Banking Industry

We have chosen to analyze the Banking Industry. The rationale behind choosing it is

India is on its way to become one of the largest economic giants. The development is taking place at a
fast pace in our country. The effective Banking system has played a significant part in this development.
The Indian Banking industry historically has been one of the most stable systems globally, despite many
external factors which might contribute in hampering its stability. The Indian banking sector consists of
20 public banks, 22 private banks, 44 foreign banks, 44 regional rural banks, 1,542 urban cooperative
banks and 94,384 rural cooperative banks as of 2019. Currently our banking system contributes 7.7% to
the national GDP of our country. It also successfully holds pride in providing employment to about 1.5
million people. Banking industry is a backbone for our country.

Objective: To analyse the banking industry and understand its evolution, Key developments, Key
Government initiatives and interventions, the complete Banking structure, Market share division, the
key competitors in both the private and public banking sectors, their performance and our
interpretation and understanding of the banking industry in a nut shell.

Evolution and Analysis of the Banking Industry:

To study about the evolution and key changes in the banking industry, we have decided to divide the
entire industry into 3 major periods of study:

1) The Pre- Independence period (Before 1947)

2) Post -Independence period ( 1947- 1991)
3) Liberalisation Period (Post 1991)

1) Pre- Independence Period:

The origin of the banking industry can be traced from the 18 th century when the banking
services were first started by the British in Calcutta in 1786. 3 main banks, Bank of Bengal,
Bank of Bombay and Bank of Madras was established under the British East India Company.
Later on in 1935, these 3 banking entities were merged back together to make the Imperial
Bank of India which is today known as the State Bank Of India. The 1 st All Indian Bank-
Allahabad Bank was set up in Allahabad in 1865.

Later Punjab National Bank and The Bank of India was established in India. The period between 1906
and 1913 saw many commercial banks coming up in our country, like Canara Bank, Indian Bank, Central
Bank of India, Bank of Baroda and Bank of Mysore. Seeing the growing number of banks, in order to
regulate them better, on the recommendation of the Hilton Young Commission, The central Bank Of
India- The Reserve Bank of India was established in 1935.
2) Post Independence Period:

Until the start of this period, the banking services were not offered to the rural segment. People from
the rural areas which included farmers had to depend on local moneylenders to borrow money. The
farmers were subjected to the unfair demands of the money lendors which included,
a) More money to be paid to the money lendors as there was manipulation of accounts.
b) Unjustifiably high amounts of interest charged on the loan.
c) Loss of land, assets, forfeit jewellery to repay the loan within the stringent time frame.

Recognising all these problems, the government nationalized the Reserve Bank of India in 1949
to solve these problems and push the country towards a better economic development. The
period from 1969- 1991 is known as the Nationalisation Period, where the government had 14
major banks, whose major deposits were more than 50 crores.
Post this move also, though the Indian economy had progressed, the rural segment had still not
seen any recovery and improvement. So in order to have a special focus on the rural segment
and cater to their needs better, in 1974, the Narasimham Committee recommended that
Regional Rural Banks (RRB) to be set which would provide credit to specifically the rural segment
of our country. This recommendation was brought into execution from 2 nd October 1975.

3) Liberalisation:
This is the period where major reforms were brought into the banking system in India.
The country was opened to foreign banks to set up either their branches or offices in our
country. The major focus of this period was to make the banking sector a competitive
industry to encourage better performance. Norms were made to ensure that the public
sector and private sector banks be equally treated by the government and RBI.
The government encouraged that banks come up with a more progressive function such as
merchant banking, retail banking and underwriting, not limiting their ideas to the
traditional banking system. This era also took a major step in allowing joint ventures
between the foreign banks and Indian banks to be set up.

Key Developments in the industry :

A key contributor to the growth of the banking industry has been technology. There were
numerous technological additions that were brought in into the banking industry which
brought in immense growth.

1) Establishment of Automatic Teller Machines (ATMs):

ATMs have helped customers withdraw money 365 days, 24/7. Apart from the
withdrawals, other activities like depositing cash, cheques, transferring funds from one
account to another can also be done at the ATMs.
2) Immediate Payment Service (IMPS):
This service provided by the NCPI. It is an immediate quick service through which we
can transfer the funds through a click of a mobile phone.

3) RTGS (Real time Gross Settlement) :

This is one of the quickest ways through which you can transfer the funds. The process
takes in real time as the name suggests. RBI is responsible for the money to reach the
beneficiary within 2 hours of the initiation. The fund transfer is irrevocable.

4) Mobile Payment:
The payments are just a click away. All the payments right from fund transfers to bill
payments to receivables, everything can be managed on your phone. It is just like your
bank on your phone.

5) E- Wallets:
E- wallet is similar to having a savings bank account but a virtual online one. One can pre
load their e- wallet with money and use the money for various online transactions like
shopping on ecommerce websites, bill payments, purchase of airline or travel ticket. The
financial partners which offer the E- wallet services have ensured that it is made
completely safe and difficult to hack.

Key Government interventions:

1) The government had nationalized 14 banks in 1935.

2) The RRB were set up to render banking services to the rural segment.

3) Permitting the partnership of public and private banks.

4) RBI plays a very vital role in maintaining the currency reserves to ensure price and
monetary stability.

5) The Monetary Policy Committee headed by the RBI governor ensure to keep the
inflation rates under control and limit it to 4% ( mid term inflation). The experts during
the meeting held, decide upon a repo rate based on which the banks have to follow and
decide their interest rates.
6) RBI has a Ombudsman to whom the citizens can complain top if they feel any injustics
being done to them or if they face any kind of a dispute from the banks or any financial
institiutions. The RBI will resolve the matter for the citizens and ensure that justice is
being done.
 7) To ensure price control and the money flow in the market, the RBI follows a system.
If there is more money in the market, the value of money decreases which may lead to
an increase in the prices and the people paying more for the same commodity. Then the
banks might borrow money from the banks which is called reverse repo rate. The banks
will lend money for the interest that they are getting paid for. This will ensure that the
supply of money is less in the market.

On the flip side, if The RBI feels that the people are not spending, which is leading to less
money flow, shortage of supply of currency notes in the market, the RBI tend to lend
money to the banks at lower interest rates to incentivize and encourage spending. The
interest at which the RBI tends to lend money is known as repo rate.

Analysis:

The Banking industry in India is a monopolistic competitive industry where there are many competitors
taking part and offering similar kind of products. The products are not significantly dissimilar to each
other and so, cannot be said that the offerings are a perfect substituite to each other. The entry and exit
barriers also quite low in the market. The banking industry is Income elastic that is, if the income levels
of the citizens is high, they might deposit more money into the depository and non depository funds.
On the other side, if parameters like interest rates, taxation amounts are low, people might be willing to
borrow more money and spend it which will lead to more money flow in the market.

For our analysis, let us divide the entire banking industry to 2 major divisions,

a) Public Sector Banks and

b) b) Private sector banks.
Lets focus on the Indian Banking sector to analyse and understand it better.

Structure of the Indian Banking Industry:

The Reserve Bank of India is neither a public sector nor a private sector bank. Both the
Scheduled Banks and the Non Scheduled banks come under the RBI governance.

a) Scheduled Banks and Unscheduled Banks: Those banks which have been included in the RBI
act of 1934 are known as scheduled banks and the rest of the banks come under the
unscheduled Banks. Example- Allahabad Bank is a scheduled bank .

Further the Scheduled banks are categorized as

a) Commercial Banks : A type of bank that provides services that any typical bank offers but
it is operated as a business for profit. Example) ICICI Bank.
 b) Cooperative Banks: When Retail Banking and Commercial Banking are organized on a
cooperative basis, they are known as cooperative banks. Example) Andhra Pradesh State
Cooperative Banks.

Further, we can see the Commercial Banks bifurcated into

a) Public sector Banks: Banks in which the majority stake is held with the government.
Example- Canara Bank.
b) Private Sector Banks: Banks where the majority stake is help by the private entities
which may be the banks themselves. Example- HDFC Bank
c) Foreign Banks – Banks which have their branches in countries other than their home
land and have to follow the rules and obligations off both the home land and the foreign
land. Example- Citibank
d) Regional Rural Banks(RRB) – The commercial banks operating at the regional level at
various states in order to cater specifically to the requirements of the rural segment of
our country. Example- Andhra Pragati Grameena Bank.

Market Size:

The current market size of the Indian Banking Industry consists of 20 public sector banks, 22 private
sector banks, 44 each regional and foreign banks, 94,384 rural corperative banks as of 2020. The assets
under the public holdings amounted to Rs. 72.59 Lakh crores. During the past 5 years, the credit off take
grew at a compounded Annual growth rate of 13.93%. The period also saw a compounded annual
growth rate of 6.81% in the number of depositors.
Market Share Growth

The chart above shows the percentage change in the market share occupied by both public and private
sector banks in India in 3 different decades. As we can observe, the private banks share has been seen
growing in the market. This is because as we had discussed in the evolution of the banking sectors, the
government had encouraged and taken steps to make the banking industry a competitive one to ensure
that proper services are rendered.

The bar graph above shows us the market share that the banks pertaining to 4 major sectors which
include Public, Private, Foreign and Regional Rural occupy in the Indian Banking Industry.
Key Competitors:

Let us break down the analysis further to understand the key players in both the public sector banks and
also the private sector banks as well.

Important players in the Public Sector Banks and their revenue contribution to the industry according
to the statistics in 2020.

We can clearly see that the market leader is SBI among the public sector banks.

Key competitors among the private sector Banks:

A complete overview of the market share of key competitors

Some Key performance indicators of the key players of the banking industry:

1) Increase in the deposit value:

 There is a significant increase in the value of the deposits as shown in the graph. This is a good sign as
the banks, after taking out some amount aside as reserve deposits, the rest of the amount becomes the
loanable amount. If the amount that can be let out is more, the interest rates come down. But if there is
too much money in the market, it can also cause Inflation. The RBI ensures that an equilibrium is
maintained. That is the reason that there are no peaks and perks in the graph. Rather the growth is
stable and regulated.

2)
NPA- Non Performing Assets: -

The amounts such as loans which are defaulted

and has not been payed to the banks within the
period mentioned is known as non performing
assets. The aim should be to minimize the bad
3) A direct relationship between the GNPA and Profits debts
: which cannot be recovered so as to
minimize the loss for a bank. The NPA trend of
Kotak Mahindra is potrayed on the left.

As we can analyase from the graphs, both the banks were making significant profits until 2014. In 2014, the gross
non performing assets started increasing which had started showing an affect on the profits of the banks. When
2018-2019, there was positive spike in GNPA, the profits also showed a negative spike.
 4)

Provision Coverage Ratio-

It is the provision made from the profit which is

kept aside in anticipation of a bad dept. A higher
provision of bad debt implies that the companies is
shielded and protected against the worst situations
too. A higher Provision coverage ratio is desirable.

Conclusion:
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