ENVIRONMENTAL ANALYSIS

Business environment includes set of conditions or situation that affects business activities or decision
making. These conditions are broadly classified into internal environment and external environment.

THE EXTERNAL ENVIRONMENT ANALYSIS

External environment include factors which are outside the control of the business organization but it
provide opportunities or pose threats. External environment is further classified into two categories
micro environment and macro environment.

MICRO ENVIRONMENT

WHAT PORTER HAS TO SAY ABOUT BANKING INDUSTRY

Threat of New Entrants:

Threat of new entrants is low due to stringent norms, RBI Regulations, High Initial
Investment & entry barriers. Licensing Requirements are very tough and it make it difficult
to obtain licenses easily. Also, the new entrants will face difficulty as product differentiation
is very difficult. Another issue they face is about the trust development with the people
which is difficult and takes time. Skills manpower and Protected intellectual Property are
also the factor that affect the threat of new entry barriers.

Bargaining Power of Suppliers:

Capital is the primary resource on any bank and there are four major suppliers (various
other suppliers [like fees] contribute to a lesser degree) of capital in the industry.
1. Customer deposits. 2. mortgages and loans. 3. mortgage-baked securities. 4. loans from
other financial institutions.
By utilizing these four major suppliers, the bank can be sure that they have the necessary
resources required to service their customers' borrowing needs while maintaining enough
capital to meet withdrawal expectations.
The power of the suppliers is largely based on the market, their power is often considered to
fluctuate between medium to high.

Bargaining Power of Buyers:

There are four things that come into play when we say bargaining power of the buyers is
high. 1) The individual customer 2) High switching costs 3) The Customer Loyalty 4) The
technology. Factors that affect are Long term Finance, Margins & volumes, Multiple options
are available, Bank competitors are also quite large in number & Retail landing. Providing
homogenous kinds of services so there is high chance that customers switch their banks and
therefore overall bargaining power of the buyer is High.

THREAT OF SUBSTITUTES:
Some of the banking industry's largest threats of substitution are not from rival banks but
from non-financial competitors, investors, NBFCs,small co-operative banks, Government
securities, t-bills and borrowing avenues. The industry does not suffer any real threat of
substitutes as far as deposits or withdrawals, however insurances, mutual funds, and fixed
income securities are some of the many banking services that are also offered by non-
banking companies.
There is also the threat of payment method substitutes and loans are relatively high for the
industry. Factors affecting threat of substitutes are Close customer relationships,
Conservative customers, Risk taking customer attitude and Switching cost. Therefore overall
Threat of substitute is medium

Competitive Rivalry:
The banking industry is considered highly competitive. The financial services industry has
been around for hundreds of years, and just about everyone who needs banking services
already has them. Because of this, banks must attempt to lure clients away from competitor
banks. They do this by offering lower financing, higher rates, investment services, and
greater conveniences than their rivals. The banking competition is often a race to determine
which bank can offer both the best and fastest services, but has caused banks to experience
a lower ROA (Return on Assets). Major banks tend to prefer to acquire or merge with other
banks than to spend money marketing and advertising. High fixed costs and high exit
barriers make it more competitive.

INDIAN BANKING INDUSTRY: NOT ATTRACTIVE,

UNLESS DIFFERENTIATED

MACRO ENVIRONMENT
PESTEL ANALYSIS
POLITICAL
Government and RBI policies affect the banking sector. Indian banking sector is least affected as
compared to other countries due to robust policy framework of RBI. Government affects the
performance of banking sector most by legislature and framing policy government through its budget
affects the banking activities securitization act has given more power to banking sector against
defaulting borrowers. Sometimes looking into the political advantage of a particular party, the
Government declares some measures to their benefits like waiver of short-term agricultural loans, to
attract the farmer’s votes. By doing so, the profits of the bank get affected. Stricter prudential
regulations with respect to capital and liquidity, gives India an advantage in terms of credibility over
other countries.
ECONOMIC
Every year RBI declares its 6 monthly policies and accordingly the various measures and rates are
implemented which has an impact on the banking sector. The Economic measures affect the banking
sector to boost the economy by giving certain concessions or facilities. If in the savings are encouraged,
then more deposits will be attracted towards the bank and in turn they can lend more money to the
agricultural sector and industrial sector, therefore booming the economy. If the FDI limits are relaxed,
then more FDI are brought in India through banking channels. Also, every year RBI declares its 6 monthly
policies and accordingly the various measures and rates are implemented which has an impact on the
banking sector. Indian economy has registered robust growth in past years and banking sector is directly
related to the growth of the economy. Government of India is trying to push the economy by framing
favorable FDI policies, NRI Investment plans which directly affect the GDP. These plans directly affect the
banking industry as money comes through banks and banks earn interest on that.

SOCIO-CULTURAL
It includes cultural aspects and health consciousness, population growth rate, age distribution, career
attitudes and emphasis on safety. Increase in population is one of the important factor, which affect the
private sector banks. Banks would open their branches after looking into the population demographics of
the area. Newer banks are coming to serve the growing population. Banks need to ensure uniform spatial
distribution.

TECHNOLOGICAL

It plays important role in banks internal control mechanism as well as services provided. The
developments in terms of telecommunication and computer have encouraged to change the concept of
branch and use ATM and internet banking to provide anytime, anywhere facility. Automatic Voice
Recorder answers simple queries, currency accounting machines makes job easier and self service
counters are encouraged. Electronic purse facilities are provided with credit and debit card facilities
encouraging cashless society. Another major tool used are the SMS and Internet.

ENVIRONMENTAL

Banking Industry is directly related to the growth of the economy. Increase in per capita income of the
company will increase, lending & savings will increase the business of the bank. Increase in investment of
Industry and Infrastructure sector will lead to increase in borrowings by various companies to boost the
Banking Industry.

LEGAL
Various acts like Banking Regulation act, etc affect the banking industry. The Reserve Bank of India also
intervenes to smooth sharp the movements and prevent a spiral in its value but will balance this with the
need to retain reserves in the event of prolonged turbulence.