INDIAN BANKING

INDUSTRY ANALYSIS
1. INTRODUCTION- INDUSTRY OVERVIEW.
Indian Banking Industry originated in the first decade of 18th century as The
General Bank of India came into existence in the year 1786. And then later Bank
of Hindustan was started. The India's oldest bank which is in existence is the
State Bank of India being established as "The Bank of Bengal" in Calcutta in
June in the year 1806. A couple of decades later in the year 1850 the foreign banks
like Credit Lyonnais started their operations in Calcutta. Calcutta was the most
active trading port at that time which was during the British Empire, due to these
reasons the banking activity took roots there and prospered. In the year 1865, the
first fully Indian owned bank was established in Allahabad.

Punjab National Bank was established expanding the markets by the 1900s,
Bank of India in the year 1895 in Lahore and the same Bank of India 1906, in
Mumbai - both were founded under private ownership. Then later in the year
1935, the Reserve Bank of India formally took over the responsibility of
regulating Indian banking sector. In the year 1947 after India's independence the
Reserve Bank was nationalized and given more powers.

The Indian Banking Industry in 1960 became an important tool to facilitate the
financial development of the Indian economy. Simultaneously, it emerged as a
large employer and debate prevailed that ensured about the possibility of
nationalization of the banking industry. The then Prime Minister of India, Indira
Gandhi expressed the intention of the GOI in the annual conference of the All
India Congress Meeting. This was received with positive enthusiasm by the whole
nation. Later the GOI was issued an ordinance and nationalized the 14 largest
commercial banks with effect from the midnight of July 19, 1969. In 1980 for the
second time nationalization of 6 more commercial banks was done. The
nationalization was done to give the government more control of credit delivery.
With this the GOI controlled around 91% of the banking business of India.
Narasimha Rao government formulated a policy of liberalization in the year
1990 and gave licenses to a small number of banks, which was known as the New
Generation tech-savvy banks, some of the banks were like the UTI Bank (now
re-named Axis Bank) ICICI Bank and HDFC Bank. Liberalization along with
the rapid growth in the economy of India boosted the banking sector in India,
which has seen strong contribution from all the three sectors of banks, namely,
government banks, private and foreign banks. The next stage for the Indian
Banking Industry was to setup with the proposed relaxation in the Foreign Direct
Investment, where voting rights were given to all the Foreign Investors in banks
which could exceed the present cap of 10%, at present it has gone up to 49%
with some restrictions.

Indian Banking Industry was completely shooked with the new policy, Till this
time the Banks used to the follow the 4-6-4 method (Borrow at 4%, Lend at 6%
Go home at 4) of functioning. This new wave ushered in a modern outlook and
tech-savvy methods of working for traditional banks which led to the retail boom
in India. People not only just demanded more from their banks but also received
more. Today Banking in India is generally fair and mature in terms of supply,
product range and reach though in rural India still remains a challenge for the
private sector and foreign banks Banking in terms of quality of assets and capital
adequacy, banks in India are considered to have clean, strong and transparent
balance sheets relative to other banks in comparable other economies.

The Reserve Bank of India is the autonomous body, which has the minimal
pressure from the government. The Reserve Bank of India had permitted Warburg
Pincus to increase its stake in Kotak Mahindra Bank (a private sector Bank) to
10% in March 2006. It is the first time an investor has been allowed to hold more
than 5% in a private sector bank. As the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks.

Due to the growing dynamic environment the Indian Banking Industry has gone
under tremendous changes in the last few decades. These changes has made
banks to foresee the factors impacting their businesses and try to minimize the
impact. This Report reflects one of those important method adopted to tackle the
changing environment i.e. Michael Porter’s Five Forces Model, it
brings out the rivalry and competitiveness in any industry. It is a very widely acce
pted tool for industry analysis.
2. LATEST DEVELOPMENTS
 The Indian banking system consists of 20 public sector banks, 22 private
sector banks, 44 foreign banks, 44 regional rural banks, 1,542 urban
cooperative banks and 94,384 rural cooperative banks, in addition to
cooperative credit institutions.
 As on March 31, 2019, the total number of ATMs in India increased to
221,703 and is further expected to increase to 407,000 by 2021. As of 2017,
80 per cent of the adult population has bank accounts. As on March 31, 2019
the number of debit and credit cards issued were 925 million and 47 million,
respectively.
 Assets of public sector banks stood at Rs. 72.59 lakh crore (US$ 1,038.76
billion) in FY19. As per Union Budget 2019-2020, Provision coverage ratio
of banks reached highest in 7 years. As per RBI, as of February 14, 2020,
India recorded foreign exchange reserves of approximately US$ 476.09
billion.
 Deposits as of Feb 2020, stood at Rs 132.35 lakh crore (US$ 1,893.77
billion) and credit to non-food industries reached Rs 100.41 lakh crore (US$
1.45 trillion) as on February 14, 2020.
 Indian banks are increasingly focusing on adopting integrated approach to
risk management. The NPAs (Non-Performing Assets) of commercial
banks has recorded a recovery of Rs 400,000 crore (US$ 57.23 billion) in
FY2019, which is highest in last four years.

 Banks have already embraced the international banking supervision accord

of Basel II, and majority of the banks already meet capital requirements of
Basel III, which has a deadline of March 31, 2019.
 Reserve Bank of India (RBI) has decided to set up Public Credit Registry
(PCR) an extensive database of credit information which is accessible to all
stakeholders. The Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2017 Bill has been passed and is expected to strengthen the
banking sector.
 Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) stood at Rs
1.06 lakh crore (US$ 15.17 billion) with 37.34 crore accounts registered. In
May 2018, the Government of India provided Rs 6 lakh crore (US$ 93.1
billion) loans to 120 million beneficiaries under Mudra scheme. As of
November 2019, the total number of subscribers was 19 million under Atal
Pension Yojna.
 Rising incomes are expected to enhance the need for banking services in
rural areas and therefore drive the growth of the sector. As of September
2018, Department of Financial Services (DFS), Ministry of Finance and
National Informatics Centre (NIC) launched Jan Dhan Darshak as a part
of financial inclusion initiative. It is a mobile app to help people locate
financial services in India.
 The digital payments revolution will trigger massive changes in the way
credit is disbursed in India. Debit cards have radically replaced credit cards
as the preferred payment mode in India, after demonetization. Transactions
through Unified Payments Interface (UPI) stood at 1.2 billion in
November 2019 worth Rs 1.89 lakh crore (US$ 27.08 billion).
 As of Q1 FY19, total credit extended by commercial banks surged to Rs
86,976.2 billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3
billion (US$ 1,716.4 billion).
 Credit off-take has been surging ahead over the past decade, aided by strong
economic growth, rising disposable incomes, increasing consumerism &
easier access to credit.
 During FY07-18, credit off-take grew at a CAGR of 11%. As of Q1 FY19,
total credit extended surged to Rs 86,976 billion (US$ 1,297.4 billion).
 Demand has grown for both corporate & retail loans; particularly the
services, real estate, consumer durables & agriculture allied sectors have
led the growth in credit.
 Total banking sector assets (including public and private sector banks) have
increased at a CAGR of 6% to US$ 2.2 trillion during FY13–18.
 Public sector banks account for over 68.3% of interest income in the
sector in FY18.
 They lead the pack in interest income growth with a CAGR of 6.6% over
FY09-18. Overall, the interest income for the sector (including public and
private sector banks) has grown at 6.9% CAGR during FY09-18.
 Total lending has increased at a CAGR of 10.9% during FY07-18 and
total deposits has increased at a CAGR of 11.6%, during FY07-18 & are
further poised for growth, backed by demand for housing and personal
finance.
 India’s retail credit market is the fourth largest in the emerging
countries. It increased to US$ 281 billion on December 2017 (FY18) from
US$ 181 billion on December 2014.
 The digital payments system in India has evolved the most among 25
countries, including UK, China and Japan, with the IMPS being the only
system at level 5 in the Faster Payments Innovation Index (FPII). India
stepped up to 28th position on the government's adoption of e-payments
ranking in 2018.
 Digital influence in the Indian banking sector has been growing faster due
to the rising digital footprint. India’s digital lending stood at US$ 75 billion
in FY18.

Figure-1:- Growth in Banking Industry.

 Favorable demographics and rising income levels. India ranks among
the top six economies with a GDP of US$ 2,597 in 2017 and economy is
forecasted to grow at 7.3% in 2018. The sector will benefit from
structural economic stability and continued credibility of Monetary
Policy.
 Increase in working population & growing disposable incomes will
raise demand for banking & related services. Housing & personal finance
are expected to remain key demand drivers. Rural banking is expected to
witness growth in the future.
 Rising fee incomes improving the revenue mix of banks. High net interest
margins, along with low NPA levels, ensure healthy business
fundamentals.
 Wide policy support in the form of private sector participation & liquidity
infusion. Healthy regulatory oversight & credible Monetary Policy by the
Reserve Bank of India (RBI) have lent strength & stability to the
country’s banking sector.
 With entry of foreign banks, competition in the Indian banking sector
has intensified. Banks are increasingly looking at consolidation to derive
greater benefits such as enhanced synergy, cost take-outs from economies
of scale, organizational efficiency & diversification of risks.
STRENGTHS WEAKNESSES
•DRIVING FORCE TO ANY NATION. •SHORT-TERM UNCERTAINTY DUE TO THE DEBT
•SOURCE OF EMPLOYMENT & GDP CRISES
GROWTH. •VULNERABLE TO RISK.
•RISE IN RETAIL & CORPORATE NPA’S (NON-
•SHIFT IN MANAGEMENT ROLE. PERFORMING ASSETS)
•DIVERSIFIED SERVICES. •DIFFFICULT TO REACH THE UNDER-
•CONNECTING PEOPLE. PENETRATED MARKET.
•HEDGING OF RISK. •FRAGMENTED INDUSTRY STRUCTURE,
•RESTRICTIVE LABOR LAWS.
•WEAK CORPORATE GOVERNANCE.
•POLITICAL PRESSURE AND INEFFECTIVE
REGULATIONS.

OPPORTUNITIES THREATS
•BUSINESS EXPANSION. •FLUCTUATIONS IN BUSINESS CYCLE.
•RISE IN PRIVATE SECTOR BANKS. •RECESSION.
•TECHNOLOGICAL ADVANCEMENTS. •STRINGENT REGULATIONS.
•CHANGING SOCIO-CULTURAL AND •STABILITY OF SYSTEM.
DEMOGRAPHIC FACTORS. •COMPETITION FROM NBFCS.

Figure-2:- SWOT Analysis of the Indian Banking Industry.

3. MICHAEL PORTER’S FIVE FORCES MODEL
FOR INDIAN BANKING INDUSTRY
Porter's Five Forces is a model that identifies and analyzes five competitive
forces that shape every industry and helps determine an industry's weaknesses
and strengths. Five Forces analysis is frequently used to identify an industry's
structure to determine corporate strategy. Porter's model can be applied to
any segment of the economy to understand the level of competition within the
industry and enhance a company's long-term profitability. Following are the
five pillars of the model explaining the impact on Banking Industry.

*THREAT OF NEW ENTRANTS

The average person can’t come along and start up a bank, but there are services,
such as internet bill payment, on which entrepreneurs can capitalize. Banks are
fearful of being squeezed out of the payments business, because it is a good
source of fee-based revenue. Another trend that poses a threat is companies
offering other financial services. What would it take for an insurance company
to start offering mortgage and loan services? Not much. Also, when analyzing a
regional bank, remember that the possibility of a megabank entering into the
market poses a real threat. In Indian banking industry, the main threats are foreign
players and Non-Banking Finance Companies.

*POWER OF SUPPLIERS

The suppliers of capital might not pose a big threat, but the threat of suppliers
luring away human capital does. In Indian Banking industry, RBI acts as a
regulator which pose a big threat for banks as a supplier of money.

*POWER OF BUYERS

The individual doesn’t pose much of a threat to the banking industry, but one
major factor affecting the power of buyers is relatively high switching costs. If a
person has a mortgage, car loan, credit card, checking account and mutual funds
with one particular bank, it can be extremely tough for that person to switch to
another bank. In an attempt to lure in customers, banks try to lower the price of
switching, but many people would still rather stick with their current bank. On the
other hand, large corporate clients have banks wrapped around their little fingers.
Financial institutions – by offering better exchange rates, more services, and
exposure to foreign capital markets – work extremely hard to get high-margin
corporate clients.

*AVAILABILITY OF SUBSTITUTES

As you can probably imagine, there are plenty of substitutes in the banking
industry. Banks offer a suite of services over and above taking deposits and
lending money, but whether it is insurance, mutual funds or fixed income
securities, chances are there is a non-banking financial services company that can
offer similar services. On the lending side of the business, banks are seeing
competition rise from unconventional companies. All offer preferred financing to
customers who buy big ticket items. If car companies are offering 0% financing,
why would anyone want to get a car loan from the bank and pay 5-10% interest?

*COMPETITIVE RIVALRY

The banking industry is highly competitive. The financial services industry has
been around for hundreds of years, and just about everyone who needs banking
services already has them. Because of this, banks must attempt to lure clients’
away from competitor banks. They do this by offering lower financing, preferred
rates and investment services. The banking sector is in a race to see who can
offer both the best and fastest services, but this also causes banks to experience a
lower ROA. They then have an incentive to take on high-risk projects. In the
long run, we’re likely to see more consolidation in the banking industry. Larger
banks would prefer to take over or merge with another bank rather than spend the
money to market and advertise to people.