Banking

Last Updated: July 2011

Indian Banking Sector: Overview 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. Worth noting is the fact that Indias banking sector has been one of the very few ones that have actually been able to maintain resilience without much impacting the growth process. Growth in the sector has been favoured by factors including low defaulter ratio,strong economic growth, central banks regular intervention and pre-emptive adjustment of monetary policy. India has the potential to become the third largest banking sector by 2050 after China and US, according to a PricewaterhouseCoopers (PwC) report titled Banking In 2050. The report states that India has particularly strong long-term growth potential. Indian Banking Sector Key Drivers The banking sector in India is expected to have another good year during 2011, with growth being propelled by factors such as good economic growth, favourable demographics and low penetration, according to a report titled Indian banks are likely to ride an economic growth wave, by research firm Standard & Poors.

The countrys economy grew by 8.5 per cent in the last fiscal and the government expects the growth impetus to continue this year as well More than 50 per cent of Indias population is under the age of 30 years, which is a major target group for banks Penetration of banking services in the country remains low. The government has set targets to provide banking facilities to all areas with a population of over 2,000 by March, 2012.

Indian Banking Sector Key Statistics

The banking sector in India is well capitalised, with capital ratios being above the global average. The average tier-1 Capital Adequacy Ratio (CAR) of the Indian banking industry is above 10 per cent compared to the Basel III norm of 8.5 per cent including the contingency buffer. Moreover, the Reserve Bank of India, in its Financial Stability Report (FSR) has also asserted that the sector remains well capitalised with both core capital adequacy and leverage ratios at comfortable level. Efficient internal capital generation, fairly active capital markets, and strong support from the government ensured good capitalisation for most banks. The overall CAR reached 14 per cent as on March 31, 2011. High levels of public deposits also ensured a comfortable liquidity profile 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 by 19.9 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. Indian Banking Trends& Developments The last three decades have demonstrated a significant increase in the size, spread and scope of activities of banks in India. The business profile of banks has changed significantly to include non-traditional activities such as merchant banking, new financial services, mutual funds, etc.

The evolution from class banking to mass banking and rising customer focus is immensely changing the landscape of Indian banking.

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

Indian Banking Key Investments

Standard Chartered Private Equity (SCPE) said that it has invested US$ 56 million in Ravi Jaipuria-promoted Varun Beverages International (VBIL), buying a "significant minority" stake in the bottling firm. The funds would be used to fast-track VBIL's growth in its beverages business in India and in foreign countries South Indian Bank has signed a service agreement with TimesofMoney, an e-payments service provider to offer remittance solutions to Non Resident Indians (NRIs) in selected countries. The service would enable NRIs to get a strong transaction platform along with better pricing and safety, besides speedy money transfer

Government Initiatives The policy makers for the banking sector, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. These changes include:

Strengthening prudential norms Developing the payments system and, Integrating regulations between commercial and co-operative banks To support capitalisation, the government has infused Rs 23,200 crore (US$ 5.2 billion) into state-owned banks during the last three fiscals The RBI has said that for each branch that is proposed to be opened in Tier 3 to Tier 6 centres of under-banked districts of under-banked States, a bank will get the authorisation to open a branch in a Tier 1 or Tier 2 centre. This incentive to banks comes on the back

of the continuing need to open more branches in these States in order to ensure more uniform spatial distribution With financial inclusion being a key program for RBI and the government, the central bank has decided to give private banks a push to go rural. The RBI has, in its circular, said that banks should open at least 25 per cent of the branches under the annual branch expansion plan in un-banked rural centres.

Indian Banking - Road Ahead The Indian banking story is running in parallel with Indias growth story. With economic growth of India expected to average at double-digit for the current decade, the banking sector is also poised for growth as the factors contributing to the growth of GDP would act as catalysts for the banking sector as well in retail, corporate as well as rural banking. By 2017, the average consumption in rural India will be the same as of urban India in 2005, according to a McKinsey study. As a result, Indias labour force will grow at a higher rate than population growth and therefore, the ratio of working age population to total population will be on the rise, and it will be more urban, rich and educated. This will result in a higher flow of savings to the banking system. 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. (Exchange rate used: INR 1 = US$ 0.02253, as on July 22, 2011) References: RBI documents, weekly statistical supplement by RBI, RBIs Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, December 2010, Press Releases, McKinsey report on Indian Banking, Report by Thomas White on Indian Banking