Banking Sector in India

Latest update: October, 2017

Growth in Banking Sector Deposits

• During FY06–17, deposits grew at a CAGR of 12.03 per cent and reached 1.54 trillion by FY171.
• Strong growth in savings amid rising disposable income levels are the major factors influencing deposit growth.
• Access to banking system has also improved over the years due to persistent government efforts to promote banking-technology and promote expansion in unbanked and non-metropolitan regions.
• At the same time India’s banking sector has remained stable despite global upheavals, thereby retaining public confidence over the years.
• Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY), have also increased. As on November 9, 2016, US$ 6,971.68 million were deposited, while 255.1 million accounts were opened

• SNAPSHOT
• SHOWCASE
• INFOGRAPHIC
• PRESENTATION

Last Updated: October, 2017

 SECTORAL REPORT | OCTOBER, 2017

Introduction

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

In August 2017, Global rating agency Moody's announced that its outlook for the Indian banking system was stable.

Market Size

The Indian banking system consists of 27 public sector banks, 26 private sector banks, 46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control more than 70 per cent of the banking system assets, thereby leaving a comparatively smaller share for its private peers. Banks are also encouraging their customers to manage their finances using mobile phones.

ICRA estimates that credit growth in India’s banking sector would be at 7-8 per cent in FY 2017-18.

Investments/developments

Key investments and developments in India’s banking industry include:

• International Finance Corp, (IFC), a member of the World Bank Group, has invested Rs 130 crore (US$ 20 million) in, Avas Financiers Ltd, which will provide housing loans to low-income consumers in rural and semi-urban areas of India.
• The Reserve Bank of India (RBI) has proposed to allow banks to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) which is expected to benefit both real estate and banking sector in diversifying investor base and investment avenues respectively.
• The Canada Pension Plan Investment Board (CPPIB) and the Caisse de Depot Quebec (CDPQ) have acquired a 1.5 per cent stake in Kotak Mahindra Bank from Mr Uday Kotak, Executive vice-chairman and Managing director, Kotak Mahindra Bank, for a total consideration of Rs 2,254 crore (US$ 350.0 million).
• Fullerton India Credit Co Ltd, a non-banking finance company (NBFC), has raised Rs 500 crore (US$ 75 million) through masala bonds, to support its onward lending and other financing activities.
• The Insurance Regulatory and Development Authority of India (IRDA) has allowed insurers to invest up to 10 per cent in additional tier 1 (AT1) bonds, that are issued by banks to augment their tier 1 capital, in order to expand the pool of eligible investors for the banks.
• Qatar’s Doha Bank plans to apply to the Qatar Central Bank and Reserve Bank of India for permission to establish a local subsidiary in India, with the vision to create a retail branch network in India.
• Fairfax Financial Holdings, a Canada-based financial services firm, has received an approval from the RBI to acquire a majority 51 per cent stake in Kerala-based Catholic Syrian Bank for Rs 1,000 crore (US$ 150 million), which will be the first takeover of an Indian bank by a non-banking financial entity, after RBI tweaked ownership norms.
• IndiaPost has received the final license from RBI to start its payment bank operations, thus becoming the third entity in India after Bharti Airtel and Paytm to receive payment bank license from RBI.
• Microfinance firm Ujjivan Financial Services Ltd has announced starting of banking services across its branches under the name of Ujjivan Small Finance Bank Ltd, thus becoming the largest among five small banks which are scheduled to start their operations or have already started.

Government Initiatives

• Under Pradhan Mantri Jan Dhan Yojana (PMJDY), the total number of accounts opened since January 2015 increased 135 per cent to 295.2 million as of August 16, 2017.
• Mr Arun Jaitley, Minister of Finance, Government of India, introduced 'The Banking Regulation (Amendment) Bill,2017', which will replace the Banking Regulation (Amendment) Ordinance, 2017, to allow the Reserve Bank of India (RBI) to guide banks for resolving the problems of stressed assets.
• Finance Minister Mr Arun Jaitley has proposed various measures to quicken India's transition to a cashless economy, including a ban on cash transactions over Rs 200,000 (US$ 3,100), tax incentives for creation of a cashless infrastructure, promoting greater usage of non-cash modes of payments, and making Aadhaar-based payments more widespread.
• The Government of India has announced demonetisation of high denomination bank notes of Rs 1000 and Rs 500, with effect from November 08, 2016, in order to eliminate black money and the growing menace of fake Indian currency notes, thereby creating opportunities for improvement in economic growth.
• The RBI has cut its key repo rate by 25 basis points to 6.25 per cent, in order to boost growth as according to RBI, the inflation momentum has moderated because of a normal monsoon.

The government and the regulator have undertaken several measures to strengthen the Indian banking sector.

• Government of India has decided to amend Section 35 A of the Banking Regulation Act that will allow the Reserve Bank of India (RBI) to direct banks for the recovery of non-performing assets (NPAs)
• The Reserve Bank of India (RBI) has proactively instructed banks to increase their levels of provision on the loans provided to the telecom sector as a prudent measure, which will help to shore up provisions for future recognition of any non-performing assets arising out of the sector.
• The RBI has allowed banks in India to raise funds through issuance of rupee-denominated bonds overseas, also called masala bonds, within the current limit of Rs 2,44,323 crore (US$ 36.6 billion) set for foreign investment in corporate bonds.
• The Ministry of Labour and Employment has successfully opened around 3,840,863 bank accounts as on December 26, 2016, for workers especially in the unorganised sector, as part of its campaign to promote and ensure cashless transfer of wages to workers.
• The National Bank for Agriculture and Rural Development (NABARD) plans to provide around 200,000 point-of-sale (PoS) machines in 100,000 villages and distribute RuPay cards to over 34 million farmers across India, to enable farmers to undertake cashless transactions.
• The Government of India’s indigenous digital payments application, BHIM (Bharat Interface for Money), has recorded 18 million downloads since its launch on December 30, 2016, according to Mr Amitabh Kant, Chief Executive Officer, NITI Aayog.
• The Ministry of Finance has lowered the threshold for making electronic payments to suppliers, contractors or institutions from Rs 10,000 (US$ 150) to Rs 5,000 (US$ 75), in order to attain the goal of complete digitisation of government payments.

Road Ahead

Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth. All these factors suggest that India’s banking sector is also poised for robust growth as the rapidly growing business would turn to banks for their credit needs.

Also, the advancements in technology have brought the mobile and internet banking services to the fore. The banking sector is laying greater emphasis on providing improved services to their clients and also upgrading their technology infrastructure, in order to enhance the customer’s overall experience as well as give banks a competitive edge.

Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit and debit cards in the market shortly. The cards, which use near field communication (NFC) mechanism, will allow customers to transact without having to insert or swipe.

Mr Bill Gates, Co-founder of Microsoft Corp, has stated that India will move quite rapidly to a digital payments economy in as little as seven years, based on the introduction of digital payment banks combined with other things like direct benefit transfers, universal payments interface and Aadhaar.

Exchange Rate Used: INR 1 = US$ 0.015 as of October 06, 2017.