A year isn't too long a time when it comes to financial institutions like banks. Yet, there are plenty of changes you'll find in our 12th BT-KPMG annual list of India's best banks. While HDFC Bank tenaciously held on to its top perch on the list for the third year in a row, last year's #2, Citibank, was displaced by Niall S.K. Booker-led HSBC. ABN AMRO stayed put at #3, but guess who jumped to #4, #5 and #7 (Citi was at 6)? Three public sector banks: Corporation Bank, Andhra Bank and Punjab National Bank, who were at #6, #15, and #21, respectively, just the year before (2003-04).

The biggest gainers-in terms of jumping places on our list-were public sector banks too. Karnataka Bank, for instance, was #44 on our 2004 list, but this year it stands at an impressive 19. Indian Overseas Bank, State Bank of Mysore and Punjab National Bank are some others that rose on our rankings.

The rise of India's public sector banks is but a pointer to the dramatic changes sweeping through the industry for some years now. A growing economy, greater consumer confidence and appetite for credit, and greater thrust on technology have helped the more aggressive PSU banks not just grow their business, but drum their balance sheets into shape. According to the Reserve Bank of India's banking review of 2004-05, there was a notable pickup in credit to the commercial sector, thanks to renewed demand from industry for investments and a surge in exports. While both operating profits and net profits grew slowly (2.2 per cent and 0.9 per cent, respectively, compared to 2.7 per cent and 1.1 per cent in 2003-04), in absolute terms, the banks still made a lot of money. Rs 20,705 crore in total net profits in the case of our 60 banks.

Impressively enough, the NPA monster is on the run. Over the last five years, the industry has halved its bad debts. Last year alone, bad loans as a percentage of advances shrank to 2.2 per cent from 2.9 per cent the year before. Evidently, the industry's focus now is on scaling up both domestically and in markets abroad, widening the product and services portfolio, and better using technology to make banking more accessible and efficient.

So apart from looking at what makes HDFC Bank India's best bank and Centurion Bank's phenomenal turnaround, we decided to step back and look at the industry's changing contours. KPMG's Russell Parera and Anand Giridhar consider what a possible opening up of the banking sector in 2009 will mean for the players (see page 68). Their conclusion: Whether or not the sector actually opens up in 2009, banks should use that as an opportunity to get their growth strategies in place. That means not just organic growth, but growth through mergers and acquisitions.

BT's own editors and writers examine what seemed to be a dominant theme last year viz. bankers' rushing to tap the country's small and medium enterprises. What makes the sector so attractive to banks? The fact that it has been growing upwards of 10 per cent annually and that profit margins here are better than those in corporate lending. SMEs apart, we've looked at what will soon become a headline-grabbing affair in the banking industry: mergers and acquisitions. Not the one to mince words, we make a case for consolidation in the industry, arguing that what India needs is not a large number of small banks, but a small number of large banks (see page 78).

BANK ON WHEELS

K.V. Kamath of ICICI Bank They say elephants don't dance. Kundapur Vaman Kamath thinks otherwise. Since leading ICICI Bank's first foray into retail business five years ago, Managing Director and CEO Kamath has turned ICICI into the fastest growing bank in the industry. At Rs 62,063 crore, the bank has the largest retail portfolio and is the leader in home loans and car loans. The most diversified universal bank, ICICI boasts of more than 15 million customer accounts, 600 branches and a network of 2,000 ATMs across the country. Its life and general insurance subsidiaries have become the biggest private insurers in just five years. Similarly, ICICI's asset management business, with a corpus of Rs 22,600 crore, is amongst the fastest growing mutual funds and is second only to UTI Mutual Fund in terms of size. In fact, the bank's growth is emanating from every business segment it is in. No wonder, it turns up as the Fastest Growing (large) Bank on the BT-KPMG study of best banks in India. But will ICICI's growth be affected by a sudden tightening of liquidity? "Factors driving the growth in retail are very fundamental like affordability, rising income levels and the buoyancy in the overall economy," says Chanda Kochhar, Executive Director, ICICI Bank. Going forward, the bank is also betting big on its international operations. In just one year of its launch, ICICI Bank became the biggest Indian bank in Singapore. In the UK too, the bank has turned profitable in the first full year of its operations. -Anand Adhikari

SMALL BUT PRODUCTIVE

Bhaskar Ghose of IndusInd Bank Right from early 2000, the Hinduja-owned IndusInd Bank has been on top of the productivity charts. In 2004-05, the 10-year-old private sector bank raked in Rs 9.25 crore in business per employee, ahead of its peers like ICICI Bank, HDFC Bank and UTI Bank. How does IndusInd, which ranks as the most productive bank on our list, manage such high levels of productivity? The answer lies in its ability to make optimum utilisation of low-cost deposits by deploying them in high-yielding loans such as vehicle financing (trucks, cars two- and three-wheelers). Today, the booming vehicle financing business generates a yield of over 11 per cent for the bank as against 8 per cent offered by the mortgage business. "We have also focussed on financing stand-alone SMEs right from our inception, and here the yields are as high as 11 per cent," says Bhaskar Ghose, Managing Director of IndusInd Bank. On the retail distribution side, the bank has its own subisidiary, while most other banks employ direct sales agents (DSAs). "Having our own subsidiary is a very cost effective route. You can sell multiple products, keep the cost low and check incidence of NPAs in a far better way," explains Ghose. -Anand Adhikari

Indeed, underlining the frenetic activity in the sector is the growing realisation that strong and large banks are what the country needs to drive its economy. As the RBI's Deputy Governor, V. Leeladhar, said at the Indian Banking Association's January 31 seminar on "Indian Banks and the Global Challenges", "there is a growing realisation that the ability of countries to do business across national borders and the ability to cope with possible downside risks would depend, among others, on the soundness of the financial system and the strength of individual participants".

Having cleaned up their balance sheets to a large extent, banks in India must now be allowed to take the next logical step, and which is to merge or acquire to become globally competitive. China, which is required by its WTO commitments to open up banking by 2006, has already undertaken extensive overhaul of the industry. Apart from recapitalising its major banks, the country has opened the gates to private investment in the sector. Between late 2004 and 2005, $18 billion (Rs 81,000 crore) worth of foreign money poured into Chinese banks. HSBC and Bank of America alone have pumped in about $5 billion (Rs 22,500 crore) into Bank of Communications and China Construction Bank, respectively.

India, by contrast, is still cagey about foreign investment in banks. No doubt, Indian banks must be given time to get their act together. But the point is, India cannot hope to be a global economic powerhouse if the industry responsible for fuelling its growth-the banking sector-is forcibly kept local.