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- 1. The Banking Sector In India Banking services worldwide can broadly classified into into investment banking and commercial banking is primarily concerned with helping corporate bodies raise funds at the best possible rates from variousย markets. Commercial banking is concerned with channeling savings to productive uses. Banking in an intermediary function but one that is very essential for sustained economic growth. In India, since the nationalization of banks in 1969, banking has been primarily in the Central Governmentโs domain. As part of the Governmentโs liberalization policy which began in 1991, New Private Sector Banks (NPSBs) were allowed to be set up. Today, India has nine NPSBs that provide commercial banking services.ย In a relatively short period, the NPSBs have managed to achieve about 2% of the market share in terms of business, a disproportionate of 2% share of the total income and almost 17% of the total net profit earned by the banking system as a whole. These success can be attributed in large measure to the superior Quality of Services that these banks have been able to provide.
- 3. Banking industry as on date
- 4. Market share The Service Sector now contributes over 40% of Indiaโs GDP. In the service sector, the banking segment has been amongst the fastest growing segment as can be seen from the following tables. The share of Banking and Insurance has increased to over 6.3% of Indiaโs GDP (at constant prices ) from about 2% (at constant prices) in the early seventies, and as Indiaโs markets continue to develop and integrate with world markets, this share is likely to increase further. New Private Sector Banks (NPSBs) Today, India has nine NPSBs that provide commercial banking services.ย In a relatively short period, the NPSBs have managed to achieve about 2% of the market share in terms of business, a disproportionate of 2% share of the total income and almost 17% of the total net profit earned by the banking system as a whole. These success can be attributed in large measure to the superior Quality of Services that these banks have been able to provide. Service Annual Rate of Growth* Banking and Insurance 7.9% Transport (other than Rail) 6.8% Communication 6.5% Hotels and Restaurants 5.1% Real Estate and Business Services 4.4% Railways 3.4% Services 4.9% *For the period 1950-1995 Source :CMIE
- 5. The financial sector in India has become stronger in terms of capital and the number of customers. It has become globally competitive and diverse aiming, at higher productivity and efficiency. Exposure to worldwide competition and deregulation in Indian financial sector has led to the emergence of better quality products and services. Reforms have changed the face of Indian banking and finance. The banking sector has improved manifolds in terms of capital adequacy, asset classification, profitability, income recognition, provisioning, exposure limits, investment fluctuation reserve, risk management,
Editor's Notes
- In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of neces sary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at a low ebb. Consolidation phase : The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.
- The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 is estimated at ` 40,90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The Public Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry. In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank , ING Vyasa Bank , SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry.
- The Indian banking industry started taking shape after Indiaโs independence in 1947. Though the Indian banking industry can be traced as far back as 1806 with the establishment of Bank of Bengal, the industry was in a state of turmoil. Under the British influence, Calcutta witnessed a surge in trading activities, giving rise to a number of banking establishments during the period. Several banks, set up in order to finance trading, went out of business. For instance, Union bank, formed by Indian merchants, failed due to economic recession during 1848-49 resulting in depositors losing money. Such events resulted in shifting the reigns of the industry into the hands of Europeans till the early twentieth century. >> Read more >> Check out more such India-centric e-books and reports From 1906 to1911, several banks were set up based on the principles of the Swadesi movement. The movement inspired Indian businessmen and politicians to set up banks for the Indian community and many new banks were launched to promote trade and finance in communal groups. Some of the prominent ones among these are Bank of India, Corporation Bank, Bank of Baroda, Indian bank, Canara Bank, and Central bank of India. Bank of Bengal, along with its sister banks, Bank of Bombay and Bank of Madras, set up by British East India Company, merged in 1921 to give birth to Imperial bank of India, now known as State bank of India. During 1914-1945, India went through several ups and downs politically and economically and the effects were felt in the banking sector too. The World Wars disrupted banking activities of the nation and almost 94 banks failed during this period. After 1947, however, banking activities flourished. After the partition of India, the government toook drastic steps to regulate the banking industry. For example, in 1948, additional powers and authority were vested in the Reserve bank of India to monitor the functioning of the entire banking system. The passing the Banking regulation act in 1949, empowered RBI to further regulate, inspect, and control Indian banks. The nationalization and liberalization of banks 1969 and 1991 respectively also boosted the development of the Indian banking sector. Nationalization resulted in 91% of government holding in the banking industry and liberalization paved the path for private players to participate in the industry. As a result, banks like Oriental bank of Commerce, HDFC bank, ICICI bank, and AXIS bank came into being. Foreign banks too were permitted to set up their offices in India. The rationalization of FDI norms in 2002 also allowed foreign players to acquire stakes in Indian banks. These banks implemented innovative forms of banking like ATMs, mobile banking, phone banking, internet banking, and debit/credit cards. The private players constantly improved services in order to retain customers and win the severe competition which had become a feature of the Indian banking industry. Currently, private banks are going through a series of mergers and acquisitions and public sector banks are shrinking in the form of manpower, equity, and non-performing assets. The public sector banks have been grappling with attrition which surfaced after the Voluntary Retirement Scheme was announced. The dilution of equity from 51% to 33% has opened up opportunities for takeovers. The Indian banking system, however, proved resilient to shocks arising out of the global financial recession. In terms of quality of assets, the Indian banking players have come out clean with strong and transparent balance sheets compared to their counterparts in other nations. Following the financial crisis, new deposits made their way towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5% of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8%. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8%, 5.6%, and 3%, respectively. Ever since US declared recovery from the global financial crisis, the confidence of non-resident Indians (NRIs) in the Indian economy has revived again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin. The report also found that scheduled commercial banks served 34,709 banked centers. Of these centers, 28,095 were single office centers and 64 centers had 100 or more bank offices. The expansion plans are self evident from the example of SBI, which is adding 23 new branches abroad, bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers. Currently, the Indian banking framework is comprised of 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake, they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS. Currently the banking industry looks optimistic in terms of strong inflow of funds. This could be supported by the declaration made by RBI in 2009. According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to: Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly through policy adjustments, Actively manage liquidity to ensure credit demands of productive sectors are met adequately, Maintain an interest rate environment consistent with financial stability and price stability. The money supply growth on a year-on-year basis at 18.9% as on October 9, 2009, remained above the indicative projection of 18% set out in the First Quarter Review of July 2009. The main source of the expansion was bank credit to the government, reflecting large market borrowings of the government.