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Banking Sector in India

May, 2014


India is one of the top 10 economies globally, with vast potential for the banking sector to grow. The last decade witnessed a tremendous upsurge in transactions through ATMs, and Internet and mobile banking. In 2014, the country’s Rs 81 trillion (US$ 1.34 trillion) banking industry is set for a greater change. Two new banks have already received licences from the government. Furthermore, the Reserve Bank of India’s (RBI) new norms will provide incentives to banks to spot potential bad loans and take corrective steps that will curb the practices of rogue borrowers.

The Indian government’s role in expanding the banking industry has been significant. Through the Financial Inclusion Plan (FY 10–13), banking connectivity in the country increased more than three-fold to 211,234 villages in 2013 from 67,694 at the beginning of the plan.

Banks are also looking at new ways to attract customers. In September, 2013, ICICI bank leveraged the popularity of the social platform, and launched its Facebook banking service, Pockets. The service enables customers to transfer funds and pay bills from within the website.

Market Size

The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion during the period 2001–2010. In the same period, the profit after tax increased from US$ 1.4 billion to US$ 12 billion.

In 2012–13, Indian banks had 170 overseas branches (163 in 2011–12) while foreign banks had 316 branches in India (309 in 2011–12).

Credit to housing sector grew at a compound annual growth rate (CAGR) of 11.1 per cent during the period FY 2008–13. Total banking sector credit is expected to grow at a CAGR of 18.1 per cent (in terms of INR) to touch US$ 2.4 trillion by 2017.

Recent Developments

Infrastructure Development Finance Company (IDFC) and Bandhan Financial Services Pvt Ltd have been chosen among a field of 25 banks by the RBI to set up banks. ‘In-principle’ approval has been given to the banks, which are both non-banking finance companies. While Mumbai-based IDFC is categorised as an infrastructure finance company, Kolkata-based Bandhan is a microfinance establishment.

Bandhan covers 5.5 million customers, nearly all of them women whose loans average Rs 10,000. The bank seeks to continue catering to a rural and unbanked customer base from its current branch network. "Why go after the same person and ask him to get another account? Why not just go after those who do not have any bank accounts," said Mr Chandra Shekhar Ghosh, the bank’s Managing Director.

Banks and housing finance companies (HFCs) together enjoyed a 20 per cent growth in home loans in FY 2013–14, according to Mr RV Verma, Chairman and Managing Director, National Housing Bank. Home loans disbursed by banks and HFCs collectively grew by Rs 1.60 trillion (US$ 26.59 billion) in FY 2013–14 to reach Rs 9.60 trillion (US$ 159.58 billion) at the end of the fiscal. “We expect the growth (in home loans) to continue. There is every reason to believe that,” said Mr Verma.

Jammu and Kashmir (J&K) Bank is looking at opportunities to increase its presence outside the country. The bank is likely to establish branches in London and Dubai to strengthen its relationships with current customers who have business interests in Europe and West Asia. “We have a number of business relationships in these countries and it makes sense for us to have a presence there,” said Mr Mushtaq Ahmad, Chairman and Chief Executive Officer, J&K Bank.

Indian banks operating abroad enjoyed a higher credit growth in comparison to foreign banks operating in India, as per an RBI survey on international trade in banking services for 2012–13. According to the survey, growth of credit extended by Indian banks’ branches operating overseas grew by 31.7 per cent to Rs 585,570 crore (US$ 97.36 billion); credit extended by foreign banks based in India increased 27.5 per cent to touch Rs 307,700 crore ($51.15 billion).

Strong growth in agriculture and services sectors as well as the personal loans segment has helped push bank credit growth during the period April–November, 2013 to 7.2 per cent, compared to 6.6 per cent during the same period of 2012, according to a report by credit rating agency CARE Ratings. During the period, loans to the agri sector grew by 5.2 per cent compared to 2.3 per cent in 2012. "Higher growth in credit to agriculture may be attributed to the expected better kharif crop which has been announced by the Ministry of Agriculture," according to the report.

ICICI Bank is looking at different ways to maximise the digital opportunity for growth. The bank is doubling the number of cities it covers with 'tablet banking' and offering its customers services such as video conferencing, so they can talk to the money managers from the comfort of their homes. "The idea is thinking ahead of your customer. Not just what they may want today but what could they want tomorrow," said Mr Rajiv Sabharwal, Executive Director, ICICI.

Bank of India (BoI) launched its card-less cash withdrawal facility in March 2014. Under this service, a BOI customer can transfer money to anyone, using the bank’s ATMs or through Internet banking. The sender has to provide the beneficiary’s mobile number, a sender code, and the amount through internet banking or text message. The beneficiary, after receiving a code from the bank can visit any BOI ATM with instant money transfer facility and withdraw the money within a fortnight of the transfer.

Simple steps such as memorising one's PIN, lowering credit limits on cards, using virtual cards and deactivating transactional services connected to a mobile number could bring down bank frauds, says experts. Regular changing of the password can also save an account from attacks. “If there is a change in the email or phone number, it should be immediately updated with the bank," said a cyber-crime investigation specialist.

Government Initiatives

The RBI has issued extra guidelines for banks giving gold metal loans (GMLs). To safeguard against fraud, the central bank has asked lenders to check the credit worthiness of borrowers; collateral securities against the loan; and trade cycle of the manufacturing activity, before sanctioning the loans. "Lack of proper monitoring mechanism and not ensuring end use of GML has resulted in certain instances of frauds/misuse related to GML by certain unscrupulous jewellers," stated the RBI in a notification.

The Cabinet Committee on Economic Affairs (CCEA) has given the green signal to a proposal to increase foreign holding in Axis Bank from 49 per cent to 62 per cent. The move could bring in overseas investment of nearly Rs 7,250 crore (US$ 1.20 billion) into the country. The CCEA nod is dependent on FIIs’ holding capped at 49 per cent.

Road Ahead

India’s banking sector has the potential to become the fifth largest banking sector globally by 2020 and the third largest by 2025. The industry has witnessed discernable development, with deposits growing at a CAGR of 21.2 per cent (in terms of INR) in the period FY 06–13; in FY 13 total deposits stood at US$ 1,274.3 billion.

Today, banks are turning their focus to servicing clients. Banks in the country, including those in the public sector, are emphasising on enhancing their technology infrastructure, in order to improve customer experience and gain a competitive edge. The popularity of internet and mobile banking is higher than ever before, with Customer Relationship Management (CRM) and data warehousing expected to drive the next wave of technology in banks. Indian banks are also progressively adopting an integrated approach to risk management. Most banks already have in place the framework for asset–liability match, credit and derivatives risk management.

Exchange Rate Used: INR 1 = US$ 0.01661 as on April 7, 2014

References: Media Reports, Press releases, RBI Documents