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Indian Banking Industry: an overview

October, 2013

Brief Introduction

India’s Rs 77 trillion (US$ 1.25 trillion)-banking industry is the backbone to the economy. The sector emerged strong from global financial turmoil and proved its mettle when the developed economies were shaking.

India’s banking sector is on a high-growth trajectory with around 3.5 ATMs and less than seven bank branches per 100,000 people, according to a World Bank report. The statistics are going to improve in near future as the Government aims to have maximum financial inclusion in the country. Policymakers are making all the efforts to provide a facilitating policy framework and infrastructure support to ensure meaningful financial inclusion. Apart from that, financial institutions are collaborating with other service providers (in the fields of telecom, technology and consumer product providers) to create an enabling environment.

Online Banking

‘Do-it-yourself’ is the new banking norm. Just an access to high-speed internet and user-friendly smart-phone applications have made people shift to alternative channels of banking. Many banks have adopted new-age internet tools to reach out to their clients to facilitate easy and comfortable banking.

For instance, in ING Vysya Bank, 80 per cent of demand draft volumes generate through real time gross settlement (RTGS) and national electronics funds transfer (NEFT) while for HDFC Bank, 82 per cent of all transactions come from non-bank channels, with net banking and mobile banking accounting for 44 per cent of all transactions.

"Most online transactions are real-time and do not involve paper-based transactions, thus saving customer time. We are witnessing rapid customer adoption for net banking over and above their normal account related transactions. They are now viewing net banking as a single stop for all their banking requirements," said Tejas Maniar, Head, net banking, HDFC Bank, said.

Some banks like ICICI Bank have endeavoured to take a step further and introduce social media-based banking apps. ‘Pockets’ by ICICI allows its customers to have the convenience of banking while they are on Facebook.

Similarly, Kotak Mahindra Bank is working on online personal finance management tools, shopping cart and an e-relationship manager.

Bankers reveal that customers use their net-banking facility for non-account related matters like bills payment, viewing credit card statements, ticket booking etc.

For banks, online banking helps save costs too. The cost of doing a transaction at a teller counter ranges from Rs 40 to Rs 50 (US$ 0.65- 0.81) per transaction while in the case of net banking this lowers significantly to Rs 2 to Rs 3 (US$ 0.032-0.048) per transaction.

Key Statistics

Nationalised Banks accounted for the highest share of 51 per cent in gross bank credit followed by State Bank of India and its Associates (22.7 per cent) and New Private Sector Banks (14 per cent). Foreign Banks, Old Private Sector Banks and Regional Rural Banks had shares of around 4.9 per cent, 5 per cent and 2.5 per cent, respectively.

  • According to the Reserve Bank of India (RBI)’s ‘Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks’, March 2013, Nationalised Banks accounted for 52.4 per cent of the aggregate deposits, while the State Bank of India (SBI) and its Associates accounted for 22 per cent. The share of New Private Sector Banks, Old Private Sector Banks, Foreign Banks, and Regional Rural Banks in aggregate deposits was 13.6 per cent, 5.1 per cent, 4 per cent and 2.9 per cent, respectively.
  • Banks’ credit (loan) growth increased to 18 per cent for the fortnight ended September 6, 2013, while deposits grew by 13.37 per cent showed the data by RBI.
  • India's foreign exchange reserves increased to US$ 277.73 billion as of October 4, 2013.

Recent Developments

The basic motive behind such a initiative by the bank is to take the formal banking experience to people in unbanked and under-banked areas. A mini branch, manned by one, two or three persons, offers the entire range of products and services including savings and current accounts, fixed deposits, recurring deposits, credit card, instant debit card and also ATM facility. Products such as two wheeler loan, tractor loan, commercial vehicle loan, agricultural and commodities loan among others are also offered.

National Commercial Bank intends to develop electronic services and provide technology-based banking solutions to its clients through this initiative.

  • Private lender HDFC Bank is planning to launch 500 mini branches, to be handled by one to three people, across India by the end of FY14. The bank has added about 219 mini branches pan-India since 2012.
  • Saudi Arabia’s National Commercial Bank is said to have signed Tata Consultancy Services (TCS) to make India’s largest software exporter implement its core banking platform for the former. TCS offers a plethora of retail banking solutions under BaNCS, a brand of core banking suite.
  • On the similar lines, ING Vysya Bank Ltd has appointed IBM and its ‘MobileFirst’ banking solution for the development of its ING Vysya Mobile - a cost effective, secure and scalable mobile banking application. The new application will help the bank maximise its reach to untapped markets. Moreover, the advanced features will enhance bank’s involvement with its clients, facilitating higher availability and convenience.

Government Initiatives

  • In order to enhance financial inclusion in India, the RBI has taken an important step that has given banks conditional freedom to open branches in tier-I cities without seeking the central bank’s approval in each case.
  • Also, the RBI has relaxed the norms for banks borrowing through foreign currency. For bank borrowings exceeding half the unimpaired tier-I capital made on or before November 30, 2013, for availing of RBI’s swap facility, the central bank lowered the maturity requirement from three years to a year.
  • The initiative aims to attract foreign inflows, as it is easier to get loans for one year, rather than three years. However, borrowings taken after November 30, would have to have maturity period of three years.

Road Ahead

Banking industry is evolving to be more competitive and pro-active. Banks have started adopting new techniques like mobile and internet to provide their services.

Projections have stated that the Indian banking and securities companies will spend about Rs 41,700 crore (US$ 6.78 billion) on IT products and services in 2013, 13 per cent more than what they spent in 2012. This includes spending on internal IT services (including personnel), software, data centre technologies, devices and telecom services, according to a study by research and analyst firm Gartner.

Another report prepared by KPMG prepared in association with the Confederation of Indian Industry (CII) states that the Indian banking sector is expected to become fifth largest in the world by 2020. The report highlights that India is one of the top 10 economies of the world and with relatively lower domestic credit to gross domestic product (GDP) percentage, their lies a huge scope of growth for the banking sector. Bank credit is expected to grow at a compounded annual growth rate (CAGR) of 17 per cent in the medium term, eventually leading to higher credit penetration in the economy.

Exchange Rate Used: INR 1 = US$ 0.01625 as on October 18, 2013

References: Media Reports, Press releases, RBI Documents.