MANGALAYATAN UNIVERSITYRECENT DEVELOPMENT IN

BANKING SECTORPRESENTED BY: PINKEY RANA

FOREWORDThe total assets of Indian banks, which are

regulated by the Reserve Bank of India (RBI) and the Ministry of Finance (MOF)1, were pegged at Rs 82,99,220 crore (US$ 1564.8 billion) during FY 2012.

a percentage of the GDP having grown substantially over the last decade.

CURRENT STATUS AND DEVELOPMENT OF INDIAN BANKING SECTORThe revenue of Indian banks grew four-fold

from US$ 11.8 billion to US$ 46.9 billion, whereas the profit after tax rose nearly nine-fold from US$ 1.4 billion to US$ 12 billion over 2001-10.

Value of rupee- 1 dollar=61.91 Rs

CONTINUE.......This growth was driven primarily by two

factors. First, the influx of Foreign Direct Investment (FDI) of up to 74 % with certain restrictions4. Second, the conservative policies of the Reserve Bank of India (RBI), which have shielded Indian banks from recession and global economic turmoil.

BANKING INDEX(Bankex)A banking index is made up of community

banks and banking institution.This index was created to represent smaller

institution of the banking industry and stands in contrast to the KBW Banking index in that respect.

SENSEXSensex was introduced by the BSE(Bombay

stock exchange)on January 1 1986. the sensex is designed to reflect the overall market sentiments(condition). It comprises of 30 stock.

Figure 1.1 and 1.2 compares the country’s Banking Index (Bankex) with the Sensex.

16000140001200010000

Open

8000

6000

High

Low

Close40002000

Figure 1.1 Performance of banxex over 2002-2012

2o

02

20

03

20

04

20

05

200

6 200

7 200

8 200

9 20

10 201

1 201

2

Down Bar

Up BarSources: Bombay stock exchange

25000

20000 15000 10000

5000 0

200

2

20

03

200

4 200

5 200

6 200

7

200

8

200

9

201

0

201

1

201

2

Up Bar Down Bar

Performance of bankex and sansex over 2002-2012

June/3 June/4 June/5 June/6 June/7 June/8 June/9 June/10 June/11 June/12

Bankex Sansex

Figure: 1.2Performance of sensex over 2002-2012

CONTINUE...The Figure below shows that the Bankex and

the Sensex have had similar growth trends over the past decade.

The high CAGR exhibited by India’s Bankex demonstrates the industry’s resilience to recession and economic instability. This resilience primarily stems from two factors.

CONTINUE …the highly regulated Indian banking sector

restricts exposure to high risk assets and excessive leveraging.

Indian economy’s overall growth rate has been much higher than other economies worldwide 7.

CAGR AND NPACAGR (compound annual growth rate):-CAGR

the year-over-year growth rate of an investment over a specified period of time.

NPA(non performing assets):- Once the

borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset.

GROSS DOMESTIC PRODUCTThe gross domestic product (GDP) is one the

primary indicators  used to gauge the health of a country's economy.

It represents the total dollar value of all goods and services produced over a specific time period - we can think of it as the size of the economy.

IN NPAdriving Indian companies to borrow from

the Indian banks at a higher cost in times of inflation and in a period of depreciation in the value of rupee 7. The non performing assets (NPAs) of banks were pegged at 2.9 % in the fourth quarter of 2011, and are expected to rise to 3.5 % by 2012. All these factors might hamper the performance of the Indian banking sector.

positive initiatives taken by the government, the RBI mandated banks to maintain 70 per cent of the provision coverage ratio of their bad loans as on September 2010, thereby mitigating the effect of NPAs to a certain extent 2010.

The NPAs of public, private and foreign banks in India are exhibited in Figure 2.

FIGURE:2 NPAs of Public, private and foreign banks as on march 2011( in Rs Crore)

)00

Public sector banks private sector banks foreign banks

priority sector non-priority sector

60000

40000

20000

41245

29803

4823

13147

1141

3924

Conclusion about chartThe solace for Indian banks, however, lies in

the fact that India has shown a comparatively robust growth in its GDP over past years, which analysts closely correlate to the performance of the banking industry .

Development in GDPThe report forecasts that India’s GDP growth

will take the size of the country’s banking sector, to the third largest in the world by 2025.

Figure 3 shows the data from the

Ministry of Finance that supports this.

Figure: 3

6.0%

2006-07 2007-08 2008-09 2009-10 2010-11

Source: India Budget.nic.in, Reserve bank of India Statistics

Contriribution of Banking GDP at Current Prices

Perc

enta

ge C

ontr

ibuti

on o

f Ban

king

5.8%

5.6%

5.4% 5.2%

78,75,627

65,50,271

42,93,67249,86,426

55,82,623

Contribution of banking (including insurance) to the GDP (at current prices)

10,000,000

8,000,000

6,000,000

4,000,000

2,000,000

0

GD

P at Current Prices Rs Crore

Conclusion about chartFigure 3 demonstrates that the growth of

the banking sector in terms of percentage contribution to the GDP has remained mostly uniform over FY 06-10.

The banking sector is currently growing at approximately the same rate as the country’s economy.

Domestic CreditThe term “domestic credit” refers to lending

or credit that a country ’s central bank makes available to borrowers within the same country . This may include commercial banks and even involve the government itself

Commercial credit or lending that does not involve export of import of goods.

Influence of domestic credit on GDP important parameter for assessing

(majoring) the performance of the banking industry is the domestic credit provided as a percentage of the GDP, exhibited in Figure 4 below.

Figure 4 Domestic credit as a percentage of GDP (2002–11)

55.8%

57.1%

57.6%

58.4%

60.9% 60.8%

67.7% 70.4%

73.0%

75.1%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 50%

55%

60%

65%

70%

75%

Source: World Bank data

Competitive landscape and landing banks in IndiaBanking in India is moderately consolidated,

with the top 10 players accounting for approximately 60 % of the total industry.

The Indian banking sector is majorly dominated by public sector banks.

Figure 5 describes the market shares of the leading players, along with the respective shares of government, private and foreign banks

74%

19%

7%

Figure 5SPLIT BETWEEN TYPES OF BANKS

goverement banksprivate banksforeign banks

18%

6%

5%

5%

5%

5%4%4%

3%

3%

42%

Market Shares Of Landing Banks

State Bank of IndiaPunjab National BankBank of barodaICICI BankBank of IndiaCanara BankHDFC BankIDBI BankAxic BankCentral Bank of IndiaOthers

Source: ICRA, Thomas White Report on Indian Banking

KEY DEVELOPMENTS AND AN ANALYSIS OF THE UNION BUDGET OF 2012–13The overall prognosis of the Union Budget of

2012–13 was mostly positive.It focused primarily on infusing capital into

the system to propagate future growth and enable the system to adopt the Basel III norms over the next five years.

The following section highlights certain key points of the budget for the banking industry, and their associated(related) implications.

Union Budget of 2012–13 offers the banking industryFor the banking industry as a whole, the Union

Budget held three major announcements-1. the government suggested a proposed investment

of Rs 15,888 crore (US$ 3 billion) for the capitalisation of public sector banks, regional and rural banks (RRBs), and other financial institutions, including the National Bank for Agriculture and Rural Development (NABARD).

This move is expected to provide these institutions with equity and bring them a step closer to complying with the Basel III norms

Continue...2. agricultural credit was increased from Rs

4,75,000 crore (US$ 89.6 billion) to Rs 5,75,000 crore (US$ 108.4 billion) over FY12 to FY13.

The budget also proposed modifications in the Kissan Credit Card (KCC) scheme to make it a smart card that can be used at ATMs.

Continue...This is expected to promote awareness in

rural areas, and encourage better use of financial products among farmers.

The government has also set up a credit refinance scheme for RRBs(Regional Rural Bank) to give short term crop loans to small and marginal farmers.

Continue...3. the Swabhimaan scheme promoting financial inclusion

was extended to North-East and hilly regions with a population of over 1,000, and other areas with a population of 2,000.

Currently, approximately 73,000 habitations(places) have been covered under the Swabhimaan Scheme.

The government has increased the provisions under the Rural Housing Fund by Rs 10,000 crore (US$ 1.9 billion) to Rs 40,000 crore (US$ 7.5 billion).

 

Continue... RRBs accounted for 29 per cent of

NABARD’s total credit in 2010–11. Therefore, the government has proposed a Rs 10,000 crore (US$ 1.9 billion) investment in NABARD specifically for refinancing the RRBs13.

These measures are expected to boost the credit growth in the Indian banks and enable credit flow to different sectors of the economy.

Other regulatory developments that impact the Indian banking sectorThe RBI, which regulates other India banks,

formulated several policies and initiatives that directly impacted the country’s banking sector over the last few years. Some of these initiatives are as follows:

Continue...Deregulation of savings rates for banks in India.Provision Coverage Ratio (PCR) of 70%

mandatory (important) for banks.Basel III guidelines.Relaxation of branch authorisation policy for

tier II cities21:- Under the relaxation of Branch Authorisation Policy, the domestic banks do not need the RBI approval to set up service offices.

The policy will spread the organised banking to the remote areas of the country, and aid financial inclusion.

what is TireThe Reserve Bank of India (RBI) classifies centres

into 6 tiers based on population.[8] The tables below shows the classification

Tier-1 100,000 and above Tier-2 50,000 to 99,999 Tier-3 20,000 to 49,999 Tier-4 10,000 to 19,999 Tier-5 5,000 to 9,999 Tier-6 less than 5000

Continue...Relaxation of mobile payment guidelines. Issue of financial guidelines for new bank

licenses.Subsidiary route for foreign banks.

GROWTH IN INDIAN ECONOMYThe performance of the Indian economy is one of

the strongest drivers for the banking industry’s growth and vice versa (also shown in Figure 1), and the average GDP growth of 8.1 per cent expected over 2011–16 will facilitate the expansion of the banking sector.

the banking industry is also expected from the rising per capita income in India, which along with a growth in the earning population of the country will lead to a higher number of people utilising banking services

Transaction Channels Figure 7 gives a perspective on the

transaction costs of various banking channels and highlights the cost saving that can be achieved through mobile, online and ATM banking.

Figure 7 Transaction costs by banking channels

Mobile

Online

ATM

Interactive VoiceResponse

Call Centre 0 0.5 1 1.5 2 2.5 3 3.5 4 4.5

0.08

0.17

Conclusion...The economic growth of the country is an apt

indicator for the growth of the banking sector.. The Indian economy is projected to grow at a

rate of 5-6 per cent34 and the country’s banking industry is expected to reflect this growth.

Reserve Bank of India as an able central regulatory authority, whose policies have shielded Indian banks from excessive leveraging and making high risk investments.

Continue...Market entry at the country level is expected to

be tough for new players due to the moderately consolidated nature of the industry and extremely high competition.

The key challenges for the industry are to reduce NPAs, increase financial inclusion and raise capital for the Basel III compliance.

The overall impact of suggested changes in the 2012–13 Union Budget is expected to be positive.

Continue... The overall impact of suggested changes in the

2012–13 Union Budget is expected to be positive.These changes are mostly focussed on financial

inclusion through expansion into rural areas, and bringing stability by boosting credit growth.