Banking Industry in India

-A write-up by Vaibhav Choudhry BFIA II B 75057

Theoretical Brief The Indian banking sector comprises 26 state sector banks, besides a number of private as well as co-operative sector players. The banking sector in India has made significant progress in the last five years the growth is well reflected through parameters including profitability, annual credit growth, and decline in non-performing assets (NPAs). In the last decade, the sector witnessed many positive developments, as policy makers which comprise the Reserve Bank of India (RBI), Ministry of Finance and associated government and financial sector regulatory entities, made several distinguished efforts to improve regulation.
This write-up has been divided in sections and further into points.

HISTORY (Wikipedia)
1. With effect from 1969, The govt of India nationalized 14 commercial banks. 6 more banks were nationalised in 1980.

2. In 1990s,Narasimha Rao government licensed a small number of private banks. 3. New Policies by whicg all Foreign Investors in banks may be given voting rights which could
exceed the present cap of 10%,at present it has gone up to 74% with some restrictions.

4. A policy of 4-6-4 method was followed.(Borrow at 4%;Lend at 6%;Go home at 4).

5. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.

CURRENT SCENARIO 1. Growth

The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks.

2. Trends And Developments

Payments and banking transactions through mobile phones in India are likely to reach US$350 billion by 2015, according to global management consulting firm, The Boston Consulting Group (BCG). This, in turn, will provide banks, telecom operators, device makers and service providers an opportunity to earn fee income of US$4.5 billion

With an objective of increasing the financial inclusion, the SBI has opened 21 new branches, besides, 101 new Automatic Teller Machines (ATMs) and 400 green channel counters.

Around 350,000 villages spanning the entire India would have access to financial services offered by banks in the next two financial years, according to a plan given by banks to the RBI. RBI has directed banks to ensure that 223,473 villages have access to basic financial services by March 2012

Three local banks have partnered with a global financial technology firm - Polaris Software with its headquarters in India - to establish a joint venture IT company in Bangladesh. The company would start with providing software solutions to these three banks before selling customised services to other banks, non-bank financial institutions and insurance companies

3. Future Prospects (Mc kinseys report on Indian banking 2010)

At one extreme, the sector could account for over 7.7 per cent of GDP with over Rs. 7,500 billion in market cap, while at the other it could account for just 3.3 per cent of GDP with a market cap of Rs. 2,400 billion. Banking sector intermediation, as measured by total loans as a percentage of GDP, could grow marginally from its current levels of ~30 per cent to ~45 per cent or grow significantly to over 100 per cent of GDP.

In all of this the sector could generate employment to the tune of 1.5 million compared to 0.9 million today. Availability of capital would be a key factor the banking sector will require as much as Rs. 600 billion (US$ 14 billion) in capital to fund growth in advances, non performing loan (NPL) write offs and investments in IT and human capital upgradation to reach the high-performing scenario.

Consumer credit is expected to drive future growth of the sector. Further, Indias mortgage loan and wealth management business will grow 10 times by 2020, according to the estimates put by Boston Consulting Group (BCG). An under penetrated market, both in terms of number of accounts and number of borrowers, the banking segment in India holds huge potential for the future.

An article in Indian Express.com

According to a PriceWaterhouseCoopers report titled Banking In 2050, India could become the third largest banking sector by 2050 after China and US, leaving Japan, UK and Germany behind. According to the report, India has particularly strong long-term growth potential. Indian banking sector in general and the Reserve Bank of India were applauded post financial crisis for fiscal prudence. Harsh Bisht, leader (Banking and Capital Markets), PwC India said, Post downturn, Indian banks have become more efficient due to tighter credit assessment and disbursals, cost efficient model, weeded out non profitable and highly risky portfolios and increased the CASA substantially resulting in lower cost of funds for the bank. Indian banks have improved their cost to income ratio by 6 per cent on an average, he added.

KEY STATISTICS
1. Indian

Banking Sector Key Statistics

The total assets size of the banking industry rose by more than five times between March 2000 and March 2010 - from US$ 250 billion to more than US$ 1.3 trillion a Compound Annual Growth Rate (CAGR) of 18 per cent compared to the average GDP growth of 7.2 per cent during the same period.

During the last five years, while the annual rate of credit growth was 23 per cent, profitability was maintained at around 15 per cent.

 While the Indian banking sector is characterised by the presence of a large number of players, top 10 banks accounted for a significant 57 per cent share of the total credit as on March 31, 2011.

Nationalised banks accounted for 52.2 per cent of the aggregate deposits, with State Bank of India (SBI) and its Associates accounting for 22.1 per cent.

The share of new private sector banks, foreign banks, old private sector banks, and regional rural banks in aggregate deposits was 13.3 per cent, 4.8 per cent, 4.6 per cent and 3.0 per cent, respectively, according to RBIs Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, December 2010.

With respect to gross bank credit, nationalised banks had the highest share of 51.6 per cent in the total bank credit. They were followed by SBI and its associates at 22.7 per cent and new private sector banks at 13.7 per cent.

Foreign banks, old private sector banks and regional rural banks had comparatively lower shares in the total bank credit at 5.1 per cent, 4.5 per cent and 2.5 per cent, respectively.

India's foreign exchange reserves were US$ 314.6 billion as on July 8, 2011, according to the data in the weekly statistical supplement (WSS) released by RBI.

Indian bank loans increased by19.9 per cent year-on- year (y-o-y) as of July 1, 2011, according to the central bank's WSS. Deposits rose by 18.4 per cent from a year earlier.

Conclusion

The face of banking is changing rapidly. Competition is going to be tough and with financial liberalisation under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions. These are some of the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu.