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As per the Reserve Bank of India (RBI), India’s banking
sector is sufficiently capitalised and well-regulated. The financial and
economic conditions in the country are far superior to any other country in the
world. Credit, market and liquidity risk studies suggest that Indian banks are
generally resilient and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out
of innovative banking models like payments and small finance
banks. The central bank granted in-principle approval to 11 payments banks and
10 small finance banks in FY 2015-16. RBI’s new measures may go a long way in
helping the restructuring of the domestic banking industry.
The Indian banking system consists of 26 public sector
banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks,
1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition
to cooperative credit institutions. Public-sector banks control nearly 80
percent of the market, thereby leaving comparatively much smaller shares for
its private peers. Banks are also encouraging their customers to manage their
finances using mobile phones.
Standard & Poor’s estimates that credit growth in
India’s banking sector would improve to 11-13 per cent in FY17 from less than
10 per cent in the second half of CY14.
Healthy Growth of Banking
Sector - Deposits
FY06–16, deposits grew at a CAGR of 11.47 per cent and reached 1.46
trillion in FY16.
growth in savings amid rising disposable income levels are the major
factors influencing deposit growth.
under PradhanMantri Jan DhanYojana (PMJDY), have also increased. As of
October 2016, US$ 6,755.5 million were deposited, while 249.8 million
accounts were opened.
Healthy Growth of Banking
Sector - Credit
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.
- In March
FY16, total credit extended surged to US$ 1,016 billion.
- Demand has
grown for both corporate and retail loans; particularly the services, real
estate, consumer durables and agriculture allied sectors have led the
growth in credit.
Offers protection in adverse conditions.
study of PradhanMantriFasalBimaYojana (PMFBY) shows it offers hope to banks
lending to agriculture in adverse conditions. The new scheme has seen ~100%
increase in the sum insured in FY2017, greater interest from private insurance
players and higher participation of farmers. Strict timelines, mandatory use of
technology and a relatively transparent mechanism amenable to quick/easy audits
could effectively reduce the risk of sharp rise in impairments for banks.
Significant increase in outlay; more than the
cumulative allocation in all previous years
some positive signs that the lending to agriculture is taking a better form
that should lower the “volume” risk associated to famers as new schemes offer
greater protection. The government has modified the crop insurance program
under the new scheme, PMFBY, which is seeing greater levels of participation by
all segments. The government has budgeted to spend `130 bn in FY2017 for the
scheme as compared to the initial budget of `55 bn, which is ~6X increase over
FY2016 and similar to the total funds allocated to the scheme since FY1997. The
budget for FY2018 is lower at `90 bn but we wait to see the year end given that
the focus is to increase the area under the scheme to ~50% over the next two
years from ~25% currently.
100% increase in sum insured gives comfort, but a few
more years needed to ensure stability
seeing some early success of the scheme as there has been more than 100% growth
in premium in FY2017 across key players like Agriculture Insurance Corporation,
ICICI Lombard,HDFC Ergo. The total sum insured has doubled in the Kharif crop
for 2016 to `1.4 tn and one should expect this to have increased further as
some bottlenecks resulted in select states that did not implement it last year.
The government is extending this scheme for non-loan farmers as well giving a
wider business opportunity for private insurers. FY2017 may not be a good test
case as there is likely to be lower claims given the bountiful rainfall
witnessed. Private insurance companies gave away a substantial portion of risk
to reinsurers and we need a stronger reinsurance market till market players get
confident in the underlying data.
Banks stand to benefit as well; a weak monsoon is
probably of lesser concern
objective of the note is to understand the impact on bank’s portfolio given the
spate of debt waiver announcements. In a prudish manner, the success of this
scheme will imply that volume related risks have been taken away. This also
implies banks are relatively better off during the weak monsoon but a surplus
monsoon, as in FY2017 creates ‘price-risk’ where the current solution is not effective.
A strong commodity derivatives market along with adequate infrastructure for
post-harvest storage could be useful to address a part of these risks.
Key investments and developments in India’s banking
- RBL Bank
Limited, an Indian private sector bank, has raised Rs 330 crore (US$ 49.6
million) from a UK-based development finance institution CDC Group Plc,
which will help RBL to strengthen the capital base to meet future
- The State
Bank of India (SBI) signed an agreement with The World Bank for aRs 4,200
crore (US$ 625 million) credit facility, aimed at financing grid connected
rooftop solar photovoltaic (GRPV) projects in India.
- JP Morgan
Chase, the largest bank in United States by assets, plans to expand its
operations in India by opening three new branches in Delhi, Bangalore and
Chennai in addition to its existing branch in Mumbai.
Pension Plan Investment Board (CPPIB), an investment management company,
has bought a large stake in Kotak Mahindra Bank Ltd from Japan-based
Sumitomo Mitsui Banking Corporation.
first small finance bank called the Capital Small Finance Bank has started
its operations by launching 10 branch offices in Punjab, and aims to
increase the number of branches to 29 in the current FY 2016-17.
the wallet company owned by online retailer Snapdeal, has partnered with
Yes Bank and MasterCard to launch FreeCharge Go, a virtual card that
allows users to pay for goods and services at online shops and offline
- Exim Bank
of India and the Government of Andhra Pradesh has signed a Memorandum of
Understanding (MoU) to promote exports in the state.
Mahindra Bank Limited has bought 19.9 per cent stake in Airtel M Commerce
Services Limited (AMSL) for Rs 98.38 crore (US$ 14.43 million) to set up a
payments bank. AMSL provides semi-closed prepaid instrument and offers
services under the ‘Airtel Money’ brand name.
Financial Services Ltd, a microfinance services company, has raised Rs
312.4 crore (US$ 45.84 million) in a private placement from 33 domestic
investors including mutual funds, insurance firms, family offices and High
Net Worth Individuals (HNIs)).
largest public sector bank, State Bank of India (SBI), has opened its
first branch dedicated to serving start-up companies, in Bengaluru.
rating agency Moody's has upgraded its outlook for the Indian banking
system to stable from negative based on its assessment of five drivers
including improvement in operating environment and stable asset risk and