Banking industry is the backbone of Indian financial Industry. The Indian banking industry consists of 27 Public sector banks (The number to be reduced to 12 post the mega merger), 21 private sector banks, 49 foreign banks. 56 regional banks, 1,562 urban banks and 94,384 rural co-operative banks in addition to cooperative credit institutions across the country.
Scheduled banks are accounted for in the second schedule of the RBI Act and are governed by the general rules like CRR requirements, paid-up capital etc. Non-Schedule banks do not have to comply with any RBI regulations. These are local banks which usually maintain cash reserves with themselves.
The banking regulator has also allowed new entities such as payment banks and small finance banks to be created thereby adding to the number of entities operating in the sector. However, the financial sector in India is predominantly a banking sector with commercial banks accounting for more than 60 per cent of the total assets in the financial system.
In FY 07-18, total lending increased at a CAGR of 10.94 per cent and total deposits increased at a CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in emerging countries. It increased to US$ 281 billion in December 2017 from US$ 181 billion in December 2014.
Must-Know Banking Terms
Deciphering the Payment Banks and Small Finance Banks
Payment banks are the new mode of banking started by RBI to promote digital, paperless and cashless banking in India. The objective is to reach out to the unbanked and underbanked by using mobile phones and increasing internet penetration as the tool. The banks are allowed to accept deposits up to 1 lakh rupees and they are not allowed to lend money. Payments banks can issue services like ATM cards, debit cards, net-banking and mobile banking. Airtel payment bank was the payment bank to start operations. Paytm payment bank, Indian Post payment bank and Jio Payment bank are some of the popular payment banks in the country.
Small finance banks were niche banks started to promote financial inclusion of sections of the economy not being served by other banks, such as small business units, small and marginal farmers, micro and small industries and unorganised sector entities. The banks can take part in both lending and deposit activities. Post RBI guidelines, a series of banks previously that were microfinance organization have come up and many of them have already made a listing on the Indian bourses. Ujjavan small finance bank had a bumper listing recently as the stock listed at a premium of 59% on exchange. In the latest move, RBI has also allowed conversion of payment banks to small finance banks post 5 years of operations.
Key trends in Banking Sector in India
The banking sector of late has been in news for wrong reasons be it the case of Chandra Kochar or state of affairs in Yes bank. While challenges from digitisation and fintech remained, it was the asset quality that has remained in limelight for the past few years. The performance has also taken a beating due to stricter provisions. Let’s try figuring out what remains in store for us in the year 2020?
Indian economy is going through a tough spot with consumption taking a back seat and private investment slowing down. Government has been pushing for lower interest rates for credit to take off and for demand to stay upbeat. RBI has been constantly cutting down on interest rate but with the rising inflation, the rate cuts may take more time to materialize soon. The government has been focused on recapitalizing the banks on their end and we do expect things to pick up the next year. The Banking sector overall is likely to improve in the next year will the worst behind its back and we can only expect things to improve soon.
IBEF CRISIL PRSINDIA ALPHAInvesco HinduBusiness line