Introduction: Banking sector The Indian Banking industry governed by the Banking Regulation Act of India, 1949, falling into two broad classifications, non-scheduled banks and scheduled banks. Within the commercial banks there are nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). With the economic growth picking up pace and the investment cycle on the way to recovery, the banking sector has witnessed a transformation in its vital role of intermediating between the demand and supply of funds. The revived credit off take (both from the food and non food segments) and structural reforms have paved the way for a change in the dynamics of the sector itself. Besides gearing up for the compliance with Basel accord, the sector is also looking forward to consolidation and investments on the FDI front. Public sector banks have undergone much restructuring alongside technology implementation. NPAs have been written off against treasury gains in the last few years. Retail lending (especially mortgage financing) has been grabbing a major share of the market in the last 3 years. With better penetration in the semi urban and rural areas the banks garnered a higher proportion of low cost deposits thereby economizing on the cost of funds.
Apart from streamlining their processes through technology initiatives such as ATMs, telephone banking, online banking and web based products, banks have also resorted to cross selling of financial products such as credit cards, mutual funds and insurance policies to augment their fee based income. RBI's soft interest rate policy has helped increase the liquidity in the market, and banks have been liquidating their gilt portfolios partially to free resources for lending. Credit off take is expected to be reasonably good both on retail and corporate sides. Following the advice of the government banks have increased lending to agricultural sector, while ensuring good quality lending by informed customer analysis. Currently the banking sector in the country is strongly fragmented and hence with further policy changes taking place in the sector, consolidation is likely to take place at a faster rate. However this is subject to the removal of the ceiling on voting rights will ensure that private sector and foreign banks will be in a much better position to carry out acquisitions in the banking sector. A hike in FDI capital limits in the sector would further go a long way in the process of consolidation. In terms of credit growth, going forward, India's core sector is witnessing a revival of sorts. The manufacturing sector has shown significant improvement in FY05. Hence as corporate growth picks up lending too is likely to see an uptick. Retail credit off-take is expected to remain strong going forward with the housing finance industry, the main contributor to credit off-take from this segment, expected to grow between 20%-25% in the next 3-4 years. 3
Indian banks have to be encouraged to expand fast, both through organic growth and through consolidation, in order to fuel the growth of large firms and to strengthen their risk assessment systems, for catering to the requirements of smaller firms. Various policy measures are in process to help this transition along. However, when we look at the global scenario, only 22 Indian banks figure in the list of top 1000 banks and there are only 5 Indian banks in the list of top 500 banks. The biggest Indian bank, State Bank of India, has a market capitalization of under US$ 10 billion compared to the market capitalization of US$ 243 billion of Citigroup. Indian banking sector has a long way to go before we can say that Indian banks are relatively significant players. Having said that, there are sufficient reasons to believe that the Indian Banking sector is poised for tremendous growth and with proper policy framework in place, it would...