Banking in India

Banking in India by Sam Ghosh 10th May 2020

Banking Structure
Banking Structure Demand Side Supply Side Impact of COVID-19Regulations

Structure Balance Sheet OperationsAsset Quality
Source: IBEF +
Reserve Bank of India
Banks Financial Institutions
Public sector banks
Scheduled Commercial
Banks (SCBs)
Cooperative credit
institutions
Private sector banks
Foreign banks
Small Finance Banks
Urban cooperative
banks
Rural cooperative banks
All-India financial
institutions
State-level institutions
Other institutions
Payments Banks

Source: RBI
Ratios for Scheduled Commercial Banks

Source: RBI
Assets of Scheduled Commercial Banks (SCBs)

Source: RBI
Liabilities of Scheduled Commercial Banks (SCBs)

Source: RBI
Distribution of Capital in Scheduled Commercial Banks (SCBs)

Source: RBI
Deposits in Scheduled Commercial Banks (SCBs)

Source: RBI
Credit deployment by Bank-Groups

Source: RBI
Credit-Deposit Ratio in SCBs

Source: RBI
Urban Co-operative Banks

Source: RBI
Urban Co-operative Banks...

Source: RBI
Asset Quality of SCBs - Capital Adequacy

Source: RBI
Asset Quality of SCBs - Non- Performing Assets

Source: RBI
Asset Quality of Urban Co-operative Banks (UCBs)

Source: RBI
Financial Ratios for SCBs

Source: RBI
Financial Ratios for SCBs..

Source: RBI
P/L of SCBs

Source: RBI
P/L of UCBs

Source: RBI
Demand Side

Banking in India by Sam Ghosh 10th May 2020Source: RBI
Credit Deposits Market Drivers
Credit Deployed by SCBs

Total credit deployed by SCBs as of March 2020 : ~ ₹9,263,134 Crores
Total non-food credit by SCBs as of March 2020 : ~ ₹9,211,544 Crores

Source: RBI
Deposits in SCBs

Demand Driver - Rising Incomes
● PWC - India will remain one of the the fastest-growing economy until 2050.
● Growing per capita income means growing affordability.
● McKinsey - roughly 60 million households could enter the consuming class (defined as households with
incomes greater than $8,000 per annum) by 2025.
Projection: PWC

Demand Driver - Disposable Income Growth
Data: RBI
GDP: Gross Domestic Product
GNI: Gross National Income
NNI: Net National Income
GNDI: Gross National Disposable Income

Demand Driver - Domestic Savings Growth
Data: World Bank

Demand Driver - Growth in Household Net-Worth
Data: RBI

Demand Driver - Lower levels of private debt
Data: IMF

Supply Side

Banking Organisations in India
Scheduled Commercial Banks
A scheduled bank, registered under the Banking Regulation Act 1949, which is formed for
commercial purposes as a body corporate and provides banking services to the general public.
Scheduled Co-operative Banks
A scheduled bank, which is formed as a co-operative
society under the Co-operative Societies Act, 1965
along with the Banking Regulation Act 1949,
provides banking services to its members.
Scheduled Banks
All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks. "banking" means the accepting, for the
purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawal by cheque, draft, order or
otherwise.
Public
Sector
Banks
Scheduled
Commercial
Banks for
which the
majority of the
stake in the
bank is held by
the
government.
Private
Sector Banks
Scheduled
Commercial
Banks where
the majority of
the stake in the
bank is held by
non-
government
shareholders.
Foreign
Banks
Foreign banks
can operate in
India through
branches or
wholly-owned
subsidiaries.
Small
Finance
Banks
Provides basic
banking
activities of
acceptance of
deposits and
lending to
unserved and
underserved
sections.
Payments
Banks
In 2014 RBI
released
guidelines for
licensing of
payments
banks. These
banks primarily
provide limited
deposit and
payment/remitta
nce services.
Urban Co-operative
Banks
Refers to Co-operative
banks located in urban and
semi-urban areas.
State Co-operative
Banks
Co-operative banks which
mainly finance agricultural
based activities including
farming, dairy, fishiculture,
along with some small
scale industries and self
employment activities.
Regional
Rural Banks
Registered
under Regional
Rural Banks Act
1976, provides
credit and other
services for
agriculture,
trade,
commerce, etc.

Data: RBI
Branch number of SCBs

Share of Deposits in SCBs

Share of Advances by SCBs

SCBs by performance

Demand Side Supply Side Impact of COVID-19Regulations
Regulations
Banking Structure

Demand Side Supply Side Impact of COVID-19RegulationsBanking Structure
Regulators Areas of Concern Laws and Acts
Reserve Bank of India
● Central bank of india responsible for setting monetary policy, currency management, foreign exchange,
government securities markets & financial derivatives, debt & cash management for the government and
oversight of payment and settlement systems.
● RBI is responsible for transmission of monetary policy rates in the economy. RBI carries out this mainly by
participating in the interbank money market to remove the spread between WALR and repo rates.
● RBI is also responsible for managing the credit liquidity in the financial system. RBI carries out this by
managing money supply through Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).
● RBI is responsible for the implementation of anti-money laundering KYC norms in the financial institutions.
● RBI plays an important role in foreign exchange management. FEMA gives RBI power to prohibit, restrict
or regulate the transfer or issue of any foreign security by a person resident in India, transfer or issue of
any security by a person resident outside India, transfer or issue of any security or foreign security by any
branch, office or agency in India of a person resident outside India, any borrowing or lending in foreign
exchange, any borrowing or lending in rupees between a person resident in India and a person resident
outside India, deposits between persons resident in India and persons resident outside India and export,
import or holding of currency or currency notes, etc.
Regulatory Bodies

National Bank for Agriculture and Rural Development (NABARD)
● NABARD is a development bank and mandated “mandated for providing and regulating credit and other
facilities for the promotion and development of agriculture, small scale industries, cottage, and village
industries, handicrafts and other rural crafts and other allied economic activities in rural areas with a view
to promoting integrated rural development and securing prosperity of rural area”.
● NABARD is responsible for :
○ Providing refinance support to building rural infrastructure
○ Preparing district level credit plans.
○ Supervising Cooperative Banks and Regional Rural Banks (RRBs).
○ Designing new development schemes for the implementation of GoI’s development schemes.
Regulatory Bodies..

Asset Quality
Non-performing asset (NPA) is a persistent problem in the Indian banking system. Gross Non-Performing Asset
Ratio (GNPA) surged in recent years from 2% in all SCBs in 2010 and stood at 9.3% between March 2019 -
September 2019.
Areas of Regulatory Concern
Capital Adequacy
Digital Banking & FinTech
BASEL III capital regulations require a minimum of 8% of Capital to Risk-weighted Assets Ratio (CRAR). As per
RBI guidelines, banks are required to maintain a minimum of 9% CRAR on an ongoing basis. After the
recapitalisation of the public sector banks, the average CRAR for all SCBs stood at 15.1% in September 2019.
The banking and payment landscape is evolving rapidly due to the emergence of new business models and
technologies. This creates novel regulatory challenges for RBI. RBI has formed an inter-regulatory Working Group
(WG) working group to understand the possible regulatory approach for the FinTech scenario. Based on the
recommendations of the working group, RBI has introduced a framework for Regulatory Sandbox.

Reserve Bank of India Act, 1934
The RBI Act empowers the Reserve Bank issue rules, regulations, directions and guidelines on a wide range of
issues relating to banking, and the financial sector.
Laws and Acts
Banking Regulation Act, 1949
Foreign Exchange Management Act, 1999
The Banking Regulation Act regulates all banking firms in India. The act regulates various issues including the
type of activities a bank can be involved in, who can use the term “Bank”, capital requirements, etc.
Cross-border transactions and related activities are governed by the Foreign Exchange Management Act, 1999.
Deposit Insurance and Credit Guarantee Corporation Act, 1961
This act establishes Deposit Insurance Corporation for the purpose of insurance of deposits and guaranteeing of
credit facilities.
Payment and Settlement Systems Act, 2007
This act came into existence for regulation and supervision of payment systems in India and to designate the
Reserve Bank of India as the authority for that purpose.

The Personal Data Protection Bill, 2019
Financial data comes under the ‘sensitive personal data’ category and calls for additional limitations and
requirements under the proposed law.
Laws and Acts…..
Insolvency and Bankruptcy Code, 2016
Complicated and confusing insolvency process used to make the recovery of distressed assets for creditors very
time consuming and expensive. The Insolvency and Bankruptcy Code introduced a time-bound process to
resolve insolvency for both companies and individuals. The Code created a whole framework for insolvency with
Insolvency Professionals, adjudicating authorities, and with Insolvency and Bankruptcy Board as the regulatory
authority. As the Code will directly impact the asset quality of the banks, it is immensely important for the industry.

Impact of COVID - 19

Policy Measures Operations
Relevant Policy Measures
● RBI on 27th March 2020 - Reduction of the policy repo rate under the liquidity adjustment facility (LAF)
by 75 basis points to 4.40% from 5.15%. The Marginal standing facility (MSF) rate and the Bank Rate
war reduced to 4.65% from 5.4%.
● RBI on 28th March 2020 - Reduction of the cash reserve ratio (CRR) of all banks by 100 basis points to
3.0% of net demand and time liabilities (NDTL) with effect from the reporting fortnight beginning March
28, 2020.
● RBI Targeted Long Term Repo Operations (TLTRO) - auctions of targeted term repos of up to 3 years
tenor of different sizes for a total amount of up to Rs. 1,00,000 crore at a floating rate linked to the policy
repo rate. A second TLTRO was announced on 17th April 2020.
● RBI - Increase in the borrowing limits in the marginal standing facility (MSF) to 3% from 2% of the
Statutory Liquidity Ratio (SLR). This is intended to provide comfort to the banking system by allowing it
to avail an additional ₹ 1,37,000 crore of liquidity under the LAF window
● RBI Widening of the Monetary Policy Rate Corridor from 50 bps to 65 bps - Under the new corridor, the
reverse repo rate under the liquidity adjustment facility (LAF) is set to be 40 bps lower than the policy
repo rate.
Balance Sheet

Relevant Policy Measures….
● RBI Moratorium on Term Loans - All commercial banks (including regional rural banks, small finance
banks, and local area banks), co-operative banks, all-India Financial Institutions, and NBFCs (including
housing finance companies and micro-finance institutions) were permitted to allow a moratorium of
three months on payment of installments in respect of all term loans outstanding as on March 1, 2020.
● RBI Deferment of Interest on Working Capital Facilities - For working capital facilities sanctioned in the
form of cash credit/overdraft, lending institutions are being permitted to allow a deferment of three
months on payment of interest in respect of all such facilities outstanding as on March 1st 2020.
Relevant provisions have been made in the asset classification norms.
● RBI Deferment of Implementation of Net Stable Funding Ratio (NSFR) from April 1st 2020 to October
1st, 2020.
● RBI - Deferment of Last Tranche of Capital Conservation Buffer from March 31, 2020 to September 30,
2020.
● RBI Permitting Banks to Deal in Offshore Non-Deliverable Rupee Derivative Markets (Offshore NDF
Rupee Market).
Balance Sheet

Relevant Policy Measures….
● RBI bans banks from declaring any dividend till September 30th, 2020.
● RBI - reduction of the interest rate on fixed-rate reverse repo under the Liquidity Adjustment Facility
(LAF) by 25 basis points from 4.00% to 3.75%.
● RBI - Reduction in the Liquidity Coverage Ratio requirement.
● RBI - Refinancing Facilities for All India Financial Institutions (AIFIs).
● RBI - Extension of Resolution Timelines under the Prudential Framework on Resolution of Stressed
Assets.
Balance Sheet

Balance Sheet Operations
Impact on Balance Sheet
● Moody's - changed the outlook for the Indian banking system to negative from stable.
○ Further deterioration in the Indian economic outlook.
○ Deterioration in the asset quality.
○ Deterioration in profitability and loan growth hurting capitalization.
○ Funding and liquidity to remain broadly stable.
○ Government support to mitigate losses to depositors and creditors from failing financial
institutions.
● Apart from asset quality, deposits growth to get impacted
○ Rising unemployment may result in lower savings and withdrawal of deposits.
○ Increased risk in capital markets may encourage flight to safety to time deposits resulting in a
positive impact on the deposit growth of the banks.
Policy Measures

Impact on Balance Sheet...
● S&P Global - COVID-19 pandemic expected to add 1.9% additional NPA (US$25 billion) and 130 basis
points to credit cost (US$19 billion).
Policy Measures
Sector %Gross Bank Credit Crores
Transport Operators 1.56% ₹1,44,466
Tourism, Hotels &
Restaurants
0.5% ₹45,977
Vehicles, Vehicle Parts &
Transport Equipment +
Vehicle Loans
3.27% ₹3,03,215
Commercial Real Estate 8.72% ₹8,07,383
Infrastructure 11.38% ₹10,53,913
Mining & Quarrying (incl.
Coal)
0.47% ₹43,927
Source: RBI as on March 27th 2020

Impact on Banking Operations
● Digital Banking - Travel restrictions due to lockdowns are pushing digital adoption of banking services.
● Doorstep Banking - As the banking clients are getting used to various delivery services, banks have
introduced doorstep banking (cash pickup, cash delivery, cheque pickup, cheque requisition slip pickup,
form 15H pickup, delivery of drafts, delivery of term deposit advice, life certificate pickup and KYC
documents pickup.), etc.
● Work From Home - Banks are adopting a WFH culture dealing with the pandemic. Increased digital
adoption of banking services can incentivise the banks.
Policy Measures

Thank You

Banking in India

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