Banking in India

From Wikipedia, the free encyclopedia

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India in the modern sense originated in the last decades of the 18th century. Among
the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in
1829-32; and the General Bank of India, established 1786 but failed in 1791. [1][2][3][4]
The largest bank, and the oldest still in existence, is the State Bank of India. It originated as
the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one
of the three banks funded by a presidency government, the other two were the Bank of
Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial
Bank of India, which upon India's independence, became the State Bank of India in 1955. For
many years the presidency banks had acted as quasi-central banks, as did their successors, until
the Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934.[5]
[6]

In 1960, the State Banks of India was given control of eight state-associated banks under the
State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks.[5] In
1969 the Indian government nationalised 14 major private banks. In 1980, 6 more private banks
were nationalized.[7] These nationalized banks are the majority of lenders in the Indian economy.
They dominate the banking sector because of their large size and widespread networks. [8]
The Indian banking sector is broadly classified into scheduled banks and non-scheduled banks.
The scheduled banks are those which are included under the 2nd Schedule of the Reserve Bank
of India Act, 1934. The scheduled banks are further classified into: nationalised banks; State
Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private sector banks.[6] The term commercial banks refers to both scheduled and non-scheduled
commercial banks which are regulated under the Banking Regulation Act, 1949.[9]
Generally banking in India is fairly mature in terms of supply, product range and reach-even
though reach in rural India and to the poor still remains a challenge. The government has
developed initiatives to address this through the State Bank of India expanding its branch

network and through the National Bank for Agriculture and Rural Development with facilities
like microfinance.

Last Updated: September, 2015

SECTORAL REPORT | AUGUST, 2015

Introduction
As per the Reserve Bank of India (RBI), Indias banking sector is sufficiently capitalised and wellregulated. The financial and economic conditions in the country are far superior to any other country
in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient
and have withstood the global downturn well.
Indian banking industry is expected to witness better growth prospects in 2015 as a sense of optimism
stems from the Governments measures towards revitalizing the industrial growth in the country. In
addition, RBIs new measures may go a long way in helping the restructuring of the domestic banking
industry.
Market Size
The Indian banking system consists of 26 public sector banks, 20 private sector banks, 43 foreign
banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in
addition to cooperative credit institutions. Public-sector banks control nearly 80 percent of the market,
thereby leaving comparatively much smaller shares for its private peers.
As of August 5, 2015, 175 million accounts had been opened under Pradhanmantri Jan Dhan Yojna
(PMJDY) and 154 million RuPay debit cards were issued. These new accounts have mustered
deposits worth Rs 22,033 crore (US$ 3.31 billion).
Standard & Poors estimates that credit growth in Indias banking sector would improve to 12-13 per
cent in FY16 from less than 10 per cent in the second half of CY14.
Investments/developments
In the past few months, there have been many investments and developments in the Indian banking
sector

The RBI has given in-principle approval to 11 applicants to establish payment banks. These banks can accept
deposits and remittances, but are not allowed to extend any loans.

The Bank of Tokyo-Mitsubishi (BTMU), a Japanese financial services group, aims to double its branch count in
India to 10 over the next three years and also target a 10 per cent credit growth during FY16.

State Bank of India has tied up with e-commerce portal Snapdeal and payment gateway Paypal to finance
MSME businesses.

The United Economic Forum (UEF), an organisation that works to improve socio-economic status of the
minority community in India, has signed a memorandum of understanding (MoU) with Indian Overseas Bank
(IOB) for financing entrepreneurs from backward communities to set up businesses in Tamil Nadu

The RBI has allowed third-party white label automated teller machines (ATM) to accept international cards,
including international prepaid cards, and said white label ATMs can now tie up with any commercial bank for
cash supply.

The RBI has allowed Indian alternative investment funds (AIFs), to invest abroad, in order to increase the
investment opportunities for these funds.

In order to boost the infrastructure sector and the banks financing long gestation projects, the RBI has
extended its flexible refinancing and repayment option for long-term infrastructure projects to existing ones
where the total exposure of lenders is more than Rs 500 crore (US$ 75.1 million).

RBI governor Mr Raghuram Rajan and European Central Bank President Mr Mario Draghi have signed an
MoU on cooperation in central banking. The memorandum of understanding provides a framework for regular
exchange of information, policy dialogue and technical cooperation between the two institutions. Technical
cooperation may take the form of joint seminars and workshops in areas of mutual interest in the field of
central banking, RBI said on its website.

RBL Bank informed that it would be the anchor investor in Trifecta Capitals Venture Debt Fund, the first
alternative investment fund (AIF) in India with a commitment of Rs 50 crore (US$ 7.51 million). This move
provides RBL Bank the opportunity to support the emerging venture debt market in India.

Bandhan Financial Services raised Rs 1,600 crore (US$ 240.2 million) from two international institutional
investors to help convert its microfinance business into a full service bank. Bandhan, one of the two entities to
get a banking licence along with IDFC, launched its banking operations in August 2015.

An MoU has been signed between the Yes Bank and the US governments development finance institution
Overseas Private Investment Corp (OPIC) to explore US$ 220 million of financing to lend to micro, small and
medium enterprises (MSMEs) in India.

The RBI has allowed bonds issued by multilateral financial institutions like World Bank Group, the Asian
Development Bank and the African Development Bank in India as eligible securities for interbank borrowing.
The move is expected to further develop the corporate bonds market, RBI informed in a notification.

Government Initiatives
There have been a lot of developments in the Indian banking sector.

The Government of India announced a capital infusion of Rs 6,990 crore (US$ 1.05 billion) in nine state run
banks, including State Bank of India (SBI) and Punjab National Bank (PNB). However, the new efficiency
parameters would include return on assets and return on equity. According to the finance ministry, This year,
the Government of India has adopted new criteria in which the banks which are more efficient would only be
rewarded with extra capital for their equity so that they can further strengthen their position."

To facilitate an easy access to finance by Micro and Small Enterprises (MSEs), the Government/RBI has
launched Credit Guarantee Fund Scheme to provide guarantee cover for collateral free credit facilities
extended to MSEs upto Rs 1 Crore (US$ 0.15 million). Moreover, Micro Units Development & Refinance
Agency (MUDRA) Ltd. was also established to refinance all Micro-finance Institutions (MFIs), which are in the
business of lending to micro / small business entities engaged in manufacturing, trading and services activities
upto Rs 10 lakh (US$ 0.015 million).

The central government has come out with draft proposals to encourage electronic transactions, including
income tax benefits for payments made through debit or credit cards.

The Union cabinet has approved the establishment of the US$ 100 billion New Development Bank (NDB)
envisaged by the five-member BRICS group as well as the BRICS contingent reserve arrangement (CRA).

The government has plans to set up a fund that will provide surety to banks against loans given to students for
higher education.

Road Ahead
The Indian economy is on the brink of a major transformation, with several policy initiatives set to be
implemented shortly. Positive business sentiments, improved consumer confidence and more
controlled inflation are likely to prop-up the countrys the economic growth. Enhanced spending on
infrastructure, speedy implementation of projects and continuation of reforms are expected to provide
further impetus to growth. All these factors suggest that Indias banking sector is also poised for
robust growth as the rapidly growing business would turn to banks for their credit needs.
Also, the advancements in technology have brought the mobile and internet banking services to the
fore. The banking sector is laying greater emphasis on providing improved services to their clients and
also upgrading their technology infrastructure, in order to enhance the customers overall experience
as well as give banks a competitive edge.
Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit
and debit cards in the market shortly. The cards, which use near field communication (NFC)
mechanism, will allow customers to transact without having to insert or swipe.
Exchange Rate Used: INR 1 = US$ 0.0150 as on September 8, 2015

Preface|Foreword|Executive Summary|Banks|Non Banks|General Insurance|Life Insurance|Mutual Funds|

Interview|Company Profiles|Partners|Launch Event|Editorial Team

Evolution of the Indian Banking Industry:

The Indian banking industry has its foundations in the 18th century, and has had a varied evolutionary
experience since then. The initial banks in India were primarily traders banks engaged only in financing
activities. Banking industry in the pre-independence era developed with the Presidency Banks, which
were transformed into the Imperial Bank of India and subsequently into the State Bank of India. The
initial days of the industry saw a majority private ownership and a highly volatile work environment.
Major strides towards public ownership and accountability were made with nationalisation in 1969 and
1980 which transformed the face of banking in India. The industry in recent times has recognised the
importance of private and foreign players in a competitive scenario and has moved towards greater
liberalisation.

In the evolution of this strategic industry spanning over two centuries, immense developments have
been made in terms of the regulations governing it, the ownership structure, products and services
offered and the technology deployed. The entire evolution can be classified into four distinct phases.

Phase I- Pre-Nationalisation Phase (prior to 1955)

Phase II- Era of Nationalisation and Consolidation (1955-1990)

Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalisation
(1990-2004)

Phase IV- Period of Increased Liberalisation (2004 onwards)

Current Structure
Currently the Indian banking industry has a diverse structure. The present structure of the Indian
banking industry has been analyzed on the basis of its organised status, business as well as product
segmentation.
Organisational Structure
The entire organised banking system comprises of scheduled and non-scheduled banks. Largely, this
segment comprises of the scheduled banks, with the unscheduled ones forming a very small
component. Banking needs of the financially excluded population is catered to by other unorganised
entities distinct from banks, such as, moneylenders, pawnbrokers and indigenous bankers.
Scheduled Banks
A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order to be
included under this schedule of the RBI Act, banks have to fulfill certain conditions such as having a
paid up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that its affairs are
not being conducted in a manner prejudicial to the interests of its depositors. Scheduled banks are
further classified into commercial and cooperative banks. The basic difference between scheduled
commercial banks and scheduled cooperative banks is in their holding pattern. Scheduled cooperative
banks are cooperative credit institutions that are registered under the Cooperative Societies Act. These
banks work according to the cooperative principles of mutual assistance.
Scheduled Commercial Banks (SCBs):
Scheduled commercial banks (SCBs) account for a major proportion of the business of the scheduled
banks. As at end-March, 2009, 80 SCBs were operational in India. SCBs in India are categorized into
the five groups based on their ownership and/or their nature of operations. State Bank of India and its
six associates (excluding State Bank of Saurashtra, which has been merged with the SBI with effect
from August 13, 2008) are recognised as a separate category of SCBs, because of the distinct statutes
(SBI Act, 1955 and SBI Subsidiary Banks Act, 1959) that govern them. Nationalised banks (10) and
SBI and associates (7), together form the public sector banks group and control around 70% of the
total credit and deposits businesses in India. IDBI ltd. has been included in the nationalised banks
group since December 2004. Private sector banks include the old private sector banks and the new
generation private sector banks- which were incorporated according to the revised guidelines issued by
the RBI regarding the entry of private sector banks in 1993. As at end-March 2009, there were 15 old
and 7 new generation private sector banks operating in India.
Foreign banks are present in the country either through complete branch/subsidiary route presence or
through their representative offices. At end-June 2009, 32 foreign banks were operating in India with
293 branches. Besides, 43 foreign banks were also operating in India through representative offices.

Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy by
providing banking services in such areas by combining the cooperative specialty of local orientation and
the sound resource base which is the characteristic of commercial banks. RRBs have a unique structure,
in the sense that their equity holding is jointly held by the central government, the concerned state
government and the sponsor bank (in the ratio 50:15:35), which is responsible for assisting the RRB by
providing financial, managerial and training aid and also subscribing to its share capital.
Between 1975 and 1987, 196 RRBs were established. RRBs have grown in geographical coverage,
reaching out to increasing number of rural clientele. At the end of June 2008, they covered 585 out of
the 622 districts of the country. Despite growing in geographical coverage, the number of RRBs
operational in the country has been declining over the past five years due to rapid consolidation among
them. As a result of state wise amalgamation of RRBs sponsored by the same sponsor bank, the
number of RRBs fell to 86 by end March 2009.
Scheduled Cooperative Banks:
Scheduled cooperative banks in India can be broadly classified into urban credit cooperative institutions
and rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short
term lending. Credit cooperatives in most states have a three tier structure (primary, district and state
level).
Non-Scheduled Banks:
Non-scheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB).
As at end-March 2009 there were only 4 LABs operating in India. Local area banks are banks that are
set up under the scheme announced by the government of India in 1996, for the establishment of new

private banks of a local nature; with jurisdiction over a maximum of three contiguous districts. LABs aid
in the mobilisation of funds of rural and semi urban districts. Six LABs were originally licensed, but the
license of one of them was cancelled due to irregularities in operations, and the other was
amalgamated with Bank of Baroda in 2004 due to its weak financial position.
Business Segmentation
The entire range of banking operations are segmented into four broad heads- retail banking businesses,
wholesale banking businesses, treasury operations and other banking activities. Banks have dedicated
business units and branches for retail banking, wholesale banking (divided again into large corporate,
mid corporate) etc.

Retail banking
It includes exposures to individuals or small businesses. Retail banking activities are identified based on
four criteria of orientation, granularity, product criterion and low value of individual exposures. In
essence, these qualifiers imply that retail exposures should be to individuals or small businesses
(whose annual turnover is limited to Rs. 0.50 billion) and could take any form of credit like cash credit,
overdrafts etc. Retail banking exposures to one entity is limited to the extent of 0.2% of the total retail
portfolio of the bank or the absolute limit of Rs. 50 million. Retail banking products on the liability side
includes all types of deposit accounts and mortgages and loans (personal, housing, educational etc) on
the assets side of banks. It also includes other ancillary products and services like credit cards, demat
accounts etc.
The retail portfolio of banks accounted for around 21.3% of the total loans and advances of SCBs as at
end-March 2009. The major component of the retail portfolio of banks is housing loans, followed by
auto loans. Retail banking segment is a well diversified business segment. Most banks have a
significant portion of their business contributed by retail banking activities. The largest players in retail
banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara Bank.
Among the large banks, ICICI bank is a major player in the retail banking space which has had
definitive strategies in place to boost its retail portfolio. It has a strong focus on movement towards
cheaper channels of distribution, which is vital for the transaction intensive retail business. SBIs retail
business is also fast growing and a strategic business unit for the bank. Among the smaller banks,
many have a visible presence especially in the auto loans business. Among these banks the reliance on
their respective retail portfolio is high, as many of these banks have advance portfolios that are
concentrated in certain usages, such as auto or consumer durables. Foreign banks have had a
somewhat restricted retail portfolio till recently. However, they are fast expanding in this business
segment. The retail banking industry is likely to see a high competition scenario in the near future.
Wholesale banking

Wholesale banking includes high ticket exposures primarily to corporates. Internal processes of most
banks classify wholesale banking into mid corporates and large corporates according to the size of
exposure to the clients. A large portion of wholesale banking clients also account for off balance sheet
businesses. Hedging solutions form a significant portion of exposures coming from corporates. Hence,
wholesale banking clients are strategic for the banks with the view to gain other business from them.
Various forms of financing, like project finance, leasing finance, finance for working capital, term
finance etc form part of wholesale banking transactions. Syndication services and merchant banking
services are also provided to wholesale clients in addition to the variety of products and services
offered.
Wholesale banking is also a well diversified banking vertical. Most banks have a presence in wholesale
banking. But this vertical is largely dominated by large Indian banks. While a large portion of the
business of foreign banks comes from wholesale banking, their market share is still smaller than that of
the larger Indian banks. A number of large private players among Indian banks are also very active in
this segment. Among the players with the largest footprint in the wholesale banking space are SBI,
ICICI Bank, IDBI Bank, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India.
Bank of Baroda has also been exhibiting quite robust results from its wholesale banking operations.
Treasury Operations
Treasury operations include investments in debt market (sovereign and corporate), equity market,
mutual funds, derivatives, and trading and forex operations. These functions can be proprietary
activities, or can be undertaken on customers account. Treasury operations are important for managing
the funding of the bank. Apart from core banking activities, which comprises primarily of lending,
deposit taking functions and services; treasury income is a significant component of the earnings of
banks. Treasury deals with the entire investment portfolio of banks (categories of HTM, AFS and HFT)
and provides a range of products and services that deal primarily with foreign exchange, derivatives
and securities. Treasury involves the front office (dealing room), mid office (risk management including
independent reporting to the asset liability committee) and back office (settlement of deals executed,
statutory funds management etc).
Other Banking Businesses
This is considered as a residual category which includes all those businesses of banks that do not fall
under any of the aforesaid categories. This category includes para banking activities like hire purchase
activities, leasing business, merchant banking, factoring activities etc.
Products of the Banking Industry
The products of the banking industry broadly include deposit products, credit products and customized
banking services. Most banks offer the same kind of products with minor variations. The basic
differentiation is attained through quality of service and the delivery channels that are adopted. Apart
from the generic products like deposits (demand deposits current, savings and term deposits), loans
and advances (short term and long term loans) and services, there have been innovations in terms and
products such as the flexible term deposit, convertible savings deposit (wherein idle cash in savings
account can be transferred to a fixed deposit), etc. Innovations have been increasingly directed towards
the delivery channels used, with the focus shifting towards ATM transactions, phone and internet
banking. Product differentiating services have been attached to most products, such as debit/ATM
cards, credit cards, nomination and demat services.

Other banking products include fee-based services that provide non-interest income to the banks.
Corporate fee-based services offered by banks include treasury products; cash management services;
letter of credit and bank guarantee; bill discounting; factoring and forfeiting services; foreign exchange
services; merchant banking; leasing; credit rating; underwriting and custodial services. Retail feebased services include remittances and payment facilities, wealth management, trading facilities and
other value added services.