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Indian Banking Sector: Brief Introduction

July, 2013

Indian Banking Sector: Brief Introduction

India’s Rs 77 trillion (US$ 1.30 trillion)-banking industry is well at par with global standards and norms. Prudent practises and conventional framework adopted by the regulator, Reserve Bank of India (RBI), have insulated Indian banks from the global financial crisis.

The country has 87 scheduled commercial banks with deposits worth Rs.71.6 trillion (US$ 1.21 trillion) as on 31 May, 2013. Of this, 26 are public sector banks, which control over 70 per cent of India’s banking sector, 20 are private banks and 41 are foreign banks. Of the total, 41 banks are listed with a total market capitalisation of Rs.9.35 trillion (US$ 158.16 billion) as per the recent statistics.

Key Statistics

  • According to the RBI’s ‘Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks’, September 2012, Nationalised Banks accounted for 52.0 per cent of the aggregate deposits, while the State Bank of India (SBI) and its Associates accounted for 22.3 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, 4.8 per cent, 4.3 per cent and 2.9 per cent, respectively.

    Nationalised Banks accounted for the highest share of 50.9 per cent in gross bank credit followed by State Bank of India and its Associates (22.1 per cent) and New Private Sector Banks (14.7 per cent). Foreign Banks, Old Private Sector Banks and Regional Rural Banks had shares of around 4.9 per cent, 4.9 per cent and 2.6 per cent, respectively.
  • India's foreign exchange (forex) reserves stood at US$ 280.19 billion for the week ended July 12, 2013, according to data released by the central bank. The value of foreign currency assets (FCA) - the biggest component of the forex reserves – stood at US$ 252.14 billion, according to the weekly statistical supplement released by the RBI.
  • The number of mobile banking transactions doubled to 5.6 million in January 2013 from 2.8 million in January 2012. The value of these transactions increased three-times to Rs 625 crore (US$ 105.73 million) during the month from Rs 191 crore (US$ 32.31 million) in the corresponding month last year.
  • Moreover, non-resident Indians (NRIs) parked deposits aggregating US$ 14.18 billion in the financial year ended March 2013, depicting an increase of 19 per cent over the previous year.

Recent Developments

  • India's leading infrastructure development and finance company Infrastructure Leasing & Financial Services Limited (IL&FS), has inked a Memorandum of Understanding (MoU) with Industrial and Commercial Bank of China (Asia) Limited (ICBC (Asia)), for mutual cooperation in infrastructure project development services and financial services related thereto.

    The agreement envisages a scope of cooperation between the two financial entities for providing infrastructure project development services, including financial services relating thereto, trade, corporate banking, investment banking and treasury related services, debt raising, advisory and other form of permissible economic cooperation for such projects across Northern and Eastern Asia and is expected to facilitate more business opportunities for both the institutions in these geographies.
  • Meanwhile, Standard Chartered Bank has announced that it will buy US-based Morgan Stanley’s domestic private wealth management business. The deal, to be completed by the end of 2013, would boost Standard Chartered’s private wealth assets under management by 25 per cent or about US$ 750 million.
  • Marking another milestone in achieving financial inclusion, Vodafone India and ICICI Bank have partnered to launch a mobile money transfer and payment service, M-Pesa. The service will allow customers to transfer money to any mobile phone in India, remit funds to bank accounts, deposit and withdraw cash from designated outlets, pay utility bills, and shop at select merchant establishments.

    The new service will initially be offered in West Bengal, Bihar and Jharkhand through 8,300 authorised agents. It will be made available across India by 2014-15.
  • Public sector lender SBI intends to make a strong position in refinance market in 2013. The bank offers lowest lending rates for buying homes. The fast growing market of ‘home loans transferred from other banks’ consists 25 per cent of the total home loans disbursed by the bank in FY13. SBI made Rs 30,000 crore (US$ 5.08 billion) of home loans in 2012-13.
  • Meanwhile, US-based Customers Bancorp Inc (CUBI) has plans to infuse US$ 51 million in multiple securities of Religare Enterprises Ltd. Religare is currently aspiring for a banking licence to enter the banking industry.

    The investments will take place through a combination of primary and secondary market transactions.

Government Initiatives

India’s central bank is about to propose fundamental changes in the structure of Indian banking industry. The suggestions include consolidation of some large banks to create two-three global ones, setting up of smaller banks, separate licenses for specific banking operations instead of a single universal one, continuous licensing for new banks and conversion of some urban cooperative banks into full-fledged commercial banks.

Also, the RBI has, for the time being, relaxed the norm that stipulates non-banking finance companies (NBFCs) to have a minimum gap of six months between two non-convertible debentures (NCDs) issues. The move is aimed at streamlining the process of moving into a more robust asset-liability management framework in a non-disruptive manner.

Road Ahead

Over the past few years, Indian banking system has majorly went revamp and modernisation. The new infrastructure adopted by the banking system is mainly comprised of information technology (IT) products and services.

Indian banking and securities companies will spend around US$ 422 billion on IT products and services in 2013. That will imply a 13 per cent rise from Rs 37,300 crore (US$ 6.31 billion) spent in 2012. IT services is the largest overall spending category at Rs 13,200 crore (US$ 2.23 billion) in 2013. This ensures that IT service providers lay a strong focus on the financial services sector, according to a study by research and analyst firm Gartner.

Exchange Rate Used: INR 1 = US$ 0.01692 as on July 24, 2013

References: Media Reports, Press releases, RBI Documents.