Banks –

Public Sector Banks (27) Private Sector Banks (22) Foreign Banks (41) Regional Rural Banks (62) Urban Co-operative Banks (1674) Rural cooperative credit institutions (96,751)

FY 2010 FY 2011 FY 20121150

1200

1250

1300

1350

1400

1450

1500

1550

1290

1336

1510

Banks Asset Base (USD Bil)

Asset

Assets of public sector banks account for 73 per cent of the total banking assets. However, private sector banks have recorded the highest CAGR of 11.3% (in rupee terms) in their asset base in recent years.

FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E0

500

1000

1500

2000

2500

3000

610 552742

896 916 991

1423

1749

2064

2435

Bank Credit Off-Take (USD Bil)

Bank Loans

Total banking sector credit is expected to increase at a CAGR of 18.1% to $2.4 trillion by 2017.

Driven by housing and personal loans

FY08 FY09 FY10 FY11 FY12 FY13E0

20

40

60

80

100

120

140

160

180

130.1

108.6

130.2

151.3 148.1160

Housing & Personal Loans

Loans

Market share by deposits

FY05 FY120.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

Foreign banksPrivate banksPublic banks

Private sector banks have been increasing their share of deposits, especially in the low-cost savings accounts.

FY08 FY09 FY10 FY11 FY122.30%

2.40%

2.50%

2.60%

2.70%

2.80%

2.90%

3.00%

2.58%2.63%

2.54%

2.91% 2.90%

Net Interest Margins

NIMs

SBI &

its as

socia

tes

Nationali

sed ban

ks

Public Se

ctor B

anks

Private

Secto

r Ban

ks

Forei

gn Ban

ks

Sched

uled co

mmercial

banks

0.00%0.50%1.00%1.50%2.00%2.50%3.00%3.50%4.00%4.50%

3.20%2.60% 2.80%

3.10%

4.00%

2.90%

Sector-wise NIM Scenario

NIMs

Healthy NIMs compared to global peers; Chinese banks have NIMs between 2-3% and US banks have NIMs comparable to Indian.

FY07 FY08 FY09 FY10 FY11 FY120.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.02% 1.00%1.05%

1.12%

0.97%

1.28%

Net NPA Levels

Net NPA

Public Sector Banks Private Sector Banks Foreign Banks0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%3.17%

2.08%

2.68%

Gross NPAs to Gross Advances (FY12)

Gross NPAs

NPAs have remained stable with private banks maintaining the lowest NPA levels.

Competition

The entry of foreign banks has intensified competition. RBI plans on handing out additional banking licenses in the coming months. The sector is expected to see higher competition as banks explore new avenues for growth in rural markets. Some consolidation can be expected in the coming years as banks look to benefit from synergies, economies of scale, operational efficiency and risk diversifications.

Key Trends

RBI’s monetary tightening policies due to rising inflation have capped banks’ near-term growth potential.

India’s slowing GDP growth rate has a direct impact on banks. Public sector banks have been seeing their NPA levels rise as they have the most exposure to

bad-debt sectors such as power and infrastructure. Banks have adopted better risk management practices in the aftermath of the US housing

collapse and Lehmann bankruptcy of 2008-09. Compliant with Basel II/Basel III norms. Banks diversifying their revenue streams away from interest income to increasing mix of fee-

based income from asset management, wealth management and treasury products. Banks increasingly embracing technology in creating new Internet and mobile banking solutions

to enhance user experience and gain competitive advantage. Financial inclusion by expanding to rural markets to drive next phase of growth. RBI mandating KYC norms to keep a check on money laundering.

Growth Opportunities

Despite near-term inflationary challenges, India’s GDP growth rate is expected to be a strong 7% in the 2012-17 timeframe.

Increasing spend on infrastructure from 6% of GDP currently. Banks to finance part of the $1 trillion in infra investments as part of the 12th Five Year Plan.

Large proportion of Indians, especially in rural regions, still unbanked. Loans to GDP ratio one of the lowest globally, relative to many emerging market peers as well.

Driving penetration of bank branches and ATMs to reach more number of people. Technological innovation to help reach more people in a cost-effective way. Advent of mobile

banking could be one such way of reaching the masses in rural regions.

Key Challenges

Near-term inflationary challenges to keep money supply short. Volatility in the rupee and interest rates as the Fed tapers its bond buying program could impact

banks that are more reliant on wholesale funding than retail. Increasing competition could drive net margins down. New banking licenses expected this year. Reaching rural populace to be a big challenge given high cost of establishing new branches.

Cost-effective technological advances in mobile banking are key. Removing the increasing levels of bad debt from the system to be a big challenge given the

sluggish pace of growth and the poor state of the ’priority sectors’ of infrastructure and power. Need to keep a close watch on the state of the housing market in India given that a lot of the

retail debt is driven by housing and personal loans. A housing collapse after years of sustained price increases could cause a large portion of the retail loans to sour.

Regulatory Trends

Simplification of KYC norms. Introduction of no-frill accounts and Kisan credit cards. Handing out more banking licenses. Incentivizing foreign banks to convert their local operations from a branch structure to

subsidiaries by giving them ‘near-national’ status.

http://www.livemint.com/Opinion/5jCjlTEH68rflVVaZmi7FM/2014-Banking-in-India-will-changebody-and-soul.html

http://blogs.wsj.com/indiarealtime/2013/12/30/what-the-rbi-is-worried-about-in-2014/

IBEF banking report