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Industry Snapshot - Banking Industry

  • Jun 14th, 2017
Banking Industry

 The banking sector is a crucial part of any economy today. The transactions of lending and borrowing have started centuries before but today's banking system is much broader than the earlier systems. It includes providing additional services alongside borrowing and lending. It includes financial services like priority banking, payment of various bills and expenses, cheque services, foreign currency exchange, overdraft creation, consultancy, credit cards and debit cards, ATMs, online banking, mobile banking etc.

As per Reserve Bank of India, the Indian banking sector is very well regulated and centralised and is far superior to any other country. The credit, market and liquidity risk in the industry suggests that the banks in the country are generally resilient and that was proved when they withstood the global financial crisis of 2008. The banking industry in the recent years is witnessing innovative banking models like payment banks and small finance banks. The Government initiatives to prioritise the JAM Trinity - Jan Dhan, Aadhar and mobile - holds the key to one of the biggest reforms aimed at transforming the Banking sector. Large-scale enrolments under the Jan Dhan Yojana and Pradhan Mantri Suraksha Bima Yojana have been an enabler. These measures would potentially go a long way in restructuring the domestic banking industry.

Public-sector banks control nearly 80 percent of the market and 20% is controlled by the private players. Another issue which has arisen in latest time is the risk management of the banks due to the credit crisis. Indian banks have adopted the Basel II and the deadline to meet Basel III capital requirement is 31st March 2019.

Banking Industry


1. CLASSIFICATION OF BANKS

CLASSIFICATION OF BANKS

1.a. Commercial banks:

Commercial Banks refer to those banks which cater to the needs of Large or medium sized businesses. It is regulated under Banking Regulation Act, 1949. They provide services like accepting deposits and loan services .The most important feature of commercial banks is the “credit creation”. The loan is directly transferred to the business mans’ or organisations’ account as deposit from which the people can withdraw the amount thus creating a credit. As per RBI Guidelines, The minimum amount of cash deposit is Rs. 1 lacs and then in multiple of Rs. 1 lac each time the deposit is made.

This can be further divided into Public Sector banks and Private sector banks.

 1.a.1 Public Sector Banks: The Public sector banks holds share of 72.9% of the total banking Industry. These banks are those banks in which the government has a more than 50% shareholding. The minimum paid up capital requirement is Rs. 500 crore. There are 27 Public banks comprising of SBI & Associates (6 Banks), 19 other nationalised banks and 1 financial Intermediary. Their customer base is very large and serves to millions of people.

For example: Bank of Baroda, Allahabad Bank, Bank of Maharashtra etc.

The Public Sector Banks comprises of SBI & Associates and other Nationalised Banks.

SBI & Associates: With effect from 1st April 2017, 5 associate banks and Bharatiya Mahila bank became part of SBI making it a member of top 50 banks in the world. The bank includes State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Mysore (SBM), State Bank of Patiala (SBP) and State Bank of Travancore (SBT).

The details of the new entity are as follows:-

SBI & Associates

Other Nationalised Banks:

Nationalised banks are those banks in which the government has a control over the assets and the bank by having a majority holding or wholly owning it. There are 19 Indian Nationalised Banks in India. When the government buys a majority share of the private bank then that bank becomes a nationalised bank.

E.g. : - Allahabad Bank, Andhra Bank etc.

1.a.2 Private Sector Banks: The private sector banks holds 19.7% of the total Banking Industry. These banks have both private owners as well as government as shareholders with a majority of private owners. The minimum paid up capital of any private sector banks is Rs. 200 crore. There are 26 Indian private sector banks and 43 foreign Private Banks in India.

For example: Axis Bank, Induslnd Bank, Kotak Mahindra Bank, HDFC bank etc.

Private sector includes both Indian and Foreign Banks.

1.b.REGIONAL RURAL BANKS

Regional Rural Banks or RRBs are those banks which runs under the guidelines of Regional Rural Banks Act 1956. It functions in a limited area covering 1 or 2 districts. It is regulated by the National Bank for Agriculture and Rural Development (NABARD). These banks were developed due to change in culture and people across districts and to be organisation which can reuse the internal finances among themselves. In this the stakeholders comprises of the Central Government, State Government and the Sponsor Bank in the ratio of 50:15:35 respectively. Currently there are 56 Regional Rural banks functioning in India.

1.c.Co-Operatives Bank

Cooperative banks are banks which are managed by one or more persons who form societies, club like formation. These are larger than the credit unions. The Cooperatives are regulated by Banking Regulation Act 1949. It has about 67% penetration in villages and fund 46% of the total rural credit.

The Cooperative Banks comprises of two types-

  • Urban Cooperative
  • Rural Cooperative

Also, there exist Central Cooperatives, State Cooperatives and Primary Credit Agencies.

Co-Operatives Bank


2.INDIAS’ RANKING IN THE WORLD

The International Monetary Fund (IMF) expects global growth to revive to 3.4% in 2017. Anemic global growth coupled with macro events like the Brexit, US elections resulted in uncertainties to prevail. The banking sector, being the barometer of the economy, is reflective of the weak macro-economic variables. The Indian banking system continued to battle falling asset quality issues and the need to maintain capital adequacy in the light of piling bad loans. Demonetisation gave a big jolt to the Indian economy. The one move effectively reseted the economy. The banking sector was the beneficiary with access to huge deposits. The banking sector witnessed a balance sheet growth of 7.7 percent in 2015-16 compared to 9.7 percent a year earlier.

Two Indian banks, HDFC Bank ($39 billion) and State Bank of India (SBI) ($38 billion), now figure in a list of the top 50 global banks in terms of market capitalisation.


3.INDUSTRY vs. GDP

According to a joint report prepared by KPMG-Confederation of Indian Industry (CII), Indian banking sector is poised to become fifth largest by 2020. The report also states that bank credit is expected to grow at a CAGR of 17 percent in coming years.   

Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 11-13 per cent in FY17 from less than 10 percent in the second half of CY14.          

The insurance sector is expected to touch US$ 350-400 billion by 2020. India’s life insurance sector will continue to remain world’s largest life insurance sector in coming decades.

As on September 2016, the outstanding credit to NBFCs stood at US$ 55.27 billion, growing at 25 per cent on year-on-year basis.

INDUSTRY vs. GDP


4.Indian Banking system

Indian Banking system

 


5.Key points in Banking Industry

Key points in Banking Industry

 


6.TOP 10 INDIAN BANKS AND THEIR DETAILS

TOP 10 INDIAN BANKS AND THEIR DETAILS


7.TOP 10 GLOBAL BANKS AND THEIR DETAILS

TOP 10 GLOBAL BANKS AND THEIR DETAILS

 


8.FACTORS AFFECTING THE INDUSTRY

  •  Different Bank Rates
  • Economic Policies
  • Exchange rates
  • Interest rates
  • Rules and Regulations

9.BANKS AND BAD LOANS

The Indian banks have accumulation of large bad debts in the emerging markets. Bad debts puts a bad image on the functioning of the banks. However high the deposits or loans are, if the bad debts are of a substantial percentage of these then the functioning of the establishment is at question. The bad loans have risen up from Rs 261,843cr by 135 per cent in last two years which can further increase to 2.6 trillion($40.58 billion)by 2019.

By September 2016, about 16.6% of loans to corporates—or about 8.4% of GDP—had been declared non-performing, according to Credit Suisse. As per RBI’s Financial Stability Report (FSR) the PSBs’ GNPA ratio will increase to 12.9% in 2018 from 12.5% in March 2017.

There has been fall out of Private sector investment due to which the banks are stressed and there is a reduction in the private sector Investment which is likely to increase to 15% of total loans by March 2018.

To overcome these, some kind of incentives in terms of recognition date of March 31, 2017 of NPA (non-performing assets) are required from RBI which will encourage banks for faster resolutions. Other way can be creation of Bad Banks which pick up bad assets, turnaround them and make them profitable. Bad banks will have investors who see the turnaround of these assets.


10.NEW INITIATIVES BY THE GOVERNMENT

The Government of India has taken wide and broad steps to improve the lending operations and liquidity of banks which will lead to growth in economy. These steps have led to increase in the number of bank accounts, deposits, transactions, digital adoption, increase in digital channels, protection for consumers etc. The electronic payments have increased.

Steps have also been taken for agricultural lending, lending to small farmers, micro enterprises etc. The step to include tier-1 or core capital of banks will shore up the capital of state run banks and private banks to Rs.35000 crore and Rs. 5000 crore respectively. Interest subvention has been given to marginalised farmers. A special fund will take over assets which are viable but don’t have additional fresh equity from promoters coming in to complete the project. Conversion of loans into state Government bonds will help banks to improve their asset quality. To promote Micro and Small Enterprises easy finances are made available. Micro Units Development & Refinance Agency (MUDRA) Ltd. was also established to refinance all Micro-finance Institutions (MFIs).

NEW INITIATIVES BY THE GOVERNMENT


11.BANKS AND DEMONETISATION

November 2016 had led to thDemonetisation, which initiated the withdrawal of two most used value currency in India on 8increase in deposits in the banks and has bought a pleasant wave for their growth. According to an IndiaSpend analysis of Reserve Bank of India (RBI) data the Rising non-performing assets (NPAs) and sluggish economic growth marked a 60 per cent decline in corporate borrowing over the last six years.

The Unified Payments Interface (UPI) and the Bharat Interface for Money (BHIM). Both use the Immediate Payment Service (IMPS) network of the National Payments Corporation of India. IMPS has seen a 160% jump with 67 million transactions in March against 26 million a year earlier. Debit card transactions rose to more than 1billion in January from 817 million last year.

Benefits of Demonetisation

BANKS AND DEMONETISATION


12.BANKS AND GST

After the implementation of GST the Transactions fees of financial services are likely to become expensive as the government has put the financial services under the 18% tax bracket, which means that Individuals will have to pay Rs 3 more for every Rs 100 paid for banking transactions.

Big Financial organisations will absorb this tax due to huge number of transactions but the general public will suffer. Even the insurance premiums will go up depending upon the risk and how much it is classifies.

BANKS AND GST

Benefits to Banking industry:

Bank can set off their GST liabilities against credit received on purchase of goods. Banks will be able to take credit of GST paid on procurement of goods as well. Input tax credit will be allowed which would be used by a bank for making outward supply in the course of GST Will help to reduce tax evasion. Under GST doing business will be easy.


13.CHALLENGES


14.OPPORTUNITIES

  • We all know that the Indian economy is witnessing transformation. Be it the new currency, technology advancement, public initiatives, growth in FDI, improvement of India business index rank etc. The initiatives taken in the area of banking have improved the confidence of consumers and also build up positive business sentiments. It will help in the economic growth of the country. Increase in the spending on sectors like Infrastructure, Increase in the speed and number of projects, Growth in the working section of the people, will also add up to the growth if the country. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth.
  • General public is increasing the use of digital platforms and using Cards in place of cash suggest that mobile and internet banking will be the future of banking. Greater convenience and experience of customers is likely to attract the customers to these platforms and build a competitive edge. This will grow the banking Industry in the near future.
  • Many banks, including HDFC, ICICI and AXIS are bringing in the option to launch contact-less credit and debit cards in the market shortly. The cards will use near field communication (NFC) mechanism, which will allow customers to transact without having to insert or swipe.
  • Data Analytics Technologies - Data and analytics provides a few but very big opportunities for banks. Data and Analytics covers every single decision which drives revenue, control costs, mitigate risk etc. Some banks will seize that opportunity and will be able to truly differentiate themselves using data and analytics.ICICI Bank Ltd and HDFC Bank are looking at Big Data analytics as a tool to generate more revenue, as they get valuable insights on customers and markets.

OPPORTUNITIES


15.Different Types of Bank Rates

Different Types of Bank Rates

REPO RATE: - Repo Rate is the rate at which the banks borrow money from the RBI. When the rate is high it becomes costly for banks to borrow the money from RBI and vice-versa.

The current Repo Rate is 6.25%.

REVERSE REPO RATE: - The rate at which RBI borrows money from the commercial banks it is known as Reverse Repo Rate. This is generally done to reduce the supply of money in the market to curb inflation. When the rate is more it becomes costly for the customer to take loans from the bank and vice versa. The current reverse repo rate is 6%.

BANK RATE: - The rate at which the central bank lends funds to commercial banks. This rate is for a long period of time, unlike the repo rate which is for short term. Higher the bank rate, higher will be the lending rate and more will be the interest rate on customer borrowing. Banks make a profit by borrowing at a lower rate and lending at a higher rate. The current bank rate is 6.5%.

CALL RATE: - When a bank borrows from another bank for the daily requirement on a short term basis (14 days), the interest charged by the lending bank is called call rate. But, it is not very popular.

 CRR (Cash Reserve Ratio): - The banks are required to keep a certain percentage of deposits in the form of cash (also known as aka currency chest). This cash is kept with RBI and the banks are not allowed to use the money for lending or for carrying out operations.

This percentage of deposit is known as cash reserve ratio. Higher the CRR, lower is the banks’ ability to lend and vice versa. The current CRR is 4%.

SLR (Statutory Liquidity Ratio): - The banks are required to keep a percentage of deposits in the form of liquid assets or invest in government securities like Central or State securities. The current rate is 20.5%.


16.Relevant Questions

  • With Majority of inactive accounts under the Jan Dhan Yojana Scheme ,will it go on for long?
  • What will be the impact on banks as the stress on automation is increasing?
  • What can be 3-4 things which is Banking Systems should adopt to overcome the problem of NPAs?
  • How banks are benifitted from Demonetization?
  • What are the innovation that made its way into the Banking System of India?
  • What can Private sector banks learn from Public Sector Banks?
  • What is the current CRR,SLR, Repo rate and what are its implications?
  • What is the performance and potential of International Banks in India?
  • Footprints of Indian Banks internationally.

17.Latest News


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