2. The Indian Banking Industry
The Reserve Bank of India (RBI) is the central banking and monetary authority in India, and has regulatory and
supervisory authority for the Indian financial system. Until 1991, the financial sector in India was heavily regu-
lated and commercial banks and long-term lending institutions, the two dominant financial intermediaries, had
mutually exclusive roles and objectives and operated in a largely stable environment, with little or no competition.
Interest rates were administered, formal and informal parameters governed asset allocation, and strict controls
limited entry into and expansion within the financial sector.
Beginning in 1991, the financial sector was progressively liberalized, and new private banks were allowed to com-
mence operations. The various financial sector reforms have transformed the operating environment of the banks
and long-term lending institutions. In particular, the deregulation of interest rates, emergence of a liberalized
domestic capital market, and entry of new private sector banks, along with the broadening of long-term lending
institutions’ product portfolios, have progressively intensified the competition between banks and long-term
lending institutions.
Today, a number of financial intermediaries, both in the public and private sectors, are part of India’s financial
sector. These include:
Commercial banks (public sector, private banks, co-operative and rural banks);
Long-term lending institutions;
Non-bank finance companies, including housing finance companies;
Other specialized financial institutions, and state-level financial institutions;
Insurance companies and mutual funds
The Indian banking industry has witnessed a period of consistent growth during the last decade, with banks along
with their customers embracing robust systems and processes. Deposits have been growing at a CAGR of 21.2 per
cent (in rupee terms) in the period 2006–13; in FY 13 total deposits stood at US$ 1,274.3 billion.
However, industrial slowdown and sticky consumer price inflation created a hostile environment for the country’s
banking sector in 2013. The consumer price inflation was in the double digit range during the course of the year. As
aresult,RBIhadtoraisebenchmarkpolicyratesbetweenMay2013andJanuary2014.Althoughprivatebankswere
not much affected, most banks in the public sector felt the heat. The cost of servicing debt went up resulting in an
increase in bad loans in the rate sensitive sectors. As a result, the profitability of nationalized players also suffered.
The overall outlook for the banking sector is stable, and most banks have a sound financial position.
Rising per capita income, growing urbanization and consistent economic growth is anticipated to drive growth
in the banking sector. Analysts anticipate that India’s banking industry will become the fifth largest globally by
2020, and the third largest by 2025. The banking sector itself is moderately consolidated, with the top 10 players
accounting for approximately 60 per cent of the total industry. Recently, the RBI has granted two new banking
licenses, allowed private ATM networks, approved a new payment gateway called RuPay, and is actively promot-
ing the use of electronic transactions to enhance competition in the industry.
Commercial Banks
Commercial banks in India have traditionally focused primarily on meeting the short-term financial needs of
industry, trade and agriculture. Scheduled commercial banks are banks that are listed in the schedule to the RBI
Act and may further be classified as public sector banks, private sector banks and foreign banks. Scheduled com-
mercial banks have a presence throughout India, with approximately 70% of bank branches located in rural or
semi-urban areas of the country. A large number of these branches belong to the public sector banks.
Indian Banking Industry Page 2 of 8
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3. Page 3 of 8Indian Banking Industry
All Scheduled Commercial Banks (Amount in Rs million)
Items Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 80 81 81 87 89
No. of offices 67,562 72,906 78,215 85,262 92114
No. of employees 954,684 955,990 1,001,096 1,048,520 1,096,984
Business per employee 73.98 86.23 99.03 109.95 121.33
Profit per employee 0.55 0.60 0.70 0.78 0.83
Public Sector Banks
Public sector banks make up the largest category in the Indian banking system. They include the State Bank of
India and its seven associate banks, 19 nationalized banks and 196 regional rural banks. The public sector banks’
large network of branches enables them to fund themselves out of low cost deposits. The State Bank of India is the
largest public sector bank in India.
Public Sector Banks (Amount in Rs million)
Items Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 27 27 26 26 26
No. of offices 57,979 62,080 65,800 70,969 75,779
No. of employees 731,524 739,646 755,102 774,329 80,1659
Business per employee 73.44 86.43 101.67 114.68 127.47
Profit per employee 0.47 0.53 0.59 0.64 0.63
Regional Rural Banks
Regional rural banks were established from 1976 to 1987 by the central government, state governments and spon-
soring commercial banks jointly with a view to develop the rural economy. Regional rural banks provide credit to
small farmers, artisans, small entrepreneurs and agricultural laborers.
Private Sector Banks
In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI
permitted entry by the private sector into the banking system. This resulted in the introduction of nine private sector
banks. These banks are collectively known as the “new” private sector banks. There are nine new private sector banks
at present. In addition, 20 private sector banks existing prior to July 1993 are currently operating.
Private Sector Banks (Amount in Rs million)
Items Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 22 22 21 20 20
No. of offices 92,88 10,516 12,097 13,970 16001
No. of employees 193,578 188,332 217,953 248,284 269941
Business per employee 67.76 77.27 82.60 86.23 94.06
Profit per employee 0.56 0.70 0.81 0.92 1.07
Foreign banks
As part of the liberalization process, RBI has permitted foreign banks to operate more freely, subject to require-
mentslargelysimilartothoseimposedondomesticbanks.ForeignbanksoperateinIndiathroughbranchesoftheir
parent banks. The primary activity of most foreign banks in India has been in the corporate segment.
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4. Page 4 of 8Indian Banking Industry
However,inrecentyears,someofthelargerforeignbankshavestartedtomakeconsumerfinancingalargerpartoftheir
portfoliosbasedonthegrowthopportunitiesinthisareainIndia.Thesebanksofferproductssuchasautomobile,finance,
home loans, credit cards and household consumer finance. The government has also announced that foreign banks
havingbranchpresenceinIndiawillbepermittedtoacquireupto74.0%shareholdinginprivatesectorbanksinIndia.
Foreign Banks (Amount in Rs million)
Items Bank Group-wise Aggregates
2008-09 2009-10 2010-11 2011-12 2012-13
No. of banks 31 32 34 41 43
No. of offices 295 310 318 323 334
No. of employees 29,582 28,012 28,041 25,907 25384
Business per employee 128.27 141.14 155.55 195.62 217.33
Profit per employee 2.54 1.69 2.75 3.64 4.56
Cooperative Banks
Cooperative banks cater to the financing needs of agriculture, small industry and self-employed businessmen
in urban and semi-urban areas of India. The state land development banks and the primary land development
banks provide long-term credit for agriculture. Presently, RBI is responsible for supervision and regulation of
urban co-operative societies, and the National Bank for Agriculture and Rural Development (NABARD) for State
Co-operative Banks and District Central Co-operative Banks.
Long-Term Lending Institutions
The long-term lending institutions were established to provide medium-term and long-term financial assis-
tance to various industries for setting up new projects and for the expansion and modernization of existing
facilities. These institutions provide fund based and non-fund based assistance to industry in the form of
loans underwriting, direct subscription to shares, debentures and guarantees. The primary long-term lending
institutions include Industrial Development Bank of India (converted into a banking company from October
2004), Industrial Finance Corporation of India Limited and Industrial Investment Bank of India.
The long-term lending institutions were expected to play a critical role in Indian industrial growth and accord-
ingly, had access to concessional Government funding. However, in recent years, the operating environment
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5. Page 5 of 8Indian Banking Industry
of the long-term lending institutions has changed substantially. Although the initial role of these institutions
was largely limited to providing a channel for government funding to industry, the reform process required
them to expand the scope of their business activities. Their new activities include:
Fee-based activities like investment banking and advisory services; and
Short-term lending activity, including issuing corporate finance and working capital loans.
Non-Bank Finance Companies
There are over 13,617 non-bank finance companies in India as of June 30, 2004, mostly in the private sector.
All non-bank finance companies are required to register with RBI. The non-bank finance companies may be
categorized into entities, which take public deposits and those, which do not. The companies, which accept
public deposits, are subject to strict supervision and capital adequacy requirements of RBI.
The scope and activities of non-bank finance companies have grown significantly over the years. The primary
activities of the non-bank finance companies are consumer credit including automobile finance, home finance
and consumer durable products finance, wholesale finance products such as bill discounting for small and
medium-sized companies, and fee-based services such as investment banking and underwriting.
Housing Finance Companies
Housing finance companies form a distinct sub-group of the non-bank finance companies. As a result of the
various incentives given by the Government for investing in the housing sector in recent years, the scope of
their business has grown substantially. Until recently, Housing Development Finance Corporation Limited
was the premier institution providing housing finance in
India. In recent years, several other players including banks have entered the housing finance industry.
The National Housing Bank and the Housing and Urban Development Corporation Limited are the two
government-controlled financial institutions created to improve the availability of housing finance in India.
Specialized Financial Institutions
In addition to the long-term lending institutions, there are various specialized financial institutions that
cater to the specific needs of different sectors. They include the National Bank for Agricultural and Rural
Development, Export Import Bank of India, Small Industries Development Bank of India, Risk Capital and
Technology Finance Corporation Limited, Tourism Finance Corporation of India Limited, National Housing
Bank, Power Finance Corporation Limited and the Infrastructure Development Finance Corporation Limited.
State Level Financial Institutions
State financial corporations were set up to finance and promote small and medium-sized enterprises. The
state financial institutions are expected to achieve balanced regional socio-economic growth by generating
employment opportunities and widening the ownership base of industry. At the state level, there are also
state industrial development corporations, which provide finance primarily to medium-sized and large-sized
enterprises.
Changing Banking Environment
The RBI has formulated several policies and initiatives that are directly impacting the country’s banking
sector over the last few years. Some of these initiatives are:
Deregulation of savings rates: RBI has deregulated the savings bank deposit interest rates from an earlier
norm of 4 per cent per annum to aid product and price innovation. This has resulted in an increase in inter-
est rates, and especially on deposits of a high amount due to intense competition. Higher interest rates imply
higher costs for banks, and this has an impact on their profitability. On the other hand, costs have risen for
large scale borrowers as hikes in interest rates are accompanied with a rise in loan rates.
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6. Page 6 of 8Indian Banking Industry
Provision Coverage Ratio (PCR) of 70 per cent mandatory: ThemandatorydirectivetomaintainaPCRof70
percentbenefitsallcommercialbanks.ThecurrentPCRcanbeusedtominimizeNPAsduringeconomicdownturn.
Basel III guidelines: The RBI has planned the implementation of the Basel III norms, which would require
a capital infusion of approximately US$ 60 billion over the next five years. These norms would require the
systemically important banks to maintain a higher level of capital. The Governor of the Reserve Bank of India
in 2012, commented that Basel III would make Indian banks stronger in the long run, thereby enabling them
to invest in the real sectors of the economy.
Relaxation of branch authorization policy for Tier II cities: Domestic banks no longer need RBI approval
to set up service offices, central processing centers and administrative offices in the Tier II cities. Further, a
similar relaxation to expand into Tier III to Tier VI cities already exists. The policy is expected to spread the
organized banking to the remote areas of the country, and aid financial inclusion.
Relaxation of mobile payment guidelines: With the increasing popularity of mobile banking, the RBI
removed the cap of Rs. 50,000 for transactions through mobile phones. This relaxation allowed banks to
assess the involved risk, and place their own limits while granting customers with mobile banking facilities.
Issue of financial guidelines for new bank licenses: The RBI is now issuing new bank licenses to all enti-
ties that satisfy the eligibility criteria. This move is expected to encourage healthy competition and promote
financial inclusion in the banking industry.
Subsidiary route for foreign banks: TheRBIisencouragingforeignplayersenteringtheIndianbankingindus-
try to conduct business through wholly owned subsidiaries. Further, it is promoting existing important foreign
players to incorporate themselves as wholly owned subsidiaries of foreign parent companies. This move is expected
to benefit foreign players by allowing them to expand their consumer base to semi urban areas
What’s Next for the Industry?
With a view to moving towards a dynamic banking structure, a recent RBI Discussion Paper has suggested
the following basic building blocks for the industry:
Introduction of on-tap licensing to enhance competition, and bring in new ideas and variety into the system.
Implementing a domestic systemically important bank framework to deal with negative externalities of
large banks
Creating three or four global-sized banks to have a global presence through consolidation among large
public and private sector banks
Allowing banks for niche segments to take care of specialized banking needs through differentiated licensing.
Encouraging investment banks and investment banking activities.
Encouraging inclusion to reach out to the excluded and under-banked regions
Enhancing the regulatory and supervisory regimes with increased intensity of supervision for the sys-
temically important banks.
Evolving an efficient deposit insurance and resolution mechanism to support the envisaged tiered structure.
Converting urban co-operative banks which meet the necessary criteria into commercial banks or local
area banks/small banks.
Expanding the size and capacity of banking structure which enhances the ability of the banking system
to cope with multiple demands made on it for credit and varied services by diverse customer base
The RBI Vision Document 2012-15 on Payment and Settlement Systems sets out a road map for ensuring the
benefits of a structured modern payment and settlement system, including innovative products, to reach
beyond the currently served target groups. The document looks at how to promote electronic modes of pay-
ment, and reduce cash usage in the society by:
1. proactively promoting electronic payments,
2. increasing efficiency of payments through standardization and capacity building in terms of systems and
human resources and implementing giro payments (automatic bill payments)
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7. Page 7 of 8Indian Banking Industry
3. facilitating migration of government payments and receipts to electronic mode,
4. promoting use of pre-paid payment instruments, Electronic Benefit Transfer (EBT), Direct Transfer of
Subsidies (DTS) and e-commerce,
5. ensuring compliance with new international standards.
IT and Banking
Indian banks are continuing to transform their businesses by deploying technology-intensive solutions to in-
crease revenue, enhance customer experience, optimize cost structure and manage enterprise risk. While these
are fairly common themes among banks, there is a wide variation in the technology agendas and implementation
capability across different players of the banking industry.
The implementation of core banking platform has automated basic processes, enabled the movement to a single
customer view and allowed for optimization of work across branch and hub network. Core banking platform have
also given banks a strong launch pad to offer digital channel capabilities — almost all banks today are feverishly
building out their online and mobile channel offerings. Several banks have deployed best in class online and
mobile banking features including personalization, bank wide customer relationship views and cross channel
integration. In September, 2013, ICICI Bank launched its Facebook banking service, Pockets. The service enables
customers to transfer funds and pay bills from within the website.
Bank of India (BoI) launched its card-less cash withdrawal facility in March 2014. Under this service, a BOI
customer can transfer money to anyone, using the bank’s ATMs or through Internet banking. The sender has to
provide the beneficiary’s mobile number, a sender code, and the amount through internet banking or text message.
The beneficiary, after receiving a code from the bank can visit any BOI ATM with instant money transfer facility
and withdraw the money within a fortnight of the transfer.
ATM deployments and technology-enabled business correspondent (BC) network have allowed banks to
service large parts of the Indian hinterland. Responding to Basel norms and a more aggressive supervisory
regime, banks have undertaken risk and compliance management system implementations. Many banks
have responded by improving risk management processes and upgrading their systems and infrastructure.
While these initiatives are fairly standardized across banks as far as the approach is concerned, several
banks are still at a very nascent stage from a maturity perspective. The integration of risk management and
enterprise-level applications is still at preliminary stages. Just a handful of leading banks have implemented
enterprise risk management systems and business intelligence capabilities to assist in risk-based strategic
decision making.
Information management and analytics are in focus as banks have built out large data warehouses in an attempt
to leverage their data assets to better understand, sell and serve their customers. While private sector banks
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8. Page 8 of 8Indian Banking Industry
embarked on single view of the customer and customer lifecycle management frameworks in 2011–12, the initia-
tives of public sector banks were focused on enterprise data warehousing, though some large public banks have
started taking steps toward strengthening business intelligence (BI) through single view of the customer.
The impact of these BI initiatives is still a couple of years away, according to Ernst & Young. Banks will have to
gain an understanding of customers and put in place metrics such as customer satisfaction and service quality
to drive effectiveness of customer management initiatives. The investments made in BI have also been primarily
around the consumer/retail segment of customers. Banks are yet to leverage investments in these technologies
for corporate customers and functions such as finance, treasury, operations, risk management, compliance, audit
and human resources
The BFSI sector is forecast to spend Rs 477 billion on IT products and services in 2014, an increase of 12.7
percent over the previous year according to Gartner. This spending includes internal IT services (includ-
ing personnel), third-party IT services, software, data center technologies, devices and telecom services.
Spending on internal services (that includes IT personnel) is projected to grow the fastest, largely due
to the expansion strategies of banks across the country, especially in rural areas, which require more
personnel on the field. “Banks focus on expanding their branch network. There will be about 2,000
new branches in India by the end of this year,” says Vittorio D’Orazio, research director at Gartner.
Software is expected to be the second-fastest growing segment, with 19.2 percent growth in 2014. In the software
segment, vertical specific software is the fastest sub-segment due to core banking system replacements and other
back-office consolidation that will steer banks from internally developed software to external packages. “The
modernization of the back-office, and increased challenges from new more demanding customers, as well as the
need to be compliant with international regulations will be the main trends,” adds Vittorio.
For additional resources, insight and information on the banking industry in India:
1. www.ibef.org/industry/banking-india.aspx
2. www.ibef.org/download/Banking-Sector-04jan.pdf
3. http://www.rbi.org.in/scripts/AnnualPublications aspx?head=Trend%20and%20Progress%20of%20Ban
ing%20in%20India
4. http://www.gjeis.org/index.php/gjeis/article/view/33546
5. twitdoc.com/upload/ceciho758/indiabankingoutlook.pdf
6. http://www.accenture.com/us-en/outlook/Pages/outlook-jounal-2014-digital-disruptors-how-banking-got-
agile.aspx
7. http://www.gartner.com/newsroom/id/2671716
8. ijergs.org/files/documents/The-Role-of-Retail15.pdf
9. http://www.ey.com/Publication/vwLUAssets/EY-Banking-on-Technology/$File/EY-Banking-on-Technology.pdf
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