sector profile

Indian Banking Sector 2015

Indian Banking Sector An Industry Profiling This is a study of the Indian banking sector in partial fulfillment of the fieldwork curriculum of first semester at Tata Institute of Social Sciences, Mumbai

2015

Ankit Amlan Tata Institute of Social Sciences

8/31/2015

Tata Institute of Social Sciences | Mumbai

2 Banking Sector in India: An Industry Profiling

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Introduction

According to the Reserve Bank of India (RBI), the banking sector in India is sound,

adequately capitalised and well-regulated. Indian financial and economic conditions are

much better than in many other countries of the world. Credit, market and liquidity risk

studies show that Indian banks are generally resilient and have withstood the global

downturn well (IBEF 2015).

Over the past couple of years, the Indian banking sector has displayed a high level of

resilience in the face of high domestic inflation, rupee depreciation and fiscal uncertainty in

the US and Europe. In order to stimulate the economy and support growth of the banking

sector, the Reserve Bank of India (RBI) adopted several policy measures (Indian Banking

KPMG 2013).

With a sense of optimism slowly creeping in, the banking industry expects that 2015 will

bring better growth prospects. This optimism is because of the fact that the Government is

working hard to speed up the industrial growth in the country and the RBI is initiating a

number of measures that would go a long way in helping the banks to rebuild themselves.

The recent announcements of RBI, it is felt, are a clear pointer to the future of the

restructured domestic banking industry.

An Overview

Source: Business Financing: Banks GoI 2015

By 2013, the Indian Banking Industry employed 1,175,149 employees and had a total of

109,811 branches in India and 171 branches abroad and manages an aggregate deposit of

₹67504.54 billion (US$1.0 trillion or €1.0 trillion) and bank credit of ₹52604.59 billion

(US$790 billion or €780 billion). The net profit of the banks operating in India was ₹1027.51

billion (US$16 billion or €15 billion) against a turnover of ₹9148.59 billion (US$140 billion or

€140 billion) for the financial year 2012-13 (Statistical Tables related to Banks in India RBI

2013).

$1.4 Trillion Banking deposits

41% Unbanked

Population in India

$1.8 Trillion Total Banking

Assets

27.5 % Banking

Sector's total BFSI

employment



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2008 2009 2010 2011 2012 2013

Number of Commercial Banks

169 166 163 163 169 151

Number of branches

78,787 82,897 88,203 94,019 102,377 109,811

Population per Bank (in thousands) 15 15 14 13 13 12

Aggregate deposits

₹31969 ₹38341 ₹44928 ₹52078 ₹59091 ₹67504.4

Per Capita deposit

₹28610(U

S$430)

₹33919(US$

510)

₹39107(U

S$590)

₹45505 (U

S$690)

₹50183 (US

$760)

₹56380 (

US$850

Cash deposit Ratio

75% 74% 74% 76% 79% 79%

Banking Structure in India

Scheduled Commercial Banks in India are categorized into five different groups according to

their ownership and/or nature of operation.

State Bank of India and its Associates

Nationalised Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks.

Cooperative Banks

Scheduled Bank

Indian banking industry is classified into scheduled commercial banks and scheduled

cooperative banks with the Reserve Bank of India as the Central Bank.

Reserve Bank of

India

Scheduled Commercia

l Banks

Public Sector

Private Sector

Foreign Banks

Regional Rural Banks

Local Area Banks

Scheduled Cooperativ

e Banks

Urban Cooperative

Banks

Rural Cooperative

Banks

https://en.wikipedia.org/wiki/Indian_rupee














4

The Indian banking sector is broadly classified into scheduled banks and non-scheduled

banks. The scheduled banks are those which are included under the 2nd Schedule of the

Reserve Bank of India Act, 1934. The scheduled banks are further classified into:

nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs);

foreign banks; and other Indian private sector banks (Business Financing: Banks GoI 2015).

The term commercial banks refers to both scheduled and non-scheduled commercial banks

which are regulated under the Banking Regulation Act, 1949 (Directory of Bank offices

Reserve Bank of India 2015).

Sector Banks Number Of Banks in different Years

2007-08 2008-09 2009-2010 2010-11

Public Sector Banks 28 27 27 26

Old Pvt. Sector Banks

15 15 15 14

New Pvt. Sector Banks

8 7 7 7

Foreign Sector Banks

28 31 32 33

Total Commercial Banks

79 80 81 80

Source: www.rbi.org.in

History

Post-Independence

The Reserve Bank of India, India's central banking authority, was established in April 1935,

but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India

(Transfer to Public Ownership) Act, 1948.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of

India (RBI) "to regulate, control, and inspect the banks in India".

The Banking Regulation Act also provided that no new bank or branch of an existing bank

could be opened without a license from the RBI, and no two banks could have common

directors. (www.rbi.org 2015)

Nationalization Phase

The Government of India issued an ordinance ('Banking Companies (Acquisition and

Transfer of Undertakings) Ordinance, 1969') and nationalised the 14 largest commercial

banks with effect from the midnight of 19 July 1969. These banks contained 85 percent of

bank deposits in the country (A history of the Indian experience Austin 1999).

A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated

reason for the nationalisation was to give the government more control of credit delivery.



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With the second dose of nationalisation, the Government of India controlled around 91% of

the banking business of India.

Liberalization Phase

In the early 1990s, the then government embarked on a policy of liberalization, licensing a

small number of private banks. These came to be known as New Generation tech-savvy

banks, and included Global Trust Bank (the first of such new generation banks to be set up),

which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis

Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy

of India, revitalised the banking sector in India, which has seen rapid growth with strong

contribution from all the three sectors of banks, namely, government banks, private banks

and foreign banks (A history of the Indian experience Austin 1999).

The new policy shook the Banking sector in India completely. Bankers, till this time, were

used to the 4–6–4 method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new

wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.

All this led to the retail boom in India. People demanded more from their banks and received

more.

Current State of Banking in India

The Indian banking sector is fragmented, with 46 commercial banks jostling for business with

dozens of foreign banks as well as rural and co-operative lenders. State banks control 80

percent of the market, leaving relatively small shares for private rivals (Banking Sector in

India IBEF 2015).

On 28 Aug, 2014,Pradhan Mantri Jan Dhan Yojana is a scheme for comprehensive financial

inclusion launched by the Prime Minister of India, Narendra Modi. Run by Department of

Financial Services, Ministry of Finance, on the inauguration day, 1.5 Crore (15 million) bank

accounts were opened under this scheme (The Economic Times 28th August 2014).

At the end of February, 2015, 13.7 crore accounts had been opened under Pradhanmantri

Jan Dhan Yojna (PMJDY) and 12.2 crore RuPay debit cards were issued. These new

accounts have mobilised deposits of Rs 12,694 crore (Indian Banking Sector IBEF 2015).



6

Contribution to GDP

Source: Reserve Bank of India (RBI). All figures in %

Aggregate deposits of all Scheduled Commercial Banks (SCBs), as a percentage of

GDP increased from 61% in FY07 to 67% in FY13, driven by increasing demand

from retail customers.

Credit to GDP increased from 45% in FY07 to 53% in FY13 indicating the improved

lending of SCBs to various industries, which has enhanced trade and economic

development.

Contribution to Employment

Industry segments Total employment FY13 (in ‘000s)

% of total

Banking 1,100–1,200 25–30% Insurance 200–300 4–5% NBFC 25–30 0–1% Mutual Funds 15–20 0–1% Financial Intermediaries

2,500–3,000 65–70%

Source: Reserve Bank of India (RBI), National Skill Development Corporation (NSDC)

Within the Banking, Financial services and Insurance (BFSI) sector, financial

intermediaries such as DSA’s, insurance agents, mutual fund advisors, etc. account

for the largest share (65– 70%) of employment.

Banking stands second in terms of employment (average share of 28%). The

banking sector is projected to create up to 2 million new jobs in the next 5-10 years,

driven by issuance of new licenses and efforts to expand financial services into rural

areas.

61 67

45 53

FY 07 FY 13

Contribution to GDP

Deposits to GDP ratio Credit to GDP ratio



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Sector Banks

Number Of Employees in different Years 2007-08

2008-09

2009-2010

2010-11

Public Sector 715408 731524 739646 757535 Old sector banks 48700 51341 55052 55075 New sector banks 110123 124998 127468 163604 Foreign banks 31301 29582 28012 27968

Total Commercial Banks

905532 937445 950178 1004182

Source: www.rbi.org.in

Bank Deposits

Source: RBI report on trend and progress of banking in India 2012-13. All figures in USD Billion

Deposits increased at a CAGR of 11.4% during FY09–FY13 to reach USD1,360

billion in FY13.

Growth in deposits was primarily due to strong growth in current account savings

account (CASA) (33% growth in FY13). CASA growth was strong for new private

sector banks, due to their higher savings deposit rates.

Total Assets

Source: RBI report on trend and progress of banking in India 2012-13. All figures in USD Trillion

FY09 FY10 FY11 FY12 FY13

foreign banks 46 49 52 57 53

private banks 160 173 219 243 255

public banks 675 775 953 1035 1051

0

200

400

600

800

1000

1200

1400

1600

Bank Deposits

0.8 0.9 1.2 1.3

0.3 0.2 0.2 0.3 0.3 0.4 0.1 0.1 0.1 0.1 0.1

0

0.5

1

1.5

FY09 FY10 FY11 FY12 FY13

public banks private banks foreign banks



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Total banking sector assets increased at a CAGR of 11.3% to USD1.8 trillion in FY13.

Public sector banks accounted for majority (73%) of the total assets in FY13

Emerging Opportunities

Source: Indian Banking The engine for sustaining India’s growth agenda, KPMG, 2013

Government Initiatives

The Government has announced a capital infusion of Rs 6,990 crore (US$ 1.1 billion) in nine

state run banks, including State Bank of India (SBI) and Punjab National Bank (PNB), but

based on new efficiency parameters such as return on assets and return on equity. In a

statement, the finance ministry said, “This year, the Government of India has adopted new

criteria in which the banks which are more efficient would only be rewarded with extra capital

for their equity so that they can further strengthen their position."

The Union cabinet has approved the establishment of the US$ 100 billion New Development

Bank (NDB) envisaged by the five-member BRICS group as well as the BRICS “contingent

reserve arrangement” (CRA).

The RBI has decided to allow nominated banks to import gold, including coins, on a

consignment basis, extending its clarification issued in November 2014, which had eased

certain categories of gold imports.

To help Micro Small and Medium Enterprises (MSME), RBI has permitted setting up of an

exchange-based trading platform to facilitate financing of bills raised by such small entities to

corporate and other buyers, including government departments and PSUs (Banking Sector

in India IBEF 2015).

•The Government could consider diluting its stake in PSBs

•The Government may consider in the future on having a Golden share in each of the PSBs

Raising capital for public sector banks could be a problem in

the future!

•India critically needs at least 3 to 4 large banks that are globally competitive and can meet the growing demands for cross-border acquisitions by the Indian corporate and take on larger ticket risks on their balance sheets without hitting limits ceilings.

M&A in PSBs will be a reality only when the Reserve Bank of India

(RBI) intervenes

•The foreign banks operating in India with large networks would be keen to convert to WOS (Wholly owned subsidiaries) if they get national treatment

Expect competition from foreign banks as they acquire

‘near national treatment’



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On 28 Aug, 2014,Pradhan Mantri Jan Dhan Yojana is a scheme for comprehensive financial

inclusion launched by the Prime Minister of India, Narendra Modi. Run by Department of

Financial Services, Ministry of Finance, on the inauguration day, 1.5 Crore (15 million) bank

accounts were opened under this scheme (The Economic Times 28th August 2014).

Aspirations of Modern India

The ‘rising middle class’ – will account for close to one third of the

population in the next 20 years

Source: NCAER

Middle class consumers are prominent drivers of growth and consumption in India due to

their increasing disposable income. A report by National Council for Applied Economic

Research’s (NCAER) Centre for Macro Consumer Research indicates that by 2015-16, India

will be a country of 53.3 million middle class households, translating into 267 million people

(India’s middle class population to touch 267 million in 5 yrs, Economic Times, February 6,

2011).

4.3

2.5

3.5

2.4

4.4

1.8 2 2

3

2011 2015-16 2025-26

Rise in Middle class

Indian Middle Class (in millions) Individuals (in millions) Percentage of total population



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Investment in banking products may not be the default choice for

the middle class

While a rise in consumption is a given, all savings and investments going to banks is not.

Banks would have to strive hard to attract deposits in the future as the rising segment opens

up to other avenues for savings and investments such as mutual funds, insurance, real-

estate and commodities.

Most banks will need to start putting together strategic plans and identify teams to focus on

deposit raising, and move from the model of servicing walkin customers, to aggressively

pursuing new customers through innovative bundling, promise of better returns, higher levels

of customer service and attractive rewards programmes (Indian Banking The engine for

sustaining India’s growth agenda, KPMG, 2013).

What will the emerging middle class seek? Will banks be able to

provide?

Source: Banking The engine for sustaining India’s growth agenda, KPMG, 2013

The new middle class is likely to be fickle in its banking relationship – given the very low

costs of, and multiple available options for, switching. The key to building and profiting from

a long-term relationship with this segment will be the ability to build trust over a series of

transactions.

A key aspect to this challenge will be the bank’s ability to build and retain a team that is

trained, not only in the nuances of the products and services they sell, but also in the

development of soft skills and trust building skills. The emerging middle class is likely to

value the relationship higher; if their point of contact is someone they trust (Indian Banking

The engine for sustaining India’s growth agenda, KPMG, 2013).



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Banks and Digital Platforms

The last few years have witnessed a transition of banking from a predominantly transactional

business to a customer-centric one. Engaging the customer through the most relevant

channels has become key to maximising customer value and creating newer and more

innovative revenue streams for banks. digital platforms will impact the entire ecosystem of

the banking industry by redefining the type of interactions while necessitating new innovative

internal processes and employee skills to support these interactions (Banks taking a

quantum leap through digital PwC 2015).

Source: PwC’s New Digital Tipping Point

Reflections

The Indian economy is now on the threshold of a major transformation, with expectations of

policy initiatives being implemented.

After the elections, there have been positive business sentiments, improved confidence and

inflation is under control. This should help boost the economic growth.

The ‘Make in India’ campaign is showing positive trend towards some substantial

investment in the manufacturing sector.

Higher spending on infrastructure, speedy implementation of projects and

continuation of reforms will provide further impetus to growth.

All this translates into a strong growth for the banking sector too, as rapidly growing business

turn to banks for their credit needs, thus helping them grow. For this change to happen, the

banks should be on their toes. They should be prepared enough to contribute in this growth

process.

Also, with the advancements in technology, mobile and internet banking services have come

to the fore. According to a statement by Mr Uday Kotak, MD, Kotak Mahindra Group, “Mobile

banking will take a giant leap just like internet banking took over from the conventional

banks.”

Banks in India are focusing more and more to provide better services to their clients and

have also started upgrading their technology infrastructure, which can help improve

customer satisfaction as well as give banks a competitive edge.

Up to 2013 the traditional

consumers are the majority

2013-2019 The digital converts are

the majority

2020 and beyond the digital natives are the majority



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Bibliography

IBEF. 2015. Banking Sector in India (http://www.ibef.org/industry/banking-india.aspx) (accessed on 31 August 2015)

KPMG. 2013. Indian Banking –The engine for sustaining India’s growth agenda .CII

Statistical Tables Relating To Banks In India . 2013. Reserve Bank of India.

Banks taking a quantum leap through digital.2015. Price waterhouse Coopers

Koundal, Virender. 2012. Performance of Indian Banks in Indian Financial System. International Journal of Social Science & Interdisciplinary Research Vol.1 Issue 9

PM 'Jan Dhan' Yojana launched; 1.5 crore bank accounts opened in a day. (2014, August 29).

Economic Times

.

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