Indian Banking Industry Analysis
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Indian Banking Industry Analysis
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Indian Banking Industry Analysis
- 1. BANKING
- 2. OVERVIEW Important industry- Indian Economy 90%- total financial services sector Service oriented- 24 Hrs. banking solution 10% Contribution to the GDP By 2017- CAGR of 18.1% Potential to become- 5th largest in the world Consists of :26 public sector, 20 private sector, 43 foreign, 61 regional rural & 90,000 credit cooperatives
- 3. STRUCTURE
- 4. • Controlling money supply in the system • Monitoring different key indicators like GDP and inflation • Maintaining people’s confidence in the banking and financial system Regulator- Financial System • Inflation control • Control on bank credit – CRR and SLR • Interest rate control • Issue currency notes • Control circulation of fake currency Issuer -Monetary Policy & Currency • Issue Of License • Prudential Norms • Corporate Governance • KYC Norms • Transparency Norms Controller & Supervisor ROLE OF RBI • Risk Management • Audit and Inspection • Foreign Exchange Control • Development
- 5. COMPETITIVE LANDSCAPE PUBLIC SECTOR BANKS Number of banks: 26 Number of branches: 75,779 PRIVATE SECTOR BANKS Number of banks: 20 Number of branches: 16,001 FOREIGN BANK Number of banks: 43 Number of branches: 327 7.50% 6.10% 4.70% 80.29% 73% 63.20% 12.30% 20.90% 32.10% 0.00% 20.00% 40.00% 60.00% 80.00% 100.00% 120.00% 2000 2013 2025 ESTIMATES OF MARKET SHARES ON LINEAR PROJECTION foreign banks public sector banks private sector banks 17% 16 23%
- 6. TOP FIVE COMPETITIVE BANKS PUBLIC • SBI • Bank of Baroda • PNB • Canara Bank • Bank of India PRIVATE • HDFC Bank • ICICI Bank • Axis Bank • Kotak Mahindra • IndusInd Bank FOREIGN • Citi Bank • Standard Chartered • HSBC • DBS Bank • Deutsche Bank
- 7. DEPOSITS 30% 31% 32% 33% 34% 35% 36% 37% 0 10000 20000 30000 40000 50000 60000 70000 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 PUBLIC SECTOR BANKS Term Deposits Saving Deposits Current Deposits Cost of Funds (Rs. Billion) 28% 30% 32% 34% 36% 38% 40% 0 2000 4000 6000 8000 10000 12000 14000 16000 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 PRIVATE SECTOR BANKS Term Deposits Saving Deposits Current Deposits Cost of Funds (Rs. Billion) 36% 38% 40% 42% 44% 46% 48% 0 1000 2000 3000 4000 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 FOREIGN SECTOR BANKS Term Deposits Saving Deposits Current Deposits Cost of Funds (Rs. Billion)
- 8. PERFORMANCE INDICATORS -100.0 -50.0 0.0 50.0 100.0 150.0 200.0 250.0 300.0 350.0 400.0 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 NON PERFORMING ASSETS Public sector banks Old private sector banks New private sector banks Foreign banks in India (Rs. Billion) 2.54 2.56 2.7 3.75 4 3.39 1.54 1.85 2.35 2.68 2.75 2.73 4.63 5.49 4.93 5.09 4.83 3.92 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 NET PROFITABILITY MARGIN Public Sector Private Sector Foreign Sector (In %)
- 9. PRIORITY SECTOR LENDING • Specific Sectors Like Agriculture Or Small Scale Industries 0 200000 400000 600000 800000 1000000 1200000 1400000 1600000 1800000 2000000 2009 2010 2011 2012 2013 Foreign Private public sector
- 10. Small Banks & Payment Banks • a need for transactions and savings accountsObjectives • registered as a public limited companyRegistration, licensing and regulations • successful track record of at least 5 years in running their businesses. Eligibility criteria • should have a net worth of Rs 100 croreCapital requirement •cannot undertake lending activities •Invest in Government securities/Treasury Bills with maturity up to one year Deployment of funds • majority of independent Directors Corporate governance
- 11. Payment Banks • Increase Financial Inclusion • Savings/Deposits/Payments/Remittances • No Credit Lending Small banks • Banking Products • Limited Area of Operations
- 12. NEW LICENSES AND BASEL III • Promotor Holding – 50% For First 5 Years • Listing To Be Done With 3 Years Of Commencement • 25% Of Branches In Unbanked Rural Centers • Compliance To Priority Sector Lening Target New License Criteria In Principle License Granted To IDFC And Bandhan Microfinance In April 2014 24 Pending Applicants • Improve Ability To Absorb Economic And Financial Stress • To Strengthen The Regulation, Supervision And Risk Management • Capital Adequacy And Liquidity Adequacy Basel III
- 13. REASONS TO INVEST IN INDIA India’s Banking Sector Is Constantly Growing Amended Banking Laws Bill Robust Demand Innovation In Services Business Fundamentals Policy Support
Editor's Notes
- The banking industry is a systemically important industry for the Indian economy in general and financial sector in particular as it comprises nearly 90% of the total financial services sector of the country. The banking industry in India has undergone significant transformation since the initiation of the financial sector reforms that were part of the structural reforms of early 1990s. The banking sector has steadily evolved from a state-directed banking system into a fairly open competitive banking system. Banking in India has become service oriented, maturing from the days of ‘walking in business’ to the present situation of 24 hour banking solutions to attract customers. Disintermediation in the business has led banks to be extremely prudent in terms of their internal operations and has led to the adoption of newer products and delivery channels. Total banking assets in India touched US$ 1.8 trillion in FY13 and are anticipated to cross US$ 28.5 trillion in FY25. Bank deposits have grown at a compound annual growth rate (CAGR) of 21.2 per cent over FY06–13. Total deposits in FY13 were US$ 1,274.3 billion. Total banking sector credit is anticipated to grow at a CAGR of 18.1 per cent (in terms of INR) to reach US$ 2.4 trillion by 2017. In FY14, private sector lenders witnessed discernable growth in credit cards and personal loan businesses. ICICI Bank witnessed 141.6 per cent growth in personal loan disbursement in FY14, as per a report by Emkay Global Financial Services. Axis Bank's personal loan business also rose 49.8 per cent and its credit card business expanded by 31.1 per cent. 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. The Indian Banking industry is currently worth Rs. 81 trillion (US $ 1.31 trillion) and banks are now utilizing the latest technologies like internet and mobile devices to carry out transactions and communicate with the masses. The Indian banking sector consists of 26 public sector banks, 20 private sector banks and 43 foreign banks along with 61 regional rural banks (RRBs) and more than 90,000 credit cooperatives.
- ssue Of Licence: Under the Banking Regulation Act 1949, the RBI has been given powers to grant licenses to commence new banking operations. The RBI also grants licenses to open new branches for existing banks. Under the licensing policy, the RBI provides banking services in areas that do not have this facility. Prudential Norms: The RBI issues guidelines for credit control and management. The RBI is a member of the Banking Committee on Banking Supervision (BCBS). As such, they are responsible for implementation of international standards of capital adequacy norms and asset classification. Corporate Governance: The RBI has power to control the appointment of the chairman and directors of banks in India. The RBI has powers to appoint additional directors in banks as well. KYC Norms: To curb money laundering and prevent the use of the banking system for financial crimes, The RBI has “Know Your Customer“ guidelines. Every bank has to ensure KYC norms are applied before allowing someone to open an account. Transparency Norms: This means that every bank has to disclose their charges for providing services and customers have the right to know these charges. Risk Management: The RBI provides guidelines to banks for taking the steps that are necessary to mitigate risk. They do this through risk management in basel norms. Audit and Inspection: The procedure of audit and inspection is controlled by the RBI through off-site and on-site monitoring system. On-site inspection is done by the RBI on the basis of “CAMELS”. Capital adequacy; Asset quality; Management; Earning; Liquidity; System and control. Foreign Exchange Control: The RBI plays a crucial role in foreign exchange transactions. It does due diligence on every foreign transaction, including the inflow and outflow of foreign exchange. It takes steps to stop the fall in value of the Indian Rupee. The RBI also takes necessary steps to control the current account deficit. They also give support to promote export and the RBI provides a variety of options for NRIs. Development: Being the banker of the Government of India, the RBI is responsible for implementation of the government’s policies related to agriculture and rural development. The RBI also ensures the flow of credit to other priority sectors as well. Section 54 of the RBI gives stress on giving specialized support for rural development. Priority sector lending is also in key focus area of the RBI.
- 1. Objectives There is a need for transactions and savings accounts for the underserved in the population. Also remittances have both macro-economic benefits for the region receiving them as well as micro-economic benefits to the recipients. Higher transaction costs of making remittances diminish these benefits. Therefore, the primary objective of setting up of Payments Banks will be to further financial inclusion by providing (i) small savings accounts and (ii) payments / remittance services to migrant labour workforce, low income households, small businesses, other unorganised sector entities and other users, by enabling high volume-low value transactions in deposits and payments / remittance services in a secured technology-driven environment. 2. Registration, licensing and regulations The Payments Bank will be registered as a public limited company under the Companies Act, 2013, and licensed under Section 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities to acceptance of demand deposits and provision of payments and remittance services. It will be governed by the provisions of the Banking Regulation Act, 1949, Reserve Bank of India Act, 1934, Foreign Exchange Management Act, 1999, Payment and Settlement Systems Act, 2007, other relevant Statutes and Directives, Prudential Regulations and other Guidelines/Instructions issued by RBI and other regulators from time to time, including the regulations of SEBI regarding public issues and other guidelines applicable to listed banking companies. 3. Eligibility criteria The existing non-bank PPI issuers authorised under the Payment and Settlement Systems Act, 2007 (PSS Act) and other entities such as Non-Banking Finance Companies (NBFCs), corporate BCs, mobile telephone companies, super-market chains, companies, real sector cooperatives and public sector entities may apply to set up a Payments Bank. Even banks can take equity stake in a Payments Bank to the extent permitted under Section 19 (2) of the Banking Regulation Act, 1949. The entities and their Promoters/ Promoter Groups as defined in the SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2009 should be ‘fit and proper’ in order to be eligible to promote Payments Banks. RBI would assess the ‘fit and proper’ status of the applicants on the basis of their past record of sound credentials and integrity; financial soundness and successful track record of at least 5 years in running their businesses. 4. Scope of activities The Payments Bank will be set up as a differentiated bank and shall confine its activities to further the objectives for which it is set up. Therefore, the Payments Bank would be permitted to undertake only certain restricted activities permitted to banks under the Banking Regulation Act, 1949, as given below: Acceptance of demand deposits, i.e., current deposits, and savings bank deposits. The eligible deposits mobilised by the Payments Bank would be covered under the deposit insurance scheme of the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). Given that their primary role is to provide payments and remittance services and demand deposit products to small businesses and low-income households, Payments Banks will initially be restricted to holding a maximum balance of Rs. 100,000 per customer. After the performance of the Payments Bank is gauged by the RBI, the maximum balance can be raised. If the transactions in the accounts conform to the “small accounts”1 transactions, simplified KYC/AML/CFT norms will be applicable to such accounts as defined under the Rules framed under the Prevention of Money-laundering Act, 2002. Payments and remittance services through various channels including branches, BCs and mobile banking. The payments / remittance services would include acceptance of funds at one end through various channels including branches and BCs and payments of cash at the other end, through branches, BCs, and Automated Teller Machines (ATMs). Cash-out can also be permitted at Point-of-Sale terminal locations as per extant instructions issued under the PSS Act. In the case of walk-in customers, the bank should follow the extant KYC guidelines issued by the RBI. Issuance of PPIs as per instructions issued from time to time under the PSS Act. Internet banking - The RBI is also open to applicants transacting primarily using the Internet. The Payments Bank is expected to leverage technology to offer low cost banking solutions. Such a bank should ensure that it has all enabling systems in place including business partners, third party service providers and risk managements systems and controls to enable offering transactional services on the internet. While offering such services, the Payments Bank will be required to comply with RBI instructions on information security, electronic banking, technology risk management and cyber frauds. Functioning as Business Correspondent (BC) of other banks – A Payments Bank may choose to become a BC of another bank for credit and other services which it cannot offer. The Payments Bank cannot set up subsidiaries to undertake non-banking financial services activities. The other financial and non-financial services activities of the promoters, if any, should be kept distinctly ring-fenced and not comingled with the banking and financial services business of the Payments Bank. The Payments Bank will be required to use the word “Payments” in its name in order to differentiate it from other banks. 5. Deployment of funds The Payments Bank cannot undertake lending activities. Apart from amounts maintained as Cash Reserve Ratio (CRR) with RBI, minimum cash in hand and balances with a scheduled commercial bank/RBI required for operational activities and liquidity management, it will be required to invest all its monies in Government securities/Treasury Bills with maturity up to one year that are recognized by RBI as eligible securities for maintenance of Statutory Liquidity Ratio (SLR). The Payments Bank will participate in the payment and settlement system and will have access to the inter-bank uncollateralised call money market and the collateralised CBLO market for purposes of temporary liquidity management. 6. Capital requirement Since the Payments Bank will not be allowed to assume any credit risk, and if its investments are held to maturity, such investments need not be marked to market and there may not be any need for capital for market risk. However, the Payments Bank will be exposed to operational risk. The Payments Bank will also be required to invest heavily in technological infrastructure for its operations. The capital will be utilised for creation of such fixed assets. Therefore, the minimum paid up voting equity capital of the Payments Bank shall be Rs. 100 crore. Any additional voting equity capital to be brought in will depend on the business plan of the promoters. Further, the Payments Bank should have a net worth of Rs 100 crore at all times. The Payments Bank shall be required to maintain a minimum capital adequacy ratio of 15 per cent of its risk weighted assets (RWA) on a continuous basis, subject to any higher percentage as may be prescribed by RBI from time to time. However, as Payments Banks are not expected to deal with sophisticated products, the capital adequacy ratio will be computed under simplified Basel I standards. As the Payments Bank will have almost zero or negligible risk weighted assets, its compliance with a minimum capital adequacy ratio of 15 per cent would not reflect the true risk. Therefore, as a backstop measure, the Payments Bank should have a leverage ratio of not less than 5 per cent, i.e., its outside liabilities should not exceed 20 times its net-worth / paid-up capital and reserves. 7. Promoter’s contribution The promoter’s minimum initial contribution to the paid up voting equity capital of Payments Bank shall be at least 40 per cent which shall be locked in for a period of five years from the date of commencement of business of the bank. Shareholding by promoters in the bank in excess of 40 per cent shall be brought down to 40 per cent within three years from the date of commencement of business of the bank. Further, the promoter’s stake should be brought down to 30 per cent of the paid-up voting equity capital of the bank within a period of 10 years, and to 26 per cent within 12 years from the date of commencement of business of the bank. Proposals having diversified shareholding and a time frame for listing will be preferred. Corporate governance The Board of the Payments Bank should have a majority of independent Directors. The bank should comply with the corporate governance guidelines including ‘fit and proper’ criteria for Directors as issued by RBI from time to time.
- Robust demand- Increase in working population and growing disposable incomes will raise demand for banking and related services Housing and personal finance are expected to remain key demand drivers Rural banking is expected to witness growth in the future Innovation in services- Mobile, Internet banking and extension of facilities at ATM stations to improve operational efficiency Vast un-banked population highlights scope for innovation in delivery Policy Support- Wide policy support in the form of private sector participation and liquidity infusion Healthy regulatory oversight and credible Monetary Policy by the Reserve Bank of India (RBI) have lent strength and stability to the country’s banking sector Business Fundamentals- Rising fee incomes improving the revenue mix of banks •High net interest margins, along with low NPA levels, ensure healthy business fundamentals BASEI III- These measures aim to: improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source improve risk management and governance strengthen banks' transparency and disclosures. The reforms target: bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress. macroprudential, system wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time.