Topic – Indian Banking Sector

Name: Arnab Mitra

Roll Number - 2022JANBSL01002
Contents
Evolution of the Indian banking sector............................................................................................4
Market Size......................................................................................................................................4
Structure of the Industry..................................................................................................................5
India’s Top 5 Banks by Market Share.........................................................................................5
Total Deposit and Credit Market Share...................................................................................5
Indian banking sector Growth Rate.........................................................................................6
Opportunity:.............................................................................................................................7
Growth Projected in Coming Years.........................................................................................7
Growth drivers of Indian banking sector.........................................................................................7
Economic and demographic drivers........................................................................................7
Policy support..........................................................................................................................7
Infrastructure financing...........................................................................................................7
Government initiatives.............................................................................................................8
Segment Analysis....................................................................................................................8
Metrics.............................................................................................................................................9
KPIs...............................................................................................................................................10
Banking Industry - Key Success Factors.......................................................................................10
BUSINESS RISK ASSESSMENT............................................................................................10
Market Position......................................................................................................................10
Diversification.......................................................................................................................10
Management & Human Resources........................................................................................10
FINANCIAL RISK ASSESSMENT.............................................................................................11
Capitalization.............................................................................................................................11
Assets Quality............................................................................................................................11
Profitability................................................................................................................................11
Liquidity And Financial Flexibility...........................................................................................11
Regulation that Effects the Banking Sector...................................................................................12
Exposure limits..........................................................................................................................12
Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR).............................................12
Provisioning...............................................................................................................................13
New bank license norms............................................................................................................14
Willful defaulters.......................................................................................................................14
The Bottom Line........................................................................................................................14
Key Banking Statistics...................................................................................................................15
New Events....................................................................................................................................15
Recent Addition of new Banks to the list..................................................................................16
New launches of Products.........................................................................................................16
Recent M&A..............................................................................................................................16
Recent Collapses........................................................................................................................17
Business Model..............................................................................................................................17
Schemes by government................................................................................................................17
Growth Drivers and Opportunities................................................................................................18
Growth drivers of Indian banking sector...................................................................................18
Strong economic growth to propel banking sector expansion...................................................19
Rising rural income pushing up demand for banking................................................................19
Housing and personal finance have been key drivers................................................................20
Comparison of Banks....................................................................................................................21
Advantage India.............................................................................................................................21
Robust demand......................................................................................................................21
Business fundamentals...........................................................................................................22
Policy support........................................................................................................................22
Innovation in services....................................................................................................................22
Mobile banking to provide a cost-effective solution.................................................................23
Soaring rural tele-density paves the way for mobile banking (in%).........................................23
Evolution of the Indian banking sector

Market Size

The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional
rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks in addition to cooperative credit
institutions As of September 2021, the total number of ATMs in India reached 213,145 out of which 47.5% are in
rural and semi urban areas.

In FY18-FY21, bank assets across sectors increased. Total assets across the banking sector (including public and
private sector banks) increased to US$ 2.48 trillion in FY21.

In FY21, total assets in the public and private banking sectors were US$ 1,602.65 billion and US$ 878.56 billion,
respectively.

During FY16-FY21, bank credit increased at a CAGR of 0.29%. As of FY21, total credit extended surged to US$
1,487.60 billion. During FY16-FY21, deposits grew at a CAGR of 12.38% and reached US$ 2.06 trillion by FY21. Bank
deposits stood at Rs. 162.41 trillion (US$ 2.17 trillion) as of December 31, 2021.
According to India Ratings & Research (Ind-Ra), credit growth is expected to hit 10% in 2022-23 which will be a
double-digit growth in eight years. According to the RBI, bank credit stood at Rs. 116.8 lakh crore (US$ 1.56 trillion)
on 31st December 2021.

As of February 2022, credit to non-food industries stood at Rs. 114.10 trillion (US$ 1.53 trillion).

Structure of the Industry

India’s Top 5 Banks by Market Share

Total Deposit and Credit Market Share
Total Deposits with Scheduled largest Commercial Banks in India is ~INR 135 lakh crore and Total credit is ~ INR
103 lakh crore.
Out of which major market share is with the top 5 banks which is as shown below.

India's Top 5 Banks by Market Share The best 5 banks in India by Market Share in Deposits & Credits (Advances)
  As seen, SBI has the largest market share in deposits (23.9%) and credits (22.5%), being the biggest
public sector bank in India.
 Before 5-7 years, market share of SBI in Deposits and Credit was ~30%, however it declined due to
major competition from major private sector players like HDFC, ICICI, Axis, Kotak Mahindra, etc
 In recent times, due to the current turmoil in banking industry mainly due to Yes Bank issue,
consumers have become risk averse and prefer safety of principle over incremental returns. This led
to higher incremental flow in the public sector top banks in India like SBI bank.
 As the situation improves, private sector banks will again start seeing traction.
 After SBI, market share of HDFC bank in banking sector is the second largest followed by ICICI bank,
Axis Bank and Kotak Mahindra Bank.
 If we look at the total market share of the best 5 banks in India mentioned above, accounts for ~45%
of the total market share in deposits and 46% in total market share of credit.

Indian banking sector Growth Rate

 X off-take has been surging ahead over the past decade, aided by strong economic growth,
rising disposable incomes, increasing consumerism and easier access to credit.
 During FY16-FY21, bank credit increased at a CAGR of 0.29%. As of FY21, total credit
extended surged to US$ 1,487.60 billion.
 Demand has grown for both corporate and retail loans. Services, real estate, consumer
durables and agriculture allied sectors have led the growth in credit.
 In August 2021, Barclays announced investment of Rs. 30 billion (US$ 403.99 million) in India
to expand its operations.
 In August 2021, RBI developed Financial Inclusion Index (FI-Index) to measure the level of
financial inclusion across the country. The FIIndex increased from 43.4 in FY17 to 53.9 in
FY21.
 Bank credit grew by 9.16% and the deposits were up by 10.28% as of the calendar year
2021. According to Fitch arm credit growth is expected to hit 10% in 2022-23 which will be a
double-digit growth in eight years.
 According to the RBI, bank credit stood at Rs. 116.8 lakh crore (US$ 1.56 trillion) on 31st
December 2021.
 As of February 2022, credit to non-food industries stood at Rs. 114.10 trillion (US$ 1.53
trillion)
 Access to banking system has also improved over the years due to persistent effort from
Government to promote banking technology and promote expansion in unbanked and non-
metropolitan regions.
 At the same time, India’s banking sector has remained stable despite global upheavals,
thereby retaining public confidence over the years.
 Strong growth in savings amid rising disposable income levels are the major factors
influencing deposit growth.
 According to RBI, the performance of Indian banking sector improved in FY20, as lenders
reported a profit on an aggregate basis after two years of losses.
 According to the RBI, bank deposits stood at Rs. 162.41 trillion (US$ 2.17 trillion) as of
December 31 2021.
Opportunity:
o Significant growth possible in private sector lending as credit disbursal by private
sector banks is expected to increase.

Growth Projected in Coming Years

Total banking assets are expected to cross $ 28.5 Tn in 2025.
Total Loans and Deposits are projected to grow at CAGRs of 8.77% and 8.48% respectively from 2020-
2025 with Total Loans expected at ~ $ 4 Trillion by 2025 and Deposits at $3.7 Trillion

Growth drivers of Indian banking sector

Economic and demographic drivers

o Favorable demographics and rising income levels.

o India ranks among the top 7 economies with a GDP of US$ 2.73 trillion in 2018.
o The sector will benefit from structural economic stability and continued
credibility of Monetary Policy.
Policy support

o The Government passed the Banking Regulation (Amendment) Bill 2017 to

empower RBI to deal with NPAs in the banking sector.
o The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill was
passed by Rajya Sabha to strengthen the banking sector (as of Jan 2018).
Infrastructure financing
o India currently spends 6% of GDP on infrastructure; NITI Aayog expects this
fraction to grow going ahead.
o As per Union Budget 2019-20, investment driven growth requires access to low-
cost capital, which requires an investment of Rs. 20 lakh crores (US$ 300 billion)
every year
Government initiatives
o Government has smoothly carried out consolidation, reducing the number of
public sector banks by eight.
o The Government of India will invest Rs. 48,239 crore (US$ 6.78 billion) in 12
public sector banks in FY20 to help maintain regulatory capital requirements and
financial growth in India.
o The Government of India will invest Rs. 5,042 crore (US$ 730.88 million) in Bank
of Baroda post its merger with two other public sector lenders, Dena Bank and
Vijaya Bank
 Cross-border payments
o Visa Inc. has sought RBI’s permission to offer a new cross-border payments
system to process trade flows to and from India. It will be offering a potentially
cheaper, quicker and blockchain-based solution now on trial.
 Open banking ecosystem
o The open banking eco-system in India has now grown to include Non-Banking
Financial Company (NBFC) and other fintech players that have created
partnerships within the banking system.

Segment Analysis

The three main business segments for a bank are retail banking, wholesale banking, and wealth
management.
 Retail banking or personal banking involves deposits, mortgages, loans, and credit cards.
 Wholesale banking is related to sales and trading and mergers and acquisitions.
 Wealth management generates revenue through retail brokerage services and asset
management.

The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46
foreign banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural
cooperative banks in addition to cooperative credit institutions As of September 2021, the total
number of ATMs in India reached 213,145 out of which 47.5% are in rural and semi urban
areas.

India now gets about USD40 to 45 billion of private equity every year
Metrics
 Net interest margin (NIM) – A measure of the difference between interest paid and
interest received, adjusted for the total amount of interest-generating assets held by
the bank.
 Efficiency ratio – The ratio of non-interest expenses divided by revenue. This shows how
well the bank's managers control their overhead (or back office) expenses.
 Loans/Deposits Ratio (LDR) – Expressed as a percentage, LDR is used to assess a bank's
liquidity by comparing a bank's total loans to its total deposits for the same period. If
the ratio is too high, it means that the bank may not have enough liquidity to cover any
unforeseen fund requirements.
 Liquidity ratio – The measurement of capacity to pay outstanding liabilities assets on
hand. The overall liquidity ratio is calculated by dividing total assets by the difference
between its total liabilities and conditional reserves.
 Core deposits/total deposits – Core deposits are insured by the Federal Deposit
Insurance Corporation (FDIC) to the amount of up to $250,000. In addition to that
advantage, core deposits are generally less vulnerable to changes in short-term interest
rates than certificates of deposit (CDs) or money market accounts. The higher the ratio
the better for most banking institutions.
 Equity/assets – A way to look at a balance sheet and to condense it down to answer one
question – What percentage of assets do investors own?
KPIs
 Earning asset yield – A popular financial solvency ratio that compares interest income to
its earning assets. Yield on earning assets indicates how well assets are performing by
looking at how much income they bring in.
 Cost of funds – A reference to the interest rate paid for the funds used in the business.
The difference between the cost of funds and the interest rate charged to borrowers is
one of the main sources of profit for many banks.
 Return on Average Assets (ROAA) – ROAA is an indicator used to assess the profitability
of a firm's assets, and it is most often used by banks and other financial institutions as a
means to gauge financial performance.
 Return on average equity – A financial ratio that measures performance based on its
average shareholders' equity outstanding.

Banking Industry - Key Success Factors

BUSINESS RISK ASSESSMENT

Market Position
The analysis includes comprehensive assessments of the bank's market shares and sizes in key
business lines or sectors as well as its future prospect, the bank's existing products, future
products, market expansion, and other real advantages resulting from the bank's market
position (pricing power vs. funding base) either in national market, regional market, or in any
specific segment/sector. The vulnerability of the bank's market position is Also considered by
comparing its competitive advantages against its peers.
Infrastructure And Quality Of Service
The analysis covers detailed assessments on the bank's distribution network such as branches,
ATM, and IT capabilities to support its daily banking operation in an effort to provide better and
integrated products and give better services to its customers. The bank's quality of service is
also diligently assessed, as it is considered as an important factor for a retail bank to attract
customers and support the bank's sustainable growth, particularly in the intense business
competition. Other factors that are also assessed are, among others, employees' capabilities in
providing banking services and handling complaints from customers, speed of services,
accessibility, timeliness, and etc.
Diversification
The analysis covers thorough assessments on the bank's business network/base with regard to
geographical/location spread, business lines, products, revenues structures, customers base of
funding and lending, credit risk (broken down by economic sector, size, and customer base), as
well as economic diversity of the bank's market, etc.
Management & Human Resources
The analysis includes detailed assessments on the bank's quality and credibility of the
management and key personnel, the bank's management strategies to maintain sustainable
growths (external and internal), the bank's quality in financial planning and strategy (aggressive
vs. conservative), the bank's organizational structure, the bank's quality of business, which are
generally measured from its underwriting criteria, process of credit approval, delegation of
credit approval and authorities, collateral valuations, monitoring of credit exposures, internal
rating/scoring system, tools or system to identify potential problem exposures as well as roles
and reliabilities of internal audit and compliance department, and the bank's managerial
efficiency and effectiveness. The implementation of good corporate governance, particularly
accountability of the management and transparency of its financial statement, is also reviewed.

FINANCIAL RISK ASSESSMENT

Capitalization
The analysis includes diligent assessments on the bank's capital composition (equity,
subordinated debt, revalued assets, unrealized capital gains, and other types of quasi-
reorganization), the bank's capital position with respect to Central Bank (Bank Indonesia)
requirements, level of Capital Adequacy Ratio (total and Tier 1 CAR), dividend pay out ratio,
internal growth rate of capital, ability to get external sources of capital, capital in comparison
with assets, as well as management philosophy and strategy on leveraging its capital.
Assets Quality
The analysis includes intensive assessments on the bank's non performing loans broken down
by category, the bank's credit portfolio by economic sector, size, and currency, concentration
on credit risks (total exposures to certain industry, company, or individual), settlements on
problem loans (past due loans, restructured loans, or other types of problematic loans), and the
bank's loan loss reserve policy and adequacy. In addition, thorough analysis is also conducted
on the qualitative aspects on assets quality such as whether the bank fully identifies and
discloses its problematic loans, the bank's write off policy and whether the bank implements it
rightly, and other credit judgment that can provide clues about the bank's credit culture, policy,
and procedures and the effects into its asset quality.
Profitability
The analysis includes thorough assessments on the bank's net interest income and margin
(trends, ability to grow, as well as sustainability), non interest income (size, diversity, as well as
growth potential), quality of earnings, ability to price risks into various products, operating
profits, and net income (trend, sustainability, and potential growth). The bank's cost structure
(trends, ability to raise cheaper funding, stability, and etc), cost to income ratio (to measure
efficiency), and management strategy to control operational expenses and improve fee based
income are also diligently assessed.
Liquidity And Financial Flexibility
The analysis covers the assessments on current market condition and its effect on the bank's
liquidity, examination on the bank's liquidity management (in terms of policy and strategy), and
ability to earn immediate cash flow (internally or externally) and its contingency plans to
support its liquidity demand. The examination on the bank's interest rate and maturity
mismatches, net open position, loan to deposit ratio and evaluation on the proportion of the
bank's liquid assets as compared to its short term liabilities are also incorporated in the
assessments. Analysis on financial flexibility includes careful assessments on the bank's ability
to access various funding markets and raise capital from public, or private sources as well as the
likelihood of supports from the government, particularly under distress conditions.

Regulation that Effects the Banking Sector

The banking system in India is regulated by the Reserve Bank of India (RBI), through the
provisions of the Banking Regulation Act, 1949. Some important aspects of the regulations that
govern banking in this country, as well as RBI circulars that relate to banking in India, will be
explored below.

Exposure limits

Lending to a single borrower is limited to 15% of the bank’s capital funds (tier 1 and tier 2
capital), which may be extended to 20% in the case of infrastructure projects. For group
borrowers, lending is limited to 30% of the bank’s capital funds, with an option to extend it to
40% for infrastructure projects. The lending limits can be extended by a further 5% with the
approval of the bank's board of directors. Lending includes both fund-based and non-fund-
based exposure.

Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR)

Banks in India are required to keep a minimum of 4% of their net demand and time liabilities
(NDTL) in the form of cash with the RBI. These currently earn no interest. The CRR needs to be
maintained on a fortnightly basis, while the daily maintenance needs to be at least 95% of the
required reserves. In case of default on daily maintenance, the penalty is 3% above the bank
rate applied on the number of days of default multiplied by the amount by which the amount
falls short of the prescribed level.
Over and above the CRR, a minimum of 22% and a maximum of 40% of NDTL, which is known as
the SLR, needs to be maintained in the form of gold, cash or certain approved securities. The
excess SLR holdings can be used to borrow under the Marginal Standing Facility (MSF) on an
overnight basis from the RBI. The interest charged under MSF is higher than the repo rate by
100 bps, and the amount that can be borrowed is limited to 2% of NDTL. (To learn more about
how interest rates are determined, particularly in the U.S., consider reading more about who
determines interest rates.)

Provisioning
Non-performing assets (NPA) are classified under 3 categories: substandard, doubtful and loss.
An asset becomes non-performing if there have been no interest or principal payments for
more than 90 days in the case of a term loan. Substandard assets are those assets with NPA
status for less than 12 months, at the end of which they are categorized as doubtful assets. A
loss asset is one for which the bank or auditor expects no repayment or recovery and is
generally written off the books.
For substandard assets, it is required that a provision of 15% of the outstanding loan amount
for secured loans and 25% of the outstanding loan amount for unsecured loans be made. For
doubtful assets, provisioning for the secured part of the loan varies from 25% of the
outstanding loan for NPAs that have been in existence for less than one year, to 40% for NPAs
in existence between one and three years, to 100% for NPA’s with a duration of more than
three years, while for the unsecured part it is 100%.

Provisioning is also required on standard assets. Provisioning for agriculture and small and
medium enterprises is 0.25% and for commercial real estate it is 1% (0.75% for housing), while
it is 0.4% for the remaining sectors. Provisioning for standard assets cannot be deducted from
gross NPA’s to arrive at net NPA’s. Additional provisioning over and above the standard
provisioning is required for loans given to companies that have unhedged foreign exchange
exposure.
Priority sector lending
The priority sector broadly consists of micro and small enterprises, and initiatives related to
agriculture, education, housing and lending to low-earning or less privileged groups (classified
as "weaker sections"). The lending target of 40% of adjusted net bank credit (ANBC)
(outstanding bank credit minus certain bills and non-SLR bonds) – or the credit equivalent
amount of off-balance-sheet exposure (sum of current credit exposure + potential future credit
exposure that is calculated using a credit conversion factor), whichever is higher – has been set
for domestic commercial banks and foreign banks with greater than 20 branches, while a target
of 32% exists for foreign banks with less than 20 branches.

The amount that is disbursed as loans to the agriculture sector should either be the credit
equivalent of off-balance-sheet exposure, or 18% of ANBC – whichever of the two figures is
higher. Of the amount that is loaned to micro-enterprises and small businesses, 40% should be
advanced to those enterprises with equipment that has a maximum value of 200,000 rupees,
and plant and machinery valued at a maximum of half a million rupees, while 20% of the total
amount lent is to be advanced to micro-enterprises with plant and machinery ranging in value
from just above 500,000 rupees to a maximum of a million rupees and equipment with a value
above 200,000 rupees but not more than 250,000 rupees.

The total value of loans given to weaker sections should either be 10% of ANBC or the credit
equivalent amount of off-balance sheet exposure, whichever is higher. Weaker sections include
specific castes and tribes that have been assigned that categorization, including small farmers.
There are no specific targets for foreign banks with less than 20 branches.
The private banks in India until now have been reluctant to directly lend to farmers and other
weaker sections. One of the main reasons is the disproportionately higher amount of NPA’s
from priority sector loans, with some estimates indicating it to be 60% of the total NPAs. They
achieve their targets by buying out loans and securitized portfolios from other non-banking
finance corporations (NBFC) and investing in the Rural Infrastructure Development Fund (RIDF)
to meet their quota.

New bank license norms

The new guidelines state that the groups applying for a license should have a successful track
record of at least 10 years and the bank should be operated through a non-operative financial
holding company (NOFHC) wholly owned by the promoters. The minimum paid-up voting equity
capital has to be five billion rupees, with the NOFHC holding at least 40% of it and gradually
bringing it down to 15% over 12 years. The shares have to be listed within three years of the
start of the bank’s operations.

The foreign shareholding is limited to 49% for the first five years of its operation, after which
RBI approval would be needed to increase the stake to a maximum of 74%. The board of the
bank should have a majority of independent directors and it would have to comply with the
priority sector lending targets discussed earlier. The NOFHC and the bank are prohibited from
holding any securities issued by the promoter group and the bank is prohibited from holding
any financial securities held by the NOFHC. The new regulations also stipulate that 25% of the
branches should be opened in previously unbanked rural areas.

Willful defaulters
A willful default takes place when a loan isn’t repaid even though resources are available, or if
the money lent is used for purposes other than the designated purpose, or if a property
secured for a loan is sold off without the bank's knowledge or approval. In case a company
within a group defaults and the other group companies that have given guarantees fail to honor
their guarantees, the entire group can be termed as a willful defaulter.

Willful defaulters (including the directors) have no access to funding, and criminal proceedings
may be initiated against them. The RBI recently changed the regulations to include non-group
companies under the willful defaulter tag as well if they fail to honor a guarantee given to
another company outside the group.

The Bottom Line

The way a country regulates its financial and banking sectors is in some senses a snapshot of its
priorities, its goals, and the type of financial landscape and society it would like to engineer. In
the case of India, the regulations passed by its reserve bank give us a glimpse into its
approaches to financial governance and shows the degree to which it prioritizes stability within
its banking sector, as well as economic inclusiveness.
Though the regulatory structure of India's banking system seems a bit conservative, this has to
be seen in the context of the relatively under-banked nature of the country. The excessive
capital requirements that have been set are required to build up trust in the banking sector
while the priority lending targets are needed to provide financial inclusion to those to whom
the banking sector would not generally lend given the high level of NPA’s and small transaction
sizes.

Since the private banks, in reality, do not directly lend to the priority sectors, the public banks
have been left with that burden. A case could also be made for adjusting how the priority sector
is defined, in light of the high priority given to agriculture, even though its share of GDP has
been going down. (For related reading, see "The Increasing Importance of the Reserve Bank of
India")

Key Banking Statistics

 In FY18-FY21, bank assets across sectors increased. Total assets across the banking
sector (including public and private sector banks) increased to US$ 2.48 trillion in FY21.
 In FY21, total assets in the public and private banking sectors were US$ 1,602.65 billion
and US$ 878.56 billion, respectively.
 In FY21, assets of public sector banks accounted for 64.59% of the total banking assets
(including public, private sector and foreign banks).
 Public sector banks accounted for over 61.0% interest income in FY21. ▪ Interest income
of public banks reached US$ 96.60 billion in FY21.
 In FY21, interest income in the private banking sector reached US$ 61.70 billion.
 In FY21, public sector banks accounted for about 57.0% of other income.
 Other income’ for public sector banks stood at US$ 17.05 billion in FY21.
 In FY21, ‘other income’ in the private banking sector was US$ 12.87 billion.

New Events
Recent Addition of new Banks to the list
The Reserve Bank of India (RBI) on Tuesday issued a Small Finance Bank (SFB) licence to the
consortium of Centrum Financial Services Limited (Centrum) and BharatPe. “A new bank
license has been issued after a gap of nearly 6 years, and we thank the RBI for the confidence
shown in the abilities of Centrum and BharatPe,"

New launches of Products

Product Launched by

National Internet Exchange of India (NIXI) in partnership with PayU and

'Digital Payment Gateway'
National Securities Depositories Limited (NSDL)

HARBINGER 2021 – Innovation for

Reserve Bank of India
Transformation

'SafeCard' PhonePe

SBI Easy Ride State Bank of India (SBI)

Recent M&A

 The consolidated M&A activities are driven by NBFC and banking sector
 In 2019, banking and financial services witnessed 32 M&A activities worth US$ 1.72
billion
 In October 2020, HDFC Bank and Apollo Hospitals partnered to launch the ‘HealthyLife
Programme’, a holistic healthcare solution that makes healthy living accessible and
affordable on Apollo’s digital platform.
 The Government approved the amalgamation scheme for Bank of Baroda, Vijaya Bank
and Dena Bank, the commencement of which started from April 01, 2019.
 In November 2021, Kotak Mahindra Bank announced that it has completed the
acquisition of a 9.98% stake in KFin Technologies for Rs. 310 crore (US$ 41.62 million).
 In August 2019, the Government announced major mergers of public sector banks.
United Bank of India and Oriental Bank of Commerce merged with Punjab National
Bank; Allahabad Bank merged with Indian Bank; and Andhra Bank and Corporation Bank
merged with Union Bank of India
 In March 2020, State Bank of India (SBI), India’s largest lender, raised US$ 100 million in
green bonds through private placement.
 In April 2020, Axis Bank acquired additional 29% stake in Max Life Insurance.
 In February 2021, Axis Bank acquired a 9.9% share in the Max Bupa Health Insurance
Company for Rs 90.8 crore (US$ 12.32 million)
  In October 2021, Indian Bank announced that it has acquired a 13.27% stake in the
proposed National Asset Reconstruction Company Ltd. (NARCL).

Recent Collapses

Lakshmi Vilas Bank is the fifth financial firm to collapse in India within the last 30 months.
Lakshmi Vilas Bank (LVB) is the fifth Indian financial firm to collapse over a span of 30 months
after IL&FS, DHFL, Yes Bank, and PMC Bank.

Business Model
The business model of banks is based upon generating revenues via interests, financial advice,
and other transactional fees. These banks are just like the companies which can be normally
listed in the way in the place of the stock market.

Schemes by government
 Pradhan Mantri Suraksha Bima Yojana
o This scheme is mainly for accidental death insurance cover for up to Rs. 2 lakh
(US$ 2,983.29).
o Premium: Rs. 12 (US$ 0.18) per annum.
o Risk Coverage: For accidental death and full disability - Rs. 2 lakh (US$ 2,983.29)
and for partial disability - Rs. 1 lakh (US$ 1,491.65).
o Gross enrolment under the scheme reached 27.26 crore as on January 31,2022
 Pradhan Mantri Jeevan Jyoti Bima Yojana
o This scheme aims to provide life insurance cover.
o Premium: Rs. 330 (US$ 4.92) per annum. It will be auto-debited in one
instalment.
o Risk Coverage: Rs. 2 lakh (US$ 2,983.29) in case of death for any reason.
o Gross enrolment under the scheme reached 12.13 crore as on January 31, 2022.
 Atal Pension Yojana
o Under the scheme, subscribers would receive fixed pension up to Rs. 5,000 (US$
74.58) at the age of 60 years (depending on their contributions).
o On January 31,2022 the total number of subscribers are 3.76 crores.
 Capital Infusion Scheme
o The Finance Ministry announced its plan to infuse Rs. 14,500 crore (US$ ) as
capital infusion in public sector banks in the fourth quarter of FY21.
 Pradhan Mantri Jan Dhan Yojana
o As of January 31, 2022 the total number of accounts were at 44.58 crores.
 o Under the scheme, each & every citizen will be enrolled in a bank for opening a
Zero balance account.
o Each person getting into this scheme will get Rs. 30,000 (US$ 447.49) life cover
while opening the account.
o Overdraft limit under such account is Rs. 5,000 (US$ 74.58).

Growth Drivers and Opportunities

Growth drivers of Indian banking sector

 Economic and demographic drivers
o Favourable demographics and rising income levels.
o India ranks among the top 7 economies with a GDP of US$ 2.73 trillion in 2018.
o The sector will benefit from structural economic stability and continued
credibility of Monetary Policy
 Policy support
o The Government passed the Banking Regulation (Amendment) Bill 2017 to
empower RBI to deal with NPAs in the banking sector.
o The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill was
passed by Rajya Sabha to strengthen the banking sector (as of Jan 2018).
 Infrastructure financing
o India currently spends 6% of GDP on infrastructure; NITI Aayog expects this
fraction to grow going ahead.
o As per Union Budget 2019-20, investment driven growth requires access to low-
cost capital, which requires an investment of Rs. 20 lakh crores (US$ 300 billion)
every year.
 Open banking ecosystem
o The open banking eco-system in India has now grown to include Non-Banking
Financial Company (NBFC) and other fintech players that have created
partnerships within the banking system.
 Cross-border payments
o Visa Inc. has sought RBI’s permission to offer a new cross-border payments
system to process trade flows to and from India. It will be offering a potentially
cheaper, quicker and blockchain-based solution now on trial.
 Government initiatives
o Government has smoothly carried out consolidation, reducing the number of
public sector banks by eight.
o The Government of India will invest Rs. 48,239 crore (US$ 6.78 billion) in 12
public sector banks in FY20 to help maintain regulatory capital requirements and
financial growth in India.
o The Government of India will invest Rs. 5,042 crore (US$ 730.88 million) in Bank
of Baroda post its merger with two other public sector lenders, Dena Bank and
Vijaya Bank.
Strong economic growth to propel banking sector expansion

 Rise in per capita income will lead to increase in the fraction of the Indian population
that uses banking services.
 Population in 15-64 age group is expected to grow strongly going ahead, giving further
push to the number of customers in the banking sector.
 As per Economic Survey 2018-19, working age population will grow by 9.7 million per
year in between 2021 and 2031 and 4.2 million per year from 2031 to 2041

Rising rural income pushing up demand for banking

 Gross Value Added by agriculture, forestry and fishing is at Rs. 36.16 trillion (US$ 482.82
billion) in FY21.
 Rising incomes are expected to enhance the need for banking services in rural areas,
and therefore, drive growth of the sector. Programmers like MNREGA have helped in
increasing rural income, which was further aided by the recent Jan Dhan Yojana.
Housing and personal finance have been key drivers
 Rapid urbanisation, decreasing household size & easier availability of home loans
has been driving demand for housing.
 Personal finance, including housing finance, provide an essential cushion against
volatility in corporate loans.
 The recent improvement in property value have reduced the ratio of loan to
collateral value.
 Credit to housing sector increased at a CAGR of 13.4% from FY16 to FY20, wherein,
value of credit to housing sector increased from to US$ 114.10 billion in FY16 to US$
188.68 billion in FY20.
 India’s housing finance companies portfolio is estimated to be at Rs. 11 lakh crore
(US$ 146.71 billion) as of June 30, 2021.
 Demand in the low & mid-income segment exceeds supply three- to four-fold. This
has propelled the demand for housing loan in the last few years.
 In December 2021, IIFL home loan disbursed loans disbursed loans worth Rs. 3,000
crores (US$ 400.07 million) this was a 19% growth.

 Growth in disposable income has been encouraging households to raise their

standard of living and boost demand for personal credit.
 Credit under the personal finance segment (excluding housing) rose at a CAGR of
15.46% from FY16 to FY19 and stood at US$ 151.75 billion in FY19.
 Unlike some other emerging markets, credit-induced consumption is still less in
India.
Comparison of Banks

NAME 1D 1W 1M 3M 1Y 3Y 5Y
SBI 0.01 1.42 -5.69 -2.9 10.29 29.65 62.58
Bank of Baroda 0.31 -0.8 -15.03 -7.63 18.07 -30.01 -45.03
153.0
1.55 4.26 0.42 1.34 13.42 69.87
ICICI Bank 8
HDFC Bank 1.85 5.38 1.42 -4.4 -6.11 15.6 71.22

INTEREST
REV NET CAPITAL
P/B ROA NIM COST TO INCOME TO
NAME P/E (X) ROE % CAGR OPM NPM NPA ADEQUACY
(X) % % INCOME % EARNING
[3YR] % RATIO %
ASSETS %
SBI 11.57 1.34 11.7 0.68 7.09 -27.8 12.2 2.58 50.86 5.6 1.02 13.83

Bank of Baroda 6.4 0.55 8.64 0.59 12.89 -9.12 10.9 2.57 47 5.47 0.02 0.12

ICICI Bank 19.73 2.82 13.8 1.43 6.19 -38.1 26.3 3.09 57.5 5.44 0.76 19.16

HDFC Bank 20.29 3.11 15.4 1.79 10.44 4.7 28 3.64 42.31 6.4 0.32 18.9

Advantage India
Robust demand
 Increase in working population and growing disposable incomes will raise demand for
banking & related services.
 Housing and personal finance are expected to remain key demand drivers.
  Indian fintech industry is estimated to be at US$ 150 billion by 2025.
 The RBI's 'Payment Systems Vision 2021' document expects the number of digital
transactions to increase >4x to 8,707 crore in December 2021.
Business fundamentals

 Rising fee incomes improving the revenue mix of banks.

 High net interest margins along with low NPA levels ensure healthy business
fundamentals
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.
 RBI launched the ‘RBI Retail Direct Scheme’ for retail investors to increase retail
participation in government securities

Innovation in services
 Mobile, internet banking and extension of facilities at ATM stations to improve
operational efficiency.
 RBI announced the launch of its first global hackathon 'HARBINGER 2021 – Innovation
for Transformation' with the theme ‘Smarter Digital Payments’.
 In the Union budget of 2022-23 India has announced plans for a central bank digital
currency (CBDC) which will be possibly known as Digital Rupee.
Digital lending market scenario
 India is the world's largest market for Android-based mobile lending apps, accounting
for ~82% of all online lenders worldwide. According to a study conducted by CloudSEK, a
Bengaluru-based digital risk management firm, India currently has 887 active lending
apps.
 India’s digital lending stood at US$ 110 billion in FY19.
 Digital lending to micro, small and medium enterprises (MSMEs) in India is expected to
reach US$ 100 billion by 2023.
 In the previous two years, India's BNPL industry has seen a 45-fold increase in
transactions. In terms of market size, the segment is predicted to rise 11 times from US$
4.1 billion in 2021 to US$ 43 billion in 2025.
 In January 2022, Paytm India’s largest fintech company and NBFC Fullerton have plans
to expand digital lending to MSMEs.
 In October 2021, Indian Bank announced that it has inked MoUs with three leading non-
banking finance companies (NBFCs) and housing finance companies (HFCs) to offer co-
originate loans to priority sectors.
 In September 2021, Central Banks of India and Singapore announced to link their digital
payment systems by July 2022 to initiate instant and low-cost fund transfers.
 In August 2021, Prime Minister Mr. Narendra Modi launched e-RUPI, a person and
purpose-specific digital payment solution. – e-RUPI is a QR code or SMS string-based e-
voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment
 mechanism will be able to redeem the voucher at the service provider without the
usage of a card, digital payments app, or internet banking access.

Mobile banking to provide a cost-effective solution

Banking penetration in rural India picking pace
 In 2019, out of 600,000 village habitations in India, only 5% have a commercial bank
branch.
 By December 2021, the number of outstanding debit cards stood at 937.74 million and
credit cards stood at 689.48 million in India.
 The agriculture credit flow stood at Rs. 15,75,398 crore (US$ 210.39 billion) in 2020-21.
The target has been fixed at Rs. 16,50,000 crore (US$ 220.35 billion) for 2021-22.
 The banks issued 2.70 crore of Kisan Credit Cards (KCCs) in January 17,2022.
 Agriculture requires timely credit to enable smooth functioning. However, only one-
eighth of farm households availed bank credit in 2019.
 Local money-lending practices involve interest rates well above 30% therefore making
bank credit a compelling alternative.

Soaring rural tele-density paves the way for mobile banking (in%)

 Tele-density in rural India surged at a CAGR of ~5.17% between 2011 and 2020.
 Banks, telecom providers and RBI are making efforts to make roads into the un-banked
rural India through mobile banking solutions.
 As of August 31, 2021, rural tele-density reached 60.27%.
 Mobile banking allows customers to avail banking services on the move through their
cell phones. The growth of mobile banking could impact the banking sector significantly.
 Mobile banking is especially critical for countries like India as it promises to provide an
opportunity to provide banking facilities to a previously under-banked market.
 RBI has taken several steps to enable mobile payments, which forms an important part
of mobile banking; the central bank has removed the transaction limit of Rs. 50,000 (US$
745.82) and allowed banks to set their own limits.
 In January 2022, Unified Payments Interface (UPI) recorded 4.62 billion transactions
worth Rs. 8.32 trillion (US$ 111.8 billion).
 National payments corporation India (NPCI) has plans to launch UPI lite this will provide
offline UPI services for digital payments. Payments of upto Rs. 200 (US$ 2.67) can be
made using this.