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Banking Sector Analysis Report 

[Key Points | Financial Year '18 | Prospects | Sector Do's and dont's]

  • The Indian banking system consists of 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions.
  • As of Q1 FY19, total credit extended by commercial banks surged to Rs 86,976.2 billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3 billion (US$ 1,716.4 billion).
  • Indian banks are increasingly focusing on adopting integrated approach to risk management. Banks have already embraced the international banking supervision accord of Basel II, and majority of the banks already meet capital requirements of Basel III, which has a deadline of 31 March 2019.
  • Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an extensive database of credit information which is accessible to all stakeholders. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been passed and is expected to strengthen the banking sector.
  • Credit off-take has been surging ahead over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism & easier access to credit.
  • During FY07-18, credit off-take grew at a CAGR of 11%. As of Q1 FY19, total credit extended surged to Rs 86,976 billion (US$ 1,297.4 billion).
  • Demand has grown for both corporate & retail loans; particularly the services, real estate, consumer durables & agriculture allied sectors have led the growth in credit.
  • Total banking sector assets (including public and private sector banks) have increased at a CAGR of 6% to US$ 2.2 trillion during FY13–18. FY13-18 saw growth in assets of banks across sectors.

How to Research the Banking Sector (Key Points)

  • Supply
  • Liquidity is controlled by the Reserve Bank of India (RBI).
  • Demand
  • Rising incomes are expected to enhance the need for banking services in rural areas and therefore drive the growth of the sector.
  • Barriers to entry
  • Licensing requirement, investment in technology and branch network, capital and regulatory requirements.
  • Bargaining power of suppliers
  • Largely, customers prefer banks for its reliability. Gradually, customers have hedged inflation by investing in other riskier avenues.
  • Bargaining power of customers
  • For good creditworthy borrowers bargaining power is high due to the availability of large number of banks.
  • Competition
  • High - There are public sector banks, private sector and foreign banks along with non-banking finance companies competing in similar business segments. Additionally, the RBI has approved for small finance banks and payment banks which will further increase competition in the industry.

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Financial Year '18

  • Public sector banks account for over 68.3% of interest income in the sector in FY18.
  • They lead the pack in interest income growth with a CAGR of 6.6% over FY09-18. Overall, the interest income for the sector (including public and private sector banks) has grown at 6.9% CAGR during FY09-18.
  • Total lending has increased at a CAGR of 10.9% during FY07-18 and total deposits has increased at a CAGR of 11.6%, during FY07-18 & are further poised for growth, backed by demand for housing and personal finance.
  • India's retail credit market is the fourth largest in the emerging countries. It increased to US$ 281 billion on December 2017 (FY18) from US$ 181 billion on December 2014.
  • The digital payments system in India has evolved the most among 25 countries, including UK, China and Japan, with the IMPS being the only system at level 5 in the Faster Payments Innovation Index (FPII). India stepped up to 28th position on the government's adoption of e-payments ranking in 2018.
  • Digital influence in the Indian banking sector has been growing faster due to the rising digital footprint. India’s digital lending stood at US$ 75 billion in FY18.

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Prospects

  • Favorable demographics and rising income levels. India ranks among the top six economies with a GDP of US$ 2,597 in 2017 and economy is forecasted to grow at 7.3% in 2018. The sector will benefit from structural economic stability and continued credibility of Monetary Policy.
  • Increase in working population & growing disposable incomes will raise demand for banking & related services. Housing & personal finance are expected to remain key demand drivers. Rural banking is expected to witness growth in the future.
  • Rising fee incomes improving the revenue mix of banks. High net interest margins, along with low NPA levels, ensure healthy business fundamentals.
  • Wide policy support in the form of private sector participation & liquidity infusion. Healthy regulatory oversight & credible Monetary Policy by the Reserve Bank of India (RBI) have lent strength & stability to the country’s banking sector.
  • As of August 2018, total number of ATMs in India increased to 213,004 and is further expected to increase to 407,000 ATMs in 2021.
  • 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, organizational efficiency & diversification of risks.

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Related Links for Banking Sector
Quarterly Results | Sector Quote | Over The Years

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