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 India’s 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 bank’s 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 & Poor’s.
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 RBI’s 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.