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Information About Indian Banking Sector

January, 2014

Indian Banking Sector: Brief Introduction

India’s banking sector is currently valued at Rs 81 trillion (US$ 1.31 trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third largest by 2025, according to an industry report. The face of Indian banking has changed over the years. Banks are now reaching out to the masses with technology to facilitate greater ease of communication, and transactions are carried out through the Internet and mobile devices.

With the Parliament passing the Banking Laws (Amendment) Bill in 2012, the landscape of the sector will likely change. The bill allows the Reserve Bank of India (RBI) to make final guidelines on issuing new bank licenses. This could lead to a greater number of banks in the country; the style of operation could also evolve with the integration of modern technology into the industry.

Online Banking

IDBI Bank Ltd has started an online Public Provident Fund (PPF) subscription facility for its customers. The bank had already received approval from the government to operationalise PPF transactions through the Internet. The facility would help accomplish the government’s initiative of electronic transactions in banking services, and also provide a strong platform to mobilise funds through the Small Saving Schemes. PPF account holders of the bank will have the benefit of accessing their PPF account online, view account details, print statements, and make subscription to PPF by way of online transfer of funds.

Simple steps such as memorising personal identification number (PIN), bringing down credit limits on cards, using virtual cards for internet transactions and deactivating transactional services linked to a mobile number can limit bank frauds, according to experts. Changing the password regularly can also save an account from fraud attacks.

Online money transfers and money credited directly to an account are the second preferred mode of inward remittances in India, rising to 22 per cent in fiscal 2013 from 14 per cent in 2009, according to an RBI report. "While electronic wires/SWIFT continue to be the dominant mode of transferring remittances by overseas Indians, in the recent period, there has been a significant increase in the share of remittances transmitted through direct transfer to bank accounts and through online mode," the report stated.

Key Statistics

The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion in the period 2001–2010. In that phase, the profit after tax rose about nine-fold from US$ 1.4 billion to US$ 12 billion.

Banking Index with the Sensex (Bankex) that tracks the performance of primary banking sector stocks grew at a compounded annual growth rate (CAGR) of nearly 20 per cent over the period 2003–2012.

Total number of onsite and offsite ATMs of Indian Banks reached 100042 in July 2012.

Recent Developments

The central banks of Japan and India have agreed to a proposal that expands the maximum amount of the Bilateral Swap Arrangement (BSA) between the two countries to US $50 billion. The agreement is for a three-year period (2012–15); the previous size of the BSA was US $15 million. The new agreement will enable the two countries to swap their local currencies against the US dollar for an amount up to US$50 billion.

Public sector banks will soon offer customers insurance products from different companies as against products from one company. The finance ministry has asked public sector banks to become insurance brokers instead of corporate agents. This move was one of the steps stated by finance minister Mr P Chidambaram in early 2013, as a way to increase insurance penetration.

Citi has promoted Mr Anand Selvakesari as the head of consumer banking for the Association of Southeast Asian Nations (ASEAN) region. Mr Selvakesari will continue his present role as Citi’s consumer banking business head in India – a post he has occupied since July 2013 – as well as look after the consumer banking operations in Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam.

Indian Overseas Bank (IOB) has received approval from the RBI to open a second branch in Bangkok, according to the bank’s chairman and managing director Mr M Narendra. The bank will likely open the second branch before March 31, 2014. Also, the bank is looking to expand its presence. "Our focus is on opening more rural branches and taking banking to villages. We have covered 3,000 villages under the financial inclusion scheme,” said Mr Narendra.

In an effort to expand its revenue streams, Bank of India (BOI) plans to enter the merchant banking space through BOI Shareholding Ltd. BOI is looking to buy Bombay Stock Exchange’s (BSE) entire shareholding in their joint venture BOI Shareholding Ltd (BOISL). Another reason for BOI’s inclination to foray into merchant baking is to offer a greater range of financial services to its customers.

Government Initiatives

The Cabinet Committee on Economic Affairs (CCEA) has given the go-ahead to a proposal to increase foreign holding in Axis Bank to 62 per cent from the current 49 per cent. The move could lead to overseas investment of nearly Rs 7,250 crore (US$ 1.17 billion) into the country. The approval is subject to foreign institutional investors’ (FII) holding being capped at 49 per cent.

To counter the liquidity pressure faced by micro and small enterprises, the RBI will provide refinance aggregating up to Rs 5,000 crore (US$ 813.16 million) to the Small Industries Development Bank of India (SIDBI). SIDBI can use the funds for direct and onward lending to banks. Also, in an effort to encourage more lending to medium enterprises, the RBI will include incremental credit given to these units by scheduled commercial banks (which do not include regional rural banks) under the domain of priority sector lending.

HDFC Bank Ltd has started its rural financial literacy initiative in the village of Palakkad in Kerala, with the support of the RBI. The private bank will conduct financial literacy camps in 39 rural and semi-urban branches across the South Indian state. These camps will allow adults and school children from 234 Panchayat wards in 26 villages to gain theoretical knowledge on financial products and services. This initiative endorses the RBI's recent circular which recommends that banks, through their branch networks, should put in more efforts in rural areas to spread financial literacy.

Road Ahead

India is one of the top 10 economies in the world, where the banking sector has tremendous potential to grow. The last decade saw customers embracing ATM, internet and mobile banking. The number of ATMs has doubled over the past few years, with more than 100,000 in the country at present (70 per cent in urban areas). They are estimated to further double by 2016, with over 50 per cent expected to be set up in small towns. Also, the scope for mobile and internet banking is big. At the start of 2013, only 2 per cent of banking payments went through the electronic system in the country. Today, mobility and customer convenience are viewed as the primary factors of growth and banks are continuously exploring new technology, with terms such as mobile solutions and cloud computing being used with greater regularity.

Exchange Rate Used: INR 1 = 0.01625 as on January 14, 2014

References: Media Reports, Press Releases, RBI Documents