The stalwarts of India's
financial community nodded their heads
sagaciously when Prime Minister Manmohan
Singh said in a speech: "If there is one
aspect in which we can confidentially assert
that India is ahead of China, it is in the
robustness and soundness of our banking
system." Indian banks have been rated higher
than Chinese banks by international rating
agency Standard & Poor's.
With the credibility of the Indian banking
system on a high, a number of Indian banks
are now leveraging it to expand overseas.
State Bank of India, the country’s largest
bank has acquired 76 per cent stake in a
Kenyan bank, Giro Commercial Bank, for US$ 7
million. Canara Bank is helping Chinese
banks recover their huge non-performing
assets (NPA).
To meet the challenges of going global, the
Indian banking sector is implementing
internationally followed prudential
accounting norms for classification of
assets, income recognition and loan loss
provisioning. The scope of disclosure and
transparency has also been raised in
accordance with international practices.
India has complied with almost all the Core
Principles of Effective Banking Supervision
of the Basel Committee. Some Indian banks
are also presenting their accounts as per
the U.S. GAAP. The roadmap for adoption of
Basel II is under formulation.
The use of technology has placed Indian
banks at par with their global peers. It has
also changed the way banking is done in
India. ‘Anywhere banking’ and ‘Anytime
banking’ have become a reality. The
financial sector now operates in a more
competitive environment than before and
intermediates relatively large volume of
international financial flows.
Trends
The Indian banking industry is currently
in a transition phase. On the one hand, the
public sector banks, which are the mainstay
of the Indian banking system, are in the
process of consolidating their position by
capitalising on the strength of their huge
networks and customer bases. On the other,
the private sector banks are venturing into
a whole new game of mergers and acquisitions
to expand their bases.
The system is slowly moving from a regime of
“large number of small banks” to “small
number of large banks.” The new era will be
one of consolidation around identified core
competencies.
In India, one of the largest financial
institutions, ICICI, took the lead towards
universal banking with its reverse merger
with ICICI Bank a couple of years ago.
Another mega financial institution, IDBI,
has also adopted the same strategy and has
already transformed itself into a universal
bank. This trend may lead to promoting the
concept of a financial super market chain,
making available all types of credit and
non-fund facilities under one roof or
specialised subsidiaries under one umbrella
organisation.
Growth statistics
Scheduled Commercial Banks (SCBs) in
India are categorised into five different
groups according to their ownership and / or
nature of operation. These bank groups are (i)
State Bank of India and its associates (ii)
other nationalised banks (iii) regional
rural banks(iv) foreign banks and (v) other
Indian SCBs (in the private sector).
The banking sector witnessed strong growth
in deposits and advances during the year
2004-05. As of March 2005, the number of
commercial banks stood at 289. The aggregate
deposits of SCBs increased from US$ 331
billion in March 2004 to US$ 374 billion in
March 2005; credit increased from US$ 185
billion to US$ 242 billion; and investments
swelled from US$ 149 billion to US$ 162
billion.
Net domestic credit in the banking system
has witnessed a steady increase of 17.5 per
cent from US$ 445 billion on January 21,
2005 to US$ 523 billion on January 20, 2006.
The growth in net domestic credit during the
current financial year up to January 20,
2006 was 14.4 per cent.
Nationalised banks were the largest
contributors to total bank credit at 47.8
per cent as of September 2005. While foreign
banks' contribution to total bank credit was
low at 6.7 per cent, the contribution of
State Bank of India and its associates
accounted for 23.8 per cent of the total
bank credit. Credit extended by other SCBs
stood at 18.9 per cent.
Banks and consumer finance
Indian banks, particularly private
banks, are riding high on the retail
business. ICICI Bank and HDFC Bank have
witnessed over 70 per cent year-on-year
growth in retail loan assets in the second
quarter of 2005-06.
Annual revenues in the domestic retail
banking market are expected to more than
double to US$ 16.5 billion by 2010 from
about US$ 6.4 billion at present, says a
McKinsey study.
The home loan sector is also on a smooth
course. The average loan size of home
finance companies is increasing. HDFC, the
second largest player in the home finance
business, has seen average loan increase
from US$ 10,773 in FY04 to US$ 13,467 in
FY05, a change of almost 25 per cent.
For ICICI Bank, which is the largest player
in the business, the average ticket size is
about US$ 13,467 – US$ 15,711 and has
increased by 10-15 per cent over last year.
Foreign banks are working on expanding their
bases in the country. The Ministry of
Finance and Reserve Bank of India have
agreed to allow foreign banks to open 20
branches a year as against 12 now. At
present, 40 odd foreign banks have over 225
branches in India.
At the end of 2004-05, the total assets of
foreign banks aggregated US$ 30 billion or
6.9 per cent of the assets of all scheduled
commercial banks. They will also be allowed
74 per cent stake in private banks. After
2009, the local subsidiaries of foreign
banks will be treated on par with domestic
banks.
