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Banking Sector in India

July, 2014


India is considered among the top economies in the world, with tremendous potential for its banking sector to flourish. The last decade witnessed a significant upsurge in transactions through ATMs, as well as internet and mobile banking.

The country's banking industry looks set for greater transformation. With the Indian Parliament passing the Banking Laws (Amendment) Bill in 2012, the landscape of the sector has duly changed. The bill allows the Reserve Bank of India (RBI) to make final guidelines on issuing new licenses, which could lead to a greater number of banks in the country. The style of operation is also slowly evolving with the integration of modern technology into the banking industry.

In the next 5-10 years, the sector is expected to create up to two million new jobs driven by the efforts of the RBI and the Government of India to expand financial services into rural areas.Two new banks have already received licences from the government, and the RBI's new norms will offer incentives to banks to spot bad loans and take necessary recourse to curb the practices of rogue borrowers.

Market size

The size of banking assets in Indiatotalled US$ 1.8 trillion in FY 13 and is expected to touch US$ 28.5 trillion in FY 25.Bank deposits have grown at a compound annual growth rate (CAGR) of 21.2 per cent over FY 06-13. In FY 13, total deposits were US$ 1,274.3 billion.

The revenue of Indian banks increased from US$ 11.8 billion to US$ 46.9 billion over the period 2001-2010. Profit after tax also reached US$ 12 billion from US$ 1.4 billion in the period.

Credit to housing sector grew at a CAGR of 11.1 per cent during the period FY 08-13. Total banking sector credit is anticipated to grow at a CAGR of 18.1 per cent (in terms of INR) to reach US$ 2.4 trillion by 2017.

In FY 14, private sector lenders experienced significant growth in credit cards and personal loan businesses. ICICI Bank saw 141.6 per cent growth in personal loan disbursement in FY 14, as per a report by Emkay Global Financial Services. The bank also experienced healthy growth of 20.8 per cent in credit card dues, according to the report. Axis Bank's personal loan business also grew 49.8 per cent, with its credit card business expanding by 31.1 per cent.


HDFC Bank and state-owned United Bank of India plan to tap the equity markets to raise funds to enhance capital base and lending. HDFC Bank plans to raise Rs 10,000 crore (US$ 1.66 billion) while the board of Kolkata-based United Bank will seek approval for raising about Rs 1,300 crore (US$ 216.47 million) by selling shares to increase its capital base.

Export-Import Bank of India (Exim Bank) will increase its focus on supporting project exports from India to South Asia, Africa and Latin America, as per Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved up the value chain by supporting project exports so that India earns foreign exchange. In 2012-13, Exim Bank had lent support to 85 project export contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47 companies in 23 countries.

IndusInd Bank will soon begin its asset reconstruction business. The private-sector lender plans to partner asset reconstruction companies (ARCs) for this venture. "I think our new initiative, which is going to launch in the next two months, is about asset reconstruction. We will do asset reconstruction within the bank but in tie-ups with ARCs. The business plan is ready. We believe a huge stock of assets is coming into the ARCs as a business area that we need to look at and we will exploit," as per Mr Romesh Sobti, CEO and MD, IndusInd Bank.

Jammu and Kashmir (J&K) Bank plans to increase its presence outside India. The bank is looking to establish branches in London and Dubai to enhance its relationship with current customers who have business interests in West Asia and Europe. "We have a number of business relationships in these countries and it makes sense for us to have a presence there," as per Mr Mushtaq Ahmad, Chairman and CEO, J&K Bank.

Government Initiatives

The RBI has announced a few measures in its bi-monthly monetary policy on June 3, 2014 which includes an increase in the foreign exchange remittance limit to US$ 125,000 from the previous limit of US$ 75,000.

State Bank of India (SBI) has announced a one-year rural fellowship programme 'SBI Youth for India (SBI YFI)' for 2014 to draft the country's youth to become change agents in the country's rural regions. The programme is for young professionals who are keen to leadthe change for a better India.

The RBI has simplified the rules for credit to exporters. Exporters can now receive long-term advance credit from banks for up to 10 years to service their contracts. Exporters have to have a satisfactory record of three years to receive payments from banks, who can adjust the payments against future exports.

The RBI has enabled overseas investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in insurance and related activities through the automatic route.

Road Ahead

India's banking industrycould become the fifth largest banking sector globally by 2020 and the third largest by 2025. These days, banks in India are turning their focus to servicing clients and improving their technology infrastructure, which can help better customer experience and give them a competitive edge. The popularity of internet and mobile banking is at an all-time high, with customer relationship management (CRM) and data warehousing anticipatedto drive the next wave of banking technology in the country.

Exchange Rate Used: INR 1 = US$ 0.0166 as on July25, 2014

References: Media Reports, Press releases, RBI Documents