The Indian banking system is an
essential, unreplaceable aspect of the Indian economy. With the potential to
become the fifth largest banking industry in the world by 2020 and third
largest by 2025 according to KPMG-CII report, India’s banking and financial
sector is expanding rapidly. In FY16, value of public sector bank assets stood
at USD1.4 trillion.
The total Indian banking sector
assets reached USD1.96 trillion in FY15 from USD1.3 trillion in FY10, with over
70 per cent accounted for by the public sector. Total Indian asset market size
is expected to reach USD1.97 trillion in FY17-18.
One major contributing factor
for this is the Banking Laws (Amendment) Bill that was passed in 2012 that
allows the Reserve Bank of India (RBI) to make final guidelines on issuing new
Moreover, the role of the Indian
Government in expanding the banking sector is noteworthy. It is expected that
the new guidelines issued by RBI will curb practices of impish borrowers and
streamline the loan system in the country.
In the coming time, India could
see a rise in the number of banks in the country, a shift in the style of
operation, which could also evolve by incorporating modern technology in the
Brief History of Banking Sector
The banking sector in India has
grown and developed significantly, from a closed, British controlled market to
the segment that we see today.
In 1921, the banking sector was a closed market,
with the State-owned Imperial Bank of India being the only bank existing.
In 1935, the RBI was established as the central
bank of country, with the Quasi central banking role of Imperial Bank coming to
From 1936 – 1955, the Imperial Bank expanded its
network to 480 branches. In order to increase penetration in rural areas,
Imperial Bank was converted into State Bank of India.
From 1956 -2000, the nationalisation of 14 commercial
banks 1969, and another 6 in 1980 took place. Private players started emerging,
such as ICICI, that intensified the competition. This led to technology
upgradation in all PSU banks.
From 2000, till present, there have been
tremendous changes. As of Feb 2017, India has the largest foreign exchange
reserves (approximately USD 363.14 billion). In addition, the RBI has allowed
foreign investment of up to 10% in the Indian market by foreign banks, which
opens up opportunities for further development.
Executive Summary for 2016-17
Asset Growth – In FY16, value of
public sector bank assets stood at USD1.4 trillion. Total Indian
banking sector assets reached USD1.96 trillion in FY15 from USD1.3 trillion in
FY10, with over 70 per cent accounted for by the public sector. Total Indian
asset market size is expected to reach USD1.97 trillion in FY17
Growing Lending and Deposits – Total
lending and deposits have increased at a CAGR of 6 per cent during FY11-15 and
12.9 per cent, respectively, during FY06-15 and are further poised for growth,
backed by demand for housing and personal finance
Higher ATM Penetration – By
August 2016, total number of ATMs in India increased to 202,801 and is further
expected to double over next few years, thereby leading to increase in the
number of ATMs per million people in India from 105 in 2012, to about 300 by
Increasing Rural Penetration
– As of March 2016, 56 regional rural
banks are functioning in the country. Under 1 phase of FIP (2010-13), 74,000
villages, with population exceeding 2,000 people, were covered with 2,493
RBI has allowed, regional rural
banks with net worth of at least USD15.28 million to launch internet banking
facilities. Airtel payments bank opens over 1 lac accounts in UP, of which 60
per cent have been opened in rural areas.
Structure of Banking Sector
As can be seen, Banks and
Financial Institutions are the 2 kinds of entities in the Indian Market, with
financial institutions encompassing All India Financial Institutions (i.e.
nationally present institutions), State Level Institutions, and Other
Institutions, at a regional level.
Banks could include structured
commercial banks, referred to as SCBs, i.e. Scheduled Commercial Banks, seen at
a national and State Level, or Cooperative Credit Institutions, which are
usually at a regional level (with the exception of few key players like Amul
Growth in the Banking Sector:
The growth in the Indian Banking
Industry has several aspects to it, i.e. Growth in deposits, Growth in Assets
Base, as well as Money Supply, Interest Income and Other Income. In addition,
the NPA scenario too has been improving, although it has a long way to go. This
will be further aided by the Basel III norms to be implemented over the coming
A. Growth in Deposits
During FY06–17, deposits grew at
a CAGR of 12.03 per cent and reached 1.54 trillion by FY17. Strong growth in
savings amid rising disposable income levels are the major factors influencing
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,
USD6,971.68 million were deposited, while 255.1 million accounts were opened
B. Growth in Banking Sector Assets
Total banking sector assets have
increased at a CAGR of 11.71 per cent to USD1.96 billion during
Assets of public sector banks,
which account for more than 70 per cent of the total banking assets, grew at a
CAGR of 12 per cent. Private sector expanded at an CAGR of 13 per cent, while
foreign banks posted a growth of 9 per cent.
Total assets of Public Sector
Banks amounted to USD 1384.31 billion in FY16.
Corporate demand for bank loans
have grown due to continued infrastructure investments, and due to other policy
decisions such as reducing oil subsidies, issuing of telecom spectrum licenses
and the proposed abolition of penalty on loan prepayment
C. Growth in Money Supply
During FY06–17, total money supply
in the country increased at a CAGR of 9.92 per cent, reaching to USD1.8
trillion by the June end 2016.
Narrow money supply (M1) grew at
a CAGR of 7.08 per cent while its components currency with public and deposit
money of the public, grew at a CAGR of 10.1 per cent and 5.1 per cent,
respectively, during FY06–16, and stood at USD397.37 billion by the end of June
During FY06-16, broad money
supply (M2) grew at a CAGR of 12.2 per cent reaching to USD415.7 billion in
Money supply (M3) grew at a CAGR
of 15.7 per cent, during FY06-16, and stood at USD1.78 trillion by the end of
June 2016. During FY06–16, highest
average growth in time deposits was witnessed at a rate of 12.41 per cent, with
the value of time deposits reaching to USD1.38 trillion in June 2016.
D. Growth in Interest Income and Other Income
Public sector banks account for
over 72.3 per cent of interest income in the sector in FY15. They lead the pack
in interest income growth with a CAGR of 11.5 per cent over FY09-15.
Overall, the interest income for
the sector has grown at 11 per cent CAGR during FY09-15. Interest income of
Public Banks was witnessed to be USD105.44 billion in FY16.
Public sector banks account for
about 57.65 per cent of income other than from interest (‘other income’). ‘Other
income’ for public sector banks has risen at a CAGR of 5.7 per cent during
Overall, ‘Other income’ for the
sector has risen at 7.53 per cent CAGR during FY09-15.
Other income for Public banks
increased from USD12.39 billion in FY15 to USD12.69 billion in FY16.
E. Non Performing Assets
Despite the global financial
crisis, net Non-Performing Assets (NPA) of Indian banking sector have declined
over the past few years. Gross NPA to Gross Advances in public sector banks
grew from 4.46 per cent in FY14 to 5.09 per cent in FY15.
Private sector banks maintained
lowest gross non-performing assets to gross advances at 2.16 per cent in FY15.
Net NPA to Net advances by
public sector banks increased from 2.92 percent in FY15 to 5.75 percent in
F. Basel III Norms
An NPA is defined as a loan or
an advance where;
Interest and/ or instalment of principal remain
overdue for a period of more than 90 days in respect of a term loan; ?
The account remains ‘out of order’ – in respect
of an overdraft/cash credit (OD/CC)
The bill remains overdue for more than 90 days
in case of bills purchased and discounted. ?
An existing NPA account is upgraded to standard
category only on collection of all overdues. ?
In accordance with the
guidelines of RBI, banks must adopt a standardised approach for credit risk,
basic indicator approach for operational risk and standardised duration
approach for market risk for computing capital adequacy.
Basel III Capital regulations
are applicable to Banks in India from 1st April, 2013 and will be fully phased
in by 31st March, 2018. Detailed guidelines on Basel III Capital Regulations
and Guidelines on Composition of Capital Disclosure Requirements are issued by
RBI and consolidated under the Master Circular – Basel III Capital Regulations
Use of Technology in Banking
In the last few years, technology is being increasingly
used by Indian banks
Banks are using technology at various levels
such as, back-office processing, convergence of delivery channels, IT-enabled
business process reengineering as well as communication with customers
Indian banks currently devote around 15% of
total spending on technology
Spending on technology is expected to increase
at an annual rate of 14.2 per cent
Banks in the country are set to benefit further
as they move ahead in implementing additional technological advancements
Indian banking and securities companies will
spend USD8.89 billion on IT products & services in 2015, an increase of
nearly 15.2 per cent over 2014
Technology has allowed
banks to increase their scale rapidly and manage increased business and
transactions volume with lesser man power and reduced costs (at the operational
level). Digital analytics is providing deeper insights into customer needs and
enabling banks to offer highly targeted products and services; this is likely
to pick up pace in the coming years. New channel-integration technologies are
enabling a more seamless end-to-end experience for banking customers.
Customer Relationship Management
(CRM) and data warehousing will drive the next wave of technology in banks. Indian
banks are rapidly focusing on SMAC (Social, Mobile, Analytics and Cloud) techniques
to reach new customers.
Real Time Gross Settlement
(RTGS) and National Electronic Funds Transfer (NEFT) are being implemented by
Indian banks for fund transaction. Securities Exchange Board of India (SEBI)
has included NEFT and RTGS payment system to the existing list of methods that
a company can use for payment of dividend or other cash benefits to their
shareholders and investors.
Other Notable Trends in Banking
Improved Risk Management Practices
Indian banks are increasingly focusing on
adopting integrated approach to risk management
Banks have already embraced the international
banking supervision accord of Basel II.; interestingly, according to RBI,
majority of the banks already meet capital requirements of Basel III, which has
a deadline of 31 March 2019
Most of the banks have put in place the
framework for asset-liability match, credit and derivatives risk management
Diversification of Revenue Stream
Banks are laying emphasis on diversifying the
source of revenue stream to protect themselves from interest rate cycle and its
impact on interest income
Focusing on increasing fee and fund based income
by launching plethora of new asset management, wealth management and treasury
Consolidation in the Industry
With entry of foreign banks competition in the
Indian banking sector has intensified
Banks are increasingly looking at consolidation
to derive greater benefits such as enhanced synergy, cost take-outs from
economies of scale, organisational efficiency, and diversification of risks
RBI Deputy Governor, said that since
demonetization the Central Bank has collected over USD 185.81 billion in
demonetized notes from various bank branches
The effects of demonetization are also visible
in the fact that bank credit plunged by 0.8 per cent from November 8 to
November 25, as USD 9.85 billion were paid by defaulters. As per RBI, a total
of USD 125.53 billion was deposited in banks till November 27, 2016
Know Your Customer
RBI mandated the Know Your Customer (KYC)
Standards, wherein all banks are required to put in place a comprehensive
policy framework in order to avoid money laundering activities
The KYC policy is now mandatory for opening an
account or making any investment such as mutual funds.
Industry Value Chain
Porter Five Forces Analysis
A. Competitive Rivalry
At present public sector banks, led by SBI &
associates, control 77.3 per cent of the banking sector
Rivalry is much aggressive in metropolitan areas
Issuing of new licenses will increase
competitive rivalry in rural areas over medium to long term
B. Threat of New Entrants
High entry barriers, as RBI and Central Bank
control the issuance of licenses.
New licenses may reduce market-share of public
C. Substitute Products
For deposit substitutes include investment in
gold, real estate, equity etc.
For advances substitutes include, bonds, IPO/FPO,
D. Bargaining Power of Suppliers
Largely, customers prefer banks for its
Gradually, customers have hedged inflation by
investing in other riskier avenues.
E. Bargaining Power of Customers
Nascent debt market and volatile stock market,
are less opted.
Banks are an indispensable source of fund in
Banking Industry Marketing Mix
The first task before the public
sector commercial Banks is to formulate that Bank marketing mix which suits the
national socio-economic requirements.
To be more specific, the
peripheral services need frequent innovations, since this would be helpful in
excelling competition. The product portfolio designing is found significant to
maintain the commercial viability of the public sector banks. The banks
professionals need to assign due weightage to their physical properties. They
are supposed to look smart active and attractive.
Price is a critical and
important factor of bank marketing mix due numerous players in the industry.
Most consumers will only be prepared to invest their money in search of
extraordinary or higher returns. They are ready to pay additional value if
there is a perception of extra product value. This value may be improved
performance, function, services, reliability, promptness for problem solving
and of course, higher rate of return
Bank Marketing is actually is
the marketing of reliability and faith of the people. It is the responsibility
of the banking industry to take people in favour through Word of mouth
publicity, reliability showing through long years of establishment and other
The choice of where and when to
make a product available will have significant impact on the customers.
Customers often need to avail banking services fast for this they require the
bank braches near to their official area or the place of easy access.
Challenges faced by Banking Industry
The banking industry in India is
undergoing a major change due to the advancement in Indian economy and continuous
deregulation. Some challenges it faces are:
This continuous deregulation has
given rise to extreme competition with greater autonomy, operational
flexibility, and decontrolled interest rate and liberalized norms and policies
for foreign exchange in banking market. The deregulation of the industry
coupled with decontrol in the interest rates has led to entry of a number of
players in the banking industry. Thereby reduced corporate credit off which has
resulted in large number of competitors battling for the same pie.
As a result, the market place
has been redefined with new rules of the game. Banks are transforming to
universal banking, adding new channels with lucrative pricing and freebees to
offer. New channels squeezed spreads, demanding customers better service,
marketing skills heightened competition, defined new rules of the game pressure
on efficiency. Need for new orientation diffused customer loyalty. Bank has led
to a series of innovative product offerings catering to various customer
segments, specifically retail credit.
Excellent efficiencies are
required at banker’s end to establish a balance between the commercial and
social considerations Bank need to access low cost funds and simultaneously
improve the efficiency and efficacy. Owing to cut- throat competition in the
industry, banks are facing pricing pressure, have to give thrust on retail
Attractive offers by MNC and
other nationalized banks, customers have become more demanding and the
loyalties are diffused. Value added offerings bound customers to change their
preferences and perspective. These are multiple
choices; the wallet share is reduced
per bank with demand on flexibility and customization. Given the relatively low
switching costs; customer retention calls for customized service and hassle
free, flawless service delivery.
These changes are creating
challenges, as employees are made to adapt to changing conditions. The
employees are resisting to change and the seller market mind-set is yet to be
changed. These problems coupled with fear of uncertainty and control
orientation. Moreover, banking industry is accepting the latest technology but
utilization is far below from satisfactory level.
The competency gap needs to be
addressed simultaneously otherwise there will be missed opportunities. Placing
the right skill at the right place will determine success. The focus of people
will be doing work but not providing solutions, on escalating problems rather
than solving them and on disposing customers instead of using the opportunity
to cross sell. Strategic options to cope with the challenges:
Dominant players in the industry
have embarked on a series of strategic and tactical initiatives to sustain
leadership. The major initiatives incorporate:
Focus on ensuring reliable service delivery
through Investing on and implementing right technology.
Leveraging the branch networks and sales
structure to mobilize low cost current and savings deposits.
Making aggressive forays in the retail advances
segments of home and personal loans.
Implementing initiatives involving people,
process and technology to reduce the fixed costs and the cost per transaction.
Focusing on fee based income to compensate foe
Innovating products to capture customer ‘mind
share’ to begin with and later the wallet share.
Improving the asset quality as Basel II norms.
The banking environment of today
is rapidly changing and the rules of yesterday no longer applicable. The
corporate and the legal barriers that separate the various banking, investment
and insurance sectors are less well defined and the cross-over are increasing.
As a consequence the marketing function is also changing to better support the
bank in this dynamic market environment. The key marketing challenge today is
to support and advice on the focus positioning and marketing resources needed
to deliver performance on the banking products and services. Marketing, as an
investment advisor, is about defining 4Ps and implementing key strategic
initiatives to Market segments, increasingly redefined, relevant micro-segments
to survive and flourish in the highly competitive market.