might spur further financial integration, both in the
form of increased participation in these economies by foreign internationally active
financial institutions and via an expanded international role for banks from emerging market
countries. That role might be associated with more cross-border consolidation in the financial
sector, both between institutions from emerging economies, and between those from
industrialised and emerging economies.
Another important development relates to the balance between market- and bank-based
international intermediation. According to a long-established “complementarity” view in the
literature, economic growth is stronger and efficiency benefits are greater when both bank-
and market-based financial intermediation perform their respective functions. The main
reason is that each type of intermediation has its comparative advantages, which depend on the
stage of economic or financial development and manifest themselves in different
economic sectors and industries. In addition, the complementarity of banks and markets is
enhanced by the increasing interdependence of these two forms of intermediation. Thus, the
completeness of a financial system is essential (Levine (2002), Beck and Levine (2002),
Arcalean et al (2007)).
Lessons from the crisis have lent support to this view, underscoring the importance of
resilience in both financial markets and the banking sector. The recently expanded role of
international capital markets as a source of corporate financing has illustrated the greater
flexibility of markets at a time of stress. Large non-financial corporations, particularly in
mature but also in emerging economies, resorted strongly to bond financing when faced with a
sharp contraction in bank credit, resulting in record levels of issuance. At the same time,
banks are a more important source of external financing to households, as well as to small
and medium-sized companies. These borrowers tend to be burdened by asymmetric
information issues and, thus, have only limited and indirect access to capital markets.
These broad trends have a bearing on a third secular change, which is in the regulatory
environment. Authorities envisage a new regulatory environment in which banks hold
stronger capital and liquidity buffers and build balance sheets that are resilient to funding
shocks. Many host country authorities are considering a strengthening of local oversight and
regulation. Policy design faces the challenge of fixing the shortcomings of international
banking while preserving its efficiency-enhancing functions. Effective policy should foster the
development of liquid securities markets that complement bank-based intermediation,
improve market infrastructures and ensure that entities performing similar financial functions
receive similar regulatory treatment.
Given its strong role in shaping international intermediation in the past, regulation has an
important role to play in fostering cross-border knowledge transfer. The end result, however,

should not be the convergence to a single risk assessment or risk management framework,
which would encourage herd behaviour and weaken financial stability. Since any given
framework is inevitably imperfect, diversity of approaches would carry large benefits.
Perhaps even more importantly, a new regulatory framework should aim at a level playing
field. Competition is a major channel through which international banks promote growth. In
addition, adhering to the level playing field principle goes hand in hand with the goals of
enhancing oversight, transparency and supervision of systemically important activities.
Hence, the continuing financial integration of both developed and emerging market
economies makes it even more important that regulation have a truly global reach.
At the same time, competition may have contributed to the underpricing of risk and, thus, to a
leverage-based expansion of balance sheets in the run-up to the crisis. There is scant
evidence for economies of scale within large internationally active banks. However, certain
banks may have expanded, either domestically or internationally, with the aim of attaining a
too-big-to-fail status. Such a status increases moral hazard and weakens market monitoring of
risk-taking, which benefits individual firms but distorts economic incentives and renders the
financial system more fragile. In turn, this underscores the importance of strong supervision
and prudential buffers that restrain the build-up of risks. Effective, and therefore credible,
bank resolution regimes that take into account the too-big-to-fail issue would be a welcome
complement (BCBS (2010)).
In addition to focusing attention on issues of capital and risk management, the crisis has
underscored the urgency of a careful analysis of banks’ international funding and liquidity
management practices (CGFS (2010a,b)). As jurisdictions hosting foreign banks realised that
they were exposed to risks generated in third countries and as cross-border borrowers from
internationally active banks saw their credit lines dry up, calls were heard for a greater
decentralisation of the international banking model. However, while a more decentralised
model – in which a greater portion of banking operations are funded, managed and
supervised in the same location – could restrict the spillover of adverse shocks across
national borders, such a model would also increase the dependence of economic agents on
local economic and financial conditions and could hinder the efficient flow of funds across
borders.
The trade-offs associated with a move towards greater decentralisation in international
banking illustrate how difficult it is to design a financial system that is immune to all
conceivable shocks. Rather than trying to design a foolproof system, policymakers may find it
more effective to focus their efforts on strengthening mechanisms that prevent the build-up of
excessive cross-border and local risks, as well as improving capital and liquidity
management.
REFERENCES:-
• I.M. Pandey, Financial Management, Vikas Publishing. House Pvt. Ltd. 2002
• Study material, Financial Management Unit 17, IGNOU, New Delhi.
• Trend and progress of banking, RBI
• Policy, Reserve Bank of India.
• Financial year report of SBI.
• SBI bulletin publication.
• Financial year report of ICICI Bank.
• ICICI Bank bulletin publication
• RBI statistical table relating to banks 2011-12.

• SBI and ICICI Bank annual report 2007-12.
• www.bis.org
• www.wikipedia.com
• www.moneycontrol.com
o Sbi and icici bank

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