2. The Indian Banking Industry
The Reserve Bank of India (RBI) is the central banking and monetary authority in India, and has
regulatory and supervisory authority for the Indian financial system. Until 1991, the financial sector
in India was heavily regulated and commercial banks and long-term lending institutions, the two
dominant financial intermediaries, had mutually exclusive roles and objectives and operated in a
largely stable environment, with little or no competition. Interest rates were administered, formal
and informal parameters governed asset allocation, and strict controls limited entry into and
expansion within the financial sector.
Beginning in 1991, the financial sector was progressively liberalized, and new private banks were
allowed to commence operations. The various financial sector reforms have transformed the
operating environment of the banks and long-term lending institutions. In particular, the
deregulation of interest rates, emergence of a liberalized domestic capital market, and entry of new
private sector banks, along with the broadening of long-term lending institutions’ product portfolios,
have progressively intensified the competition between banks and long-term lending institutions.
Today, a number of financial intermediaries, both in the public and private sectors, are part of India’s
financial sector. These include:
Commercial banks (public sector, private banks, co-operative and rural banks);
Long-term lending institutions;
Non-bank finance companies, including housing finance companies;
Other specialized financial institutions, and state-level financial institutions;
Insurance companies and mutual funds
The Indian banking industry has witnessed a period of consistent growth during the last decade, with
banks along with their customers embracing robust systems and processes. Deposits have been
growing at a CAGR of 21.2 per cent (in rupee terms) in the period 2006–13; in FY 13 total deposits
stood at US$ 1,274.3 billion.
However, industrial slowdown and sticky consumer price inflation created a hostile environment for
the country's banking sector in 2013. The consumer price inflation was in the double digit range
during the course of the year. As a result, RBI had to raise benchmark policy rates between May
2013 and January 2014. Although private banks were not much affected, most banks in the public
sector felt the heat. The cost of servicing debt went up resulting in an increase in bad loans in the
rate sensitive sectors. As a result, the profitability of nationalized players also suffered. The overall
outlook for the banking sector is stable, and most banks have a sound financial position.
Rising per capita income, growing urbanization and consistent economic growth is anticipated to
drive growth in the banking sector. Analysts anticipate that India’s banking industry will become the
fifth largest globally by 2020, and the third largest by 2025. The banking sector itself is moderately
consolidated, with the top 10 players accounting for approximately 60 per cent of the total industry.
Recently, the RBI has granted two new banking licenses, allowed private ATM networks, approved a
new payment gateway called RuPay, and is actively promoting the use of electronic transactions to
enhance competition in the industry.
3. Commercial Banks
Commercial banks in India have traditionally focused primarily on meeting the short-term financial
needs of industry, trade and agriculture. Scheduled commercial banks are banks that are listed in the
schedule to the RBI Act and may further be classified as public sector banks, private sector banks and
foreign banks. Scheduled commercial banks have a presence throughout India, with approximately
70% of bank branches located in rural or semi-urban areas of the country. A large number of these
branches belong to the public sector banks.
All Scheduled Commercial Banks
(Amount in Rs million)
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 80 81 81 87 89
No. of offices 67,562 72,906 78,215 85,262 92114
No. of employees 954,684 955,990 1,001,096 1,048,520 1,096,984
Business per employee 73.98 86.23 99.03 109.95 121.33
Profit per employee 0.55 0.60 0.70 0.78 0.83
Public Sector Banks
Public sector banks make up the largest category in the Indian banking system. They include the
State Bank of India and its seven associate banks, 19 nationalized banks and 196 regional rural
banks. The public sector banks’ large network of branches enables them to fund themselves out of
low cost deposits. The State Bank of India is the largest public sector bank in India.
Public Sector Banks
(Amount in Rs million)
Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 27 27 26 26 26
No. of offices 57,979 62,080 65,800 70,969 75,779
No. of employees 731,524 739,646 755,102 774,329 80,1659
Business per employee 73.44 86.43 101.67 114.68 127.47
Profit per employee 0.47 0.53 0.59 0.64 0.63
Regional Rural Banks
Regional rural banks were established from 1976 to 1987 by the central government, state
governments and sponsoring commercial banks jointly with a view to develop the rural economy.
Regional rural banks provide credit to small farmers, artisans, small entrepreneurs and agricultural
laborers.
Private Sector Banks
In July 1993, as part of the banking reform process and as a measure to induce competition in the
banking sector, RBI permitted entry by the private sector into the banking system. This resulted in
the introduction of nine private sector banks. These banks are collectively known as the “new”
private sector banks. There are nine new private sector banks at present. In addition, 20 private
sector banks existing prior to July 1993 are currently operating.
4. Private Sector Banks
(Amount in Rs million)
Items Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 22 22 21 20 20
No. of offices 92,88 10,516 12,097 13,970 16001
No. of employees 193,578 188,332 217,953 248,284 269941
Business per employee 67.76 77.27 82.60 86.23 94.06
Profit per employee 0.56 0.70 0.81 0.92 1.07
Foreign banks
As part of the liberalization process, RBI has permitted foreign banks to operate more freely, subject
to requirements largely similar to those imposed on domestic banks. Foreign banks operate in India
through branches of their parent banks. The primary activity of most foreign banks in India has been
in the corporate segment.
However, in recent years, some of the larger foreign banks have started to make consumer financing
a larger part of their portfolios based on the growth opportunities in this area in India. These banks
offer products such as automobile, finance, home loans, credit cards and household consumer
finance. The government has also announced that foreign banks having branch presence in India will
be permitted to acquire up to 74.0% shareholding in private sector banks in India.
Foreign Banks
(Amount in Rs million)
Items
Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 31 32 34 41 43
No. of offices 295 310 318 323 334
No. of employees 29,582 28,012 28,041 25,907 25384
Business per employee 128.27 141.14 155.55 195.62 217.33
Profit per employee 2.54 1.69 2.75 3.64 4.56
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small industry and self-employed
businessmen in urban and semi-urban areas of India. The state land development banks and the
primary land development banks provide long-term credit for agriculture. Presently, RBI is
responsible for supervision and regulation of urban co-operative societies, and the National Bank for
Agriculture and Rural Development (NABARD) for State Co-operative Banks and District Central Co-
operative Banks.
5. Long-Term Lending Institutions
The long-term lending institutions were established to provide medium-term and long-term financial
assistance to various industries for setting up new projects and for the expansion and modernization
of existing facilities. These institutions provide fund based and non-fund based assistance to industry
in the form of loans underwriting, direct subscription to shares, debentures and guarantees. The
primary long-term lending institutions include Industrial Development Bank of India (converted into
a banking company from October 2004), Industrial Finance Corporation of India Limited and
Industrial Investment Bank of India.
The long-term lending institutions were expected to play a critical role in Indian industrial growth
and accordingly, had access to concessional Government funding. However, in recent years, the
operating environment of the long-term lending institutions has changed substantially. Although the
initial role of these institutions was largely limited to providing a channel for government funding to
industry, the reform process required them to expand the scope of their business activities. Their
new activities include:
Fee-based activities like investment banking and advisory services; and
Short-term lending activity, including issuing corporate finance and working capital loans.
Non-Bank Finance Companies
There are over 13,617 non-bank finance companies in India as of June 30, 2004, mostly in the private
sector. All non-bank finance companies are required to register with RBI. The non-bank finance
companies may be categorized into entities, which take public deposits and those, which do not. The
companies, which accept public deposits, are subject to strict supervision and capital adequacy
requirements of RBI.
The scope and activities of non-bank finance companies have grown significantly over the years. The
primary activities of the non-bank finance companies are consumer credit including automobile
finance, home finance and consumer durable products finance, wholesale finance products such as
bill discounting for small and medium-sized companies, and fee-based services such as investment
banking and underwriting.
6. Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank finance companies. As a result
of the various incentives given by the Government for investing in the housing sector in recent years,
the scope of their business has grown substantially. Until recently, Housing Development Finance
Corporation Limited was the premier institution providing housing finance in
India. In recent years, several other players including banks have entered the housing finance
industry. The National Housing Bank and the Housing and Urban Development Corporation Limited
are the two government-controlled financial institutions created to improve the availability of
housing finance in India.
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various specialized financial institutions
that cater to the specific needs of different sectors. They include the National Bank for Agricultural
and Rural Development, Export Import Bank of India, Small Industries Development Bank of India,
Risk Capital and Technology Finance Corporation Limited, Tourism Finance Corporation of India
Limited, National Housing Bank, Power Finance Corporation Limited and the Infrastructure
Development Finance Corporation Limited.
State Level Financial Institutions
State financial corporations were set up to finance and promote small and medium-sized
enterprises. The state financial institutions are expected to achieve balanced regional socio-
economic growth by generating employment opportunities and widening the ownership base of
industry. At the state level, there are also state industrial development corporations, which provide
finance primarily to medium-sized and large-sized enterprises.
Changing Banking Environment
The RBI has formulated several policies and initiatives that are directly impacting the country’s
banking sector over the last few years. Some of these initiatives are:
Deregulation of savings rates: RBI has deregulated the savings bank deposit interest rates from
an earlier norm of 4 per cent per annum to aid product and price innovation. This has resulted in
an increase in interest rates, and especially on deposits of a high amount due to intense
competition. Higher interest rates imply higher costs for banks, and this has an impact on their
profitability. On the other hand, costs have risen for large scale borrowers as hikes in interest
rates are accompanied with a rise in loan rates.
Provision Coverage Ratio (PCR) of 70 per cent mandatory: The mandatory directive to maintain
a PCR of 70 per cent benefits all commercial banks. The current PCR can be used to minimize
NPAs during economic downturn.
Basel III guidelines: The RBI has planned the implementation of the Basel III norms, which would
require a capital infusion of approximately US$ 60 billion over the next five years. These norms
would require the systemically important banks to maintain a higher level of capital. The
Governor of the Reserve Bank of India in 2012, commented that Basel III would make Indian
banks stronger in the long run, thereby enabling them to invest in the real sectors of the
economy.
Relaxation of branch authorization policy for Tier II cities: Domestic banks no longer need RBI
approval to set up service offices, central processing centers and administrative offices in the
Tier II cities. Further, a similar relaxation to expand into Tier III to Tier VI cities already exists. The
policy is expected to spread the organized banking to the remote areas of the country, and aid
financial inclusion.
Relaxation of mobile payment guidelines: With the increasing popularity of mobile banking, the
RBI removed the cap of Rs. 50,000 for transactions through mobile phones. This relaxation
7. allowed banks to assess the involved risk, and place their own limits while granting customers
with mobile banking facilities.
Issue of financial guidelines for new bank licenses: The RBI is now issuing new bank licenses to
all entities that satisfy the eligibility criteria. This move is expected to encourage healthy
competition and promote financial inclusion in the banking industry.
Subsidiary route for foreign banks: The RBI is encouraging foreign players entering the Indian
banking industry to conduct business through wholly owned subsidiaries. Further, it is promoting
existing important foreign players to incorporate themselves as wholly owned subsidiaries of
foreign parent companies. This move is expected to benefit foreign players by allowing them to
expand their consumer base to semi urban areas
What’s Next for the Industry?
With a view to moving towards a dynamic banking structure, a recent RBI Discussion Paper has
suggested the following basic building blocks for the industry:
Introduction of on-tap licensing to enhance competition, and bring in new ideas and variety into
the system.
Implementing a domestic systemically important bank framework to deal with negative
externalities of large banks
Creating three or four global-sized banks to have a global presence through consolidation among
large public and private sector banks
Allowing banks for niche segments to take care of specialized banking needs through
differentiated licensing.
Encouraging investment banks and investment banking activities.
Encouraging inclusion to reach out to the excluded and under-banked regions
Enhancing the regulatory and supervisory regimes with increased intensity of supervision for the
systemically important banks.
Evolving an efficient deposit insurance and resolution mechanism to support the envisaged
tiered structure.
Converting urban co-operative banks which meet the necessary criteria into commercial banks
or local area banks/small banks.
Expanding the size and capacity of banking structure which enhances the ability of the banking
system to cope with multiple demands made on it for credit and varied services by diverse
customer base
The RBI Vision Document 2012-15 on Payment and Settlement Systems sets out a road map for
ensuring the benefits of a structured modern payment and settlement system, including innovative
products, to reach beyond the currently served target groups. The document looks at how to
promote electronic modes of payment, and reduce cash usage in the society by:
1. proactively promoting electronic payments,
2. increasing efficiency of payments through standardization and capacity building in terms of
systems and human resources and implementing giro payments (automatic bill payments)
3. facilitating migration of government payments and receipts to electronic mode,
4. promoting use of pre-paid payment instruments, Electronic Benefit Transfer (EBT), Direct
Transfer of Subsidies (DTS) and e-commerce,
5. ensuring compliance with new international standards.
8. IT and Banking
Indian banks are continuing to transform their businesses by deploying technology-intensive
solutions to increase revenue, enhance customer experience, optimize cost structure and manage
enterprise risk. While these are fairly common themes among banks, there is a wide variation in the
technology agendas and implementation capability across different players of the banking industry.
The implementation of core banking platform has automated basic processes, enabled the
movement to a single customer view and allowed for optimization of work across branch and hub
network. Core banking platform have also given banks a strong launch pad to offer digital channel
capabilities — almost all banks today are feverishly building out their online and mobile channel
offerings. Several banks have deployed best in class online and mobile banking features including
personalization, bank wide customer relationship views and cross channel integration. In September,
2013, ICICI Bank launched its Facebook banking service, Pockets. The service enables customers to
transfer funds and pay bills from within the website.
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.
ATM deployments and technology-enabled business correspondent (BC) network have allowed
banks to service large parts of the Indian hinterland. Responding to Basel norms and a more
aggressive supervisory regime, banks have undertaken risk and compliance management system
implementations. Many banks have responded by improving risk management processes and
upgrading their systems and infrastructure. While these initiatives are fairly standardized across
banks as far as the approach is concerned, several banks are still at a very nascent stage from a
maturity perspective. The integration of risk management and enterprise-level applications is still at
preliminary stages. Just a handful of leading banks have implemented enterprise risk management
systems and business intelligence capabilities to assist in risk-based strategic decision making.
9. Information management and analytics are in focus as banks have built out large data warehouses in
an attempt to leverage their data assets to better understand, sell and serve their customers. While
private sector banks embarked on single view of the customer and customer lifecycle management
frameworks in 2011–12, the initiatives of public sector banks were focused on enterprise data
warehousing, though some large public banks have started taking steps toward strengthening
business intelligence (BI) through single view of the customer.
The impact of these BI initiatives is still a couple of years away, according to Ernst & Young. Banks
will have to gain an understanding of customers and put in place metrics such as customer
satisfaction and service quality to drive effectiveness of customer management initiatives. The
investments made in BI have also been primarily around the consumer/retail segment of customers.
Banks are yet to leverage investments in these technologies for corporate customers and functions
such as finance, treasury, operations, risk management, compliance, audit and human resources
The BFSI sector is forecast to spend Rs 477 billion on IT products and services in 2014, an increase of
12.7 percent over the previous year according to Gartner. This spending includes internal IT services
(including personnel), third-party IT services, software, data center technologies, devices and
telecom services.
Spending on internal services (that includes IT personnel) is projected to grow the fastest, largely
due to the expansion strategies of banks across the country, especially in rural areas, which require
more personnel on the field. “Banks focus on expanding their branch network. There will be about
2,000 new branches in India by the end of this year,” says Vittorio D’Orazio, research director at
Gartner.
Software is expected to be the second-fastest growing segment, with 19.2 percent growth in 2014.
In the software segment, vertical specific software is the fastest sub-segment due to core banking
system replacements and other back-office consolidation that will steer banks from internally
developed software to external packages. “The modernization of the back-office, and increased
challenges from new more demanding customers, as well as the need to be compliant with
international regulations will be the main trends,” adds Vittorio.
For additional resources, insight and information on the banking industry in India:
1. www.ibef.org/industry/banking-india.aspx
2. www.ibef.org/download/Banking-Sector-04jan.pdf
3. http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Trend%20and%20Progress%20
of%20Banking%20in%20India
4. http://www.gjeis.org/index.php/gjeis/article/view/33546
5. twitdoc.com/upload/ceciho758/indiabankingoutlook.pdf
6. http://www.accenture.com/us-en/outlook/Pages/outlook-journal-2014-digital-disruptors-
how-banking-got-agile.aspx
7. http://www.gartner.com/newsroom/id/2671716
8. ijergs.org/files/documents/The-Role-of-Retail15.pdf
9. http://www.ey.com/Publication/vwLUAssets/EY-Banking-on-Technology/$File/EY-Banking-
on-Technology.pdf
