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MANAGERIAL ECONOMICS
PROJECT
ON
DEMAND & SUPPLY ANALYSIS OF SBI
Submitted To: Submitted By:
Dr. I.R.S. Sarma Siddhartha Gorai
(Faculty of Economics) (09BSHYD0818), St.:67,
Date: September 9, 2009. Section: J
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ACKNOWLEDGEMENT
This formal acknowledgement will hardly be sufficient in expressing our deep
sense of gratitude towards our Project Guide Dr. I. R. Sarma, (Faculty of
Economics) for his stimulating guidance and profuse assistance that we have
received through out the course of our Project work.
We are highly in debt to him for providing kind help & advice through all the
phases of the project work. We cherish our association with him and for his
encouragement, approachability and freedom of thoughts.
This continuous encouragement and valuable guidance have been the
motivating force in the accomplishment of our task.
Siddhartha Gorai (09BSHYD0818).
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ABOUT STATE BANK OF INDIA:
Website: http://www.statebankofindia.com
The evolution of State Bank of India can be traced back to the first decade of
the 19th century. It began with the establishment of the Bank of Calcutta in
Calcutta, on 2 June 1806. The bank was redesigned as the Bank of Bengal, three
years later, on 2 January 1809. It was the first ever joint-stock bank of the
British India, established under the sponsorship of the Government of Bengal.
Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bankof Madras (established on 1 July 1843) followed the Bank of Bengal. These
three banks dominated the modern banking scenario in India, until when they
were amalgamated to form the Imperial Bank of India, on 27 January 1921.
An important turning point in the history of State Bank of India is the launch of
the first Five Year Plan of independent India, in 1951. The Plan aimed at
serving the Indian economy in general and the rural sector of the country, in
particular. Until the Plan, the commercial banks of the country, including the
Imperial Bank of India, confined their services to the urban sector. Moreover,
they were not equipped to respond to the growing needs of the economic revival
taking shape in the rural areas of the country. Therefore, in order to serve the
economy as a whole and rural sector in particular, the All India Rural Credit
Survey Committee recommended the formation of a state-partnered and state-
sponsored bank.
The All India Rural Credit Survey Committee proposed the take over of the
Imperial Bank of India, and integrating with it, the former state-owned or state-
associate banks. Subsequently, an Act was passed in the Parliament of India in
May 1955. As a result, the State Bank of India (SBI) was established on 1 July
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1955. This resulted in making the State Bank of India more powerful, because
as much as a quarter of the resources of the Indian banking system were
controlled directly by the State. Later on, the State Bank of India (Subsidiary
Banks) Act was passed in 1959. The Act enabled the State Bank of India to
make the eight former State-associated banks as its subsidiaries.
The State Bank of India emerged as a pacesetter, with its operations carried out
by the 480 offices comprising branches, sub offices and three Local Head
Offices, inherited from the Imperial Bank. Instead of serving as mere
repositories of the community's savings and lending to creditworthy parties, the
State Bank of India catered to the needs of the customers, by banking
purposefully. The bank served the heterogeneous financial needs of the planned
economic development.
Branches
The corporate center of SBI is located in Mumbai. In order to cater to different
functions, there are several other establishments in and outside Mumbai, apart
from the corporate center. The bank boasts of having as many as 14 local head
offices and 57 Zonal Offices, located at major cities throughout India. It is
recorded that SBI has about 10000 branches, well networked to cater to its
customers throughout India.
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Subsidiaries:
The State Bank Group includes a network of eight banking subsidiaries and
several non-banking subsidiaries. Through the establishments, it offers various
services including merchant banking services, fund management, factoring
services, primary dealership in government securities,
Credit Cards and Insurance.
The Eight Banking Subsidiaries are:
State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of India (SBI) State Bank of Indore (SBIR) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Saurashtra (SBS)
State Bank of Travancore (SBT)
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Services
SBI provides easy access to money to its customers through more than 8500
ATMs in India. The Bank also facilitates the free transaction of money at the
ATMs of State Bank Group, which includes the ATMs of State Bank of India
as well as the Associate Banks State Bank of Bikaner & Jaipur, State Bank
of Hyderabad, State Bank of Indore, etc. You may also transact money through
SBI Commercial and International Bank Ltd by using the State Bank ATM-
cum-Debit (CashPlus) card.
Products and Services Provided by State Bank Of India:
Personal Banking
SBI Term Deposits SBI Loan For Pensioners SBI Recurring Deposits Loan Against Mortgage Of Property SBI Housing Loan Against Shares & Debentures SBI Car Loan Rent Plus Scheme SBI Educational Loan
Other Services
Agriculture/Rural Banking NRI Services ATM Services DEMAT Services
Corporate Banking Internet Banking Mobile Banking International Banking Safe Deposit Locker
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RBIEFT E-Pay E-Rail SBI Vishwa Yatra Foreign Travel Card Broking Services Gift Cheques.
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Regulation of Banking Industry:
The Banking Industry in India is regulated mainly by two Acts.
1. Reserve Bank Of India Act, 1934.2.
Banking Regulation Act, 1949.
The government controls the businesses of commercial banks through Reserve
Bank Of India (RBI) which is the Central Bank.
Following are the main rates which regulates the banking industry:
CRR (Cash Reserve Ratio):Scheduled Commercial Banks are required to maintain with RBI an averagecash balance, the amount of which shall not be less than three percent of the
total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly
basis and RBI is empowered to increase the said rate of CRR to such higher rate
not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL)
under the RBI Act, 1934.
SLR (Statutory Liquidity Ratio):All Scheduled Commercial Banks, in addition to CRR are required to maintain
under the RBI Act, 1934a) in cash, or
b) in gold valued at a price not exceeding the current market price, or
c) in unencumbered approved securities valued at a price as specified by the
RBI from time to time. An amount of which shall not, at the close of the
business on any day, be less than 25 per cent or such other percentage not
exceeding 40 per cent as the RBI may from time to time, by notification in
gazette of India, specify, of the total of its demand and time liabilities in India
as on the last Friday of the second preceding fortnight.
Repo (Repurchase) Rate (RR):Repo rate is the rate at which banks borrow funds from the RBI to meet the gap
between the demand they are facing for money (loans) and how much they have
on hand to lend.
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If the RBI wants to make it more expensive for the banks to borrow money, it
increases the repo rate; similarly, if it wants to make it cheaper for banks to
borrow money, it reduces the repo rate.
Reverse Repo Rate (RRR):This is the exact opposite of repo rate. The rate at which RBI borrows money
from the banks (or banks lend money to the RBI) is termed the reverse repo
rate. The RBI uses this tool when it feels there is too much money floating in
the banking system.
If the reverse repo rate is increased, it means the RBI will borrow money from
the bank and offer them a lucrative rate of interest. As a result, banks would
prefer to keep their money with the RBI (which is absolutely risk free) instead
of lending it out (this option comes with a certain amount of risk).
Opportunity Cost:
CRR and SLR result in lock up of funds of the banks which could have been
otherwise be lent to the customers. This results in forgo of some interest earning
capacities of the banks and results in its Opportunity Cost. Opportunity Cost is
the cost incurred for forgoing the next best alternative.
TIME LINE Of Various Essential Rates:
Year RR % RRR % CRR % SLR %
2001 11.00 6.75 6.73 25.002002 10.75 5.75 4.98 25.002003 10.25 4.50 4.54 25.002004 10.75 4.75 4.77 25.002005 10.75 5.25 5.00 25.002006 11.50 5.50 5.23 25.002007 12.50 5.75 7.03 25.002008 13.00 6.00 7.00 25.002009 11.75 3.25 5.00 24.00
0.00
5.00
10.00
15.0020.00
25.00
30.00
2000 2002 2004 2006 2008 2010
RATES(RR/RRR/CRR/S
LR/SBI
PLR)%
TIMELINE
TIMELINEOFVARIOUSRATES
RRR%CRR%SLR%RR
Poly.(RRR%)Poly.(CRR%)Poly.(SLR%)Poly.(RR)
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DEMAND SIDE:
Demand is the amount of goods and services consumers are willing to purchase
at a given price. Demand is the function of Price, Income of Consumers,
Consumers Tastes & Preferences and Future Expectations regarding change in
prices.
D = (P, Y, T, E).
A Commercial Banks Demand is the quantity of loan and advances its clients
are ready to avail at given interest rates. A Banks major service offering is the
quantum of Loans and Advances it is ready to offer to its clients at a given rate
of interest it can charge from its clients. Its loans and advances can either be in
the form of Business Loans, Personal Loans, Educational Loans and Credit
Card interest.
METHODOLGY of DEMAND SIDE ANALYSIS OF SBI:
In case of our project we are trying to establish a composite interest rate of
various loans and advances made by SBI.
For this we have collected past years figures of total Advances made and total
Interest Earned by SBI from its past Financial Statements.
On dividing the total Interest Earned by total Advances we get the required
composite offering interest rate.
Composite Offering Interest Rate (COIR %) =
(Total Interest Earned Total Advances) 100.
This rate is the price of offering of loans and advances by SBI and we take it on
the Y- Axis of Demand graph.
On the X- Axis we take the total Advances made by SBI.
Then we arrange the rate on Y Axis in ascending order to generate the Demand
Curve of SBI.
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Factors Affecting Demand side of SBI:
Economic Conditions:In a Boom period when the entire economy is growing, demand formoney increases with increase in consumption and investment. In
recession, demand for money decreases with decrease in consumption
and investment levels.
RBI Guidelines:RBI regulates the functioning of the Commercial Banks by imposing
various restraints such as CRR and SLR so as to regulate the flow of
money in the economy to cope up with inflationary or deflationary
conditions.
Calculation of Demand Schedule of SBI:
1.Data of Past 10 Years:
F.Y.
End:Advances (Rs. Crores): Interest Earned (Rs Crores):
Mar-00 938101.97 22202.26
Mar-01 113590.27 26138.91
Mar-02 120806.47 29810.09
Mar-03 137758.46 31087.02Mar-04 157933.54 30460.49
Mar-05 202374.45 32428
Mar-06 261641.53 35794.93
Mar-07 337336.49 39491.03
Mar-08 416768.20 48950.31
Mar-09 542503.20 63788.43
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2. Composite Offering Interest Rate (COIR %) of Past 10 Years:
F.Y.
End:Advances (Rs. Crores): Interest Earned (Rs Crores): COIR % :
Mar-00 938101.97 22202.26 2.37
Mar-01 113590.27 26138.91 23.01
Mar-02 120806.47 29810.09 24.68
Mar-03 137758.46 31087.02 22.57
Mar-04 157933.54 30460.49 19.29
Mar-05 202374.45 32428 16.02
Mar-06 261641.53 35794.93 13.68
Mar-07 337336.49 39491.03 11.71
Mar-08 416768.20 48950.31 11.75
Mar-09 542503.20 63788.43 11.76
3.DEMAND SCHEDULE of SBI:
F.Y.
End:Advances (Rs. Crores): Interest Earned (Rs Crores): COIR % :
Mar-00 938101.97 22202.26 2.37
Mar-07 337336.49 39491.03 11.71
Mar-08 416768.20 48950.31 11.75
Mar-09 542503.20 63788.43 11.76
Mar-06 261641.53 35794.93 13.68
Mar-05 202374.45 32428 16.02
Mar-04 157933.54 30460.49 19.29
Mar-03 137758.46 31087.02 22.57
Mar-01 113590.27 26138.91 23.01
Mar-02 120806.47 29810.09 24.68
4.DEMAND CURVE of SBI:
0.00
5.00
10.00
15.00
20.0025.00
30.00
0 200000 400000 600000 800000 1000000
COIR
%
Advances(Rs.Cr)
DemandCurve
Demand
DemandCurve
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SUPPLY SIDE:
SUPPLY is the amount of product or services a producer is willing to provide
at different prices. Supply is the function of price of offering and cost of
production i.e. (Rent for Land, Wages for Labour and Interest for Capital).
S = (P, R, W, I).
Commercial Banks are the major supplier of Financial Services in an
Economy. A Banks major service offering is Loans and Advances it is ready
to offer to its clients. Its loans and advances are funded by the deposits it
accept from the public in from of Savings Accounts, Fixed Deposit Accounts
and Recurring Deposit Accounts.
These are broadly classified into Demand and Time Deposits.
Demand Deposit is the amount deposited by a banks customer in form of
Savings Account deposits. A customer can withdraw the money on demand
either in cash or by way of drawing cheques.
Time Deposit is the amount deposited by a banks customer in form of Fixed
and Recurring Deposit Accounts. A customer can withdraw the money only on
expiry of the agreed time period.
METHODOLGY of SUPPLY SIDE ANALYSIS OF SBI:
In case of our project we are trying to establish a composite interest rate of
various deposits held by SBI from the public.
For this we have collected past years figures of total Deposits and total Interest
Expended of SBI from its past Financial Statements.
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On dividing the total Interest Expended by Deposits we get the required
composite acquisition interest rate.
Composite Acquisition Interest Rate (CAIR %) =
(Total Interest Expended Total Deposits) 100.
This rate is the cost of acquisition of funds by SBI and we take it on the Y- Axis
of Supply graph.
On the X- Axis we take the total Deposits held by SBI.
Then we arrange the rate on Y Axis in ascending order to generate the supply
Curve of SBI.
1.Data of Past 10 Years:
F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores)
Mar00 196821.07 15272.58
Mar01 242828.38 17756.02
Mar02 270560.14 20728.84
Mar03 296123.28 21109.46
Mar04 318618.67 19274.18
Mar05 367047.53 18483.38
Mar06 380046.06 20159.29
Mar07 435521.09 23436.82
Mar08 537403.94 31929.08
Mar09 742073.13 42915.29
2.Composite Acquisition Interest Rate (CAIR %) of Past 10 Years:
F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores) CAIR%
Mar00 196821.07 15272.58 7.76Mar01 242828.38 17756.02 7.31Mar02 270560.14 20728.84 7.66Mar03 296123.28 21109.46 7.13Mar04 318618.67 19274.18 6.05Mar05 367047.53 18483.38 5.04Mar06 380046.06 20159.29 5.30Mar07 435521.09 23436.82 5.38Mar08 537403.94 31929.08 5.94Mar09 742073.13 42915.29 5.78
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3.SUPPLY SCHEDULE of SBI:
F.Y.END Deposits(Rs.Crores) InterestExpended(Rs.Crores) CAIR%
Mar05 367047.53 18483.38 5.04Mar06 380046.06 20159.29 5.30Mar07 435521.09 23436.82 5.38Mar09 742073.13 42915.29 5.78Mar08 537403.94 31929.08 5.94Mar04 318618.67 19274.18 6.05Mar03 296123.28 21109.46 7.13Mar01 242828.38 17756.02 7.31Mar02 270560.14 20728.84 7.66Mar00 196821.07 15272.58 7.76
4.SUPPLY CURVE of SBI:
Supply and Demand Observation:
From the above tables and diagrams we may conclude that supply side of SBI is
more elastic as compared to its demand side. Hence we can say that supply of
deposits to SBI is sensitive to interest rates however its demand of loans and
advances are relatively less elastic.
0.00
5.00
10.00
0 200000 400000 600000 800000 1000000
CAIR
%
Deposits(RsCr)
SupplyCurve
Supply
SupplyCurve
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Equilibrium Point:
Equilibrium Point is the point where Demand and Supply are equal in other
words it is the point at which Demand and Supply Curve intersects.
In our graph the Supply and Demand Curves intersect at a point where COIRand CAIR are both 5.50 % and amount of Deposits and Advances are Rs.70,000
Crores. At this point Total Demand is equal to Total Supply.
0.00
5.00
10.00
15.00
20.00
25.00
30.00
0 200000 400000 600000 800000 1000000
Rattes(CAIR/COIR)%
Quantity(AdvancesandDeposits)
Demand&Supply
Supply
Demand
SupplyCurveDemandCurve
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Conclusion:
Though there has been increase in number of players in the banking sector since
2003 the SBI still is having a strong market share.
With changing times and increase in competition SBI revamped its servicequality at par with private players in the industry. SBI is having its branches
spread through out India and have penetration even into the deepest corners of
Rural India. Also it has access to cheaper funds as compared to other players
which enables it to provide competitive rates of interest for its loan products.
Moreover SBI has also expanded its operations in various other financial
services such as Insurance, Mutual Funds, Investment Banking and NRI
Banking Services.
With its Pan India presence and back up of government, people are having highfaith in parking their savings with SBI as they understand the low risk involved
with operating with SBI. Thus, SBI commands huge amount of funds at low
cost.
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References:
Website URLs :-
1.RBI Repo Rate:
http://in.biz.yahoo.com/090728/137/batyeg.html
2.RBI Reverse Repo Rate:
http://in.reuters.com/article/domesticNews/idINBOM18464220090724
3.SBI PLR:
http://in.reuters.com/article/domesticNews/idINBOM23779820090427
4.RBI CRR:
http://in.reuters.com/article/GCA-election/idINIndia-
39137120090420?pageNumber=2&virtualBrandChannel=0
5.RBI SLR:
http://in.reuters.com/article/domesticNews/idINBOM42977620090420
6.Past Financial Statements of SBI:
http://www.statebankofindia.com/user.htm
http://www.moneycontrol.com/financials/statebankindia/balance-sheet/SBI