An Overview of Banking Industry - Part 1

Overview

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

• Loan Growth: Above-average loan growth can mean that the bank has targeted attractive new markets, or has a low-cost capital base that allows it to charge less for its loans.
  
• Deposit Growth: Deposit growth gives investors a sense of how much lending a bank can do.
• Loan/Deposit Ratio: Loan/deposit ratio helps assess a bank's liquidity, and by extension, the aggressiveness of the bank's management.
• CASA Ratio: CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds because banks do not usually give any interests on current account deposits and the interest on savings accounts is usually very low 3-4%.
• Net Interest Spread: It refers to the difference in borrowing and lending rates of financial institutions (such as banks) in nominal terms. It is considered analogous to the gross margin of non-financial companies. Higher the better, it is for the health of banks.
• Capital Ratios: There are a host of ratios that bank regulators and investors use to assess how risky a bank's balance sheet is, and the degree to which the bank is vulnerable to an unexpected increase in bad loans, like EPS, Price to Book Value, etc.
• NPA’s: Non-performing asset (NPA) refers to a classification for loans or advances that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days. 
• SLR – SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the minimum percentage of deposits that the bank has to maintain in form of gold, cash or other approved securities.
• CRR – CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of their deposits with RBI and they do not generate any return out of this.
  
• Repo Rate – Repo (Repurchase) rate is the rate at which the RBI lends short-term money to the banks against securities.
• Reverse Repo Rate – Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the RBI.
• MCLR- Marginal Cost of Funds –(MCLR) refers to the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI. It is an internal benchmark or reference rate for the bank. MCLR describes the method by which the minimum interest rate for loans is determined by a bank – based on marginal cost or the additional or incremental cost of arranging one more rupee to the prospective borrower.

 
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?

• Higher realization through IBC: After a lot of actions, challenges, amendments and counterclaims the law has seemed to stabilize. We did see banks recovering a significant amount in certain large default cases along with hair cuts here and there. 2020 might could just be the bumper year with recoveries taking the front seat.
• Peaking of NPA’s: NPA’s seemed to almost peak. Banks have made significant provision over the past few years. Apart from a few cases of under-reporting, we did not see any surge in NPA’s last year and this trend is likely to continue and it is expected that banks will pocket profits in the upcoming year.
  
• PSB Consolidation: The Indian banking space is dominated by the Public sector banks and this mega-merger reducing the banks to 12 from 27 is likely to impact the Indian banking industry in the time to come. The government expect these larger banks to be more stable well-capitalized and provide the much-needed steam to the slowing engine of our economy.
• Yes Bank Saga: Post the exit of Rana Kapoor, things haven’t been easy for Mr Ravneet Gill. The bank under-reported on bad debt and a bank whose phenomenal growth was driven by corporate banking is today finding it difficult to raise capital. The stock price has fallen from highs of 300’s to lows of the ’40s. Investors have lost money and the task of raising capital amidst the negative sentiment around is certainly an arduous task for the New CEO.

 
Conclusion
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.
 
References:
IBEF CRISIL PRSINDIA ALPHAInvesco HinduBusiness line