Commercial Banking Industry In India

Commercial Banking Industry in India – Private Banks are likely to report strong earnings over short term on the strength of better credit growth and superior asset quality

Definition / Scope

  • A financial institution that provides services such as accepting deposits, giving loans and offering basic investment products.
  • The traditional commercial bank is an institution with tellers, safe, vaults, deposit boxes and ATMs.

Structure of Banking Sector


Porter’s Five Forces Model in Banking Industry

  • Banking is mainly a client oriented business. A high-quality of services to the client and use of latest technology is crucial for growth and stability of any bank in this competitive environment.
  • It is a model to analyze level of competition within an industry and business strategy development.
  • Competition Rivalry: High competition of account of number of prominent public, private and foreign banks.
  • Threat of New Entrants: Low threat of new entrants due to licenses issuance from RBI before setting up a new bank.
  • Supplier Power: Low power of supplier due to involvement of RBI.
  • Buyer Power: High power of buyer due to large competition in the market.
  • Availability of Substitutes: High availability of substitutes like NBFC’s Mutual funds, Government securities and T-Bills.

Market Overview

  • Indian commercial banking sector are facing virtually unprecedented challenges in the current scenario due to customers’ needs and expectations that are changing very rapidly.
  • To increase profitability and respond to these market pressure, banks need to look carefully on available data and analysis to develop a deeper understanding of the customer.
  • Total Indian banking sector assets increased at a CAGR of 8.8% to USD1.8 trillion in FY14 from USD1.3 trillion in FY10, with over 70% accounted by the public sector.
  • Total number of branches of Scheduled Commercial Banks in India have increased to 102,343 as on 31st March, 2013 from 80,200 on 31st March, 2009.
  • Total number of ATMs in India have increased to 181,398 as on March 2015 and is expected to reach 200,000 by 2016.

Market Risks

Increasing NPAs (Non-Performing Assets)

  • Slowdown in economic activity and aggressive lending by banks have returned many loans non-performing and impacting the bank’s profitability.

Low Banking Penetration

  • The current all-India CRISIL Inclusix score of 40.1 (on a scale of 100) is relatively low which reflects under-penetration of formal banking facilities in India.
  • Only 1 in 2 Indians has a saving account.
  • Only 1 in 7 Indians has access to banking credit.
  • 11% of bank branches in India are limited to its 6 largest cities.

Leadership Shortage

  • Lots of personnel who are in senior and middle management roles are retiring in the coming 5-10 years and many PSBs may not have a strong talent to replace these retiring personnel.


  • Continuous deregulation has given rise to large competition with great autonomy, operational flexibility, decontrolled interest rates and liberalized norms and policies for foreign exchange in the banking market.
  • The deregulation of the industry has led to entry of number of players in the banking industry.

Implementation of Basel III

  • Basel III norms have to be implemented in phased manner starting from April 2013 till March 2019.
  • Indian Banks will have to bring in an additional capital of INR1.8-2.0 trillion over six years to meet Basel III norms.
  • Basel III norms requires banks to maintain a Minimum Total Capital (MTC) of 9%.
  • Implementation of Basel III is expected to result in a decline in Indian banks RoE (Return on Equity) in the short term..

Top Market Opportunities

Untapped Rural Market

  • Rising rural incomes pushing up demand for banking sector.
  • The annual disposable household income in rural India is forecasted to grow at CAGR of 3.6% over the next 10 years.
  • The Indian agriculture and forestry sector has grown at a fast pace.

Mobile Banking

  • Mobile banking allows customers to avail various banking services through their mobile phone which ultimately impact on the banking sector significantly.
  • RBI has taken several steps to enable mobile payments, which is an important part of mobile banking.
  • Mobile banking transaction in India will cross 340 million by 2015 and would result in cost savings of approximately INR11 billion.

Market Drivers

Growth in Credits of Scheduled Commercial Banks

  • Credit offtake grew to 10.2% from the previous year at the ended of the March 2015.
  • Total credit went up to INR 65.25 trillion by March 31, 2015.
  • Demand has grown for both corporate and retail loans; particularly in real estates, consumer durables and agriculture allied sectors.

Growth in Deposits of Scheduled Commercial Banks

  • Deposits continue to outpace credit growth by rising at 11.62% to INR 85.54 trillion in the ended of March 2015, as against INR 76.7 in the previous year.
  • Deposits growth has been mainly driven by strong growth in savings amid rising income levels and persistent government efforts to promote banking-technology.
  • In July 2013, RBI relaxed its branch licensing policy; thereby allowing banks to set-up new branches in tier-2 to tier-6 centers, without prior approval from RBI.

Other Key Market Trends

Notable Trends in the Banking Sector

  • Commercial banks are aggressively improving their technology, infrastructure to enhance customer experience and build their reputation in the current market.
  • Public, Private and Foreign Sector Banks share 90% of total banking assets.
  • In recent years, mobile banking has been reflecting a growing trend with total volume of 3.55 crore in 2013-14 and it is expected to double its volume in next few years.
  • Indian banks are mainly focusing on SMAC (Social, Media, Analytics, and Cloud) techniques to reach new customers.
  • Indian banks are focusing to expand their branch network in the rural areas to capture the emerging market and new business opportunity.
  • Banks are developing innovative financial products and advanced risk management techniques to capture market shares.
  • Foreign banks entry in the market has intensified competition in the Indian banking sector.
  • India’s first women bank (Bharatiya Mahila Bank) has started functioning in Mumbai.
  • Pradhan Mantri Jan Dhan Yojna (PMJDY) scheme was launched by the Prime Minister of India, Narendra Modi for Financial Inclusion, 13.7 crore accounts had been opened at the end of February 2015.

Market Outlook

  • The Government has started several policy initiatives including effort to revive stalled projects.
  • Banks gross NPAs increased to 4.45% as in March 15, 2015 from 4.1% in March 2015. While the Gross NPA percentage crossed 5% for PSBs, for private banks it was marginally up at 2.1%.
  • Increase in credit cost led to profitability pressures for PSBs in Q3, FY2015, and such cost are likely to decline in the short term.
  • Private Banks are likely to report strong earnings over short term on the strength of better credit growth and superior asset quality.
  • Banks could issue over INR1 trillion capital instruments in FY2016.
  • Credit demand pick up, softening interest rates and improving capital markets could partly increase profitability of banks.
  • It is expected that bank credit and deposits to grow at 14-15% and 13-14% respectively in CY15.
  • RBI make a significant regulatory change by allowing banks to issue long-term bonds to raise funds for infrastructure and affordable housing without maintaining statutory reserves such as CRR and SLR.

Competitive Factors

Key Success Factors

Economics and Demographics

  • Strong GDP growth (7.3% in 2015 and expected to reach 8% by 2017) to facilitate banking sector expansion.
  • India has more than 50% of population under 25 year of age. This represent a large potential bankable population and present a unique opportunity for the banking system.

Policy Support

  • Simplification of KYC (Know Your Customer) norms, introduction of no-frills account and Kissan Credit Cards to increase rural banking penetration.
  • RBI is considering to give more license to private sector banks.

Financial Inclusion

  • Approximately 41% of the adult population currently does not have banks account in India, reflecting a large untapped market.
  • With the Government of India (GOI) and the RBI prioritizing financial inclusion and issuing new banking license, which encourage banks to expand their network through setting up new rural branches.
  • PM, Narendra Modi asked the RBI to prepare a 20-year road map for financial inclusion to start lending to the unprivileged including poor farmers, poor students and people running small businesses.

Technological Innovation

  • It will not only help to improve products and services but also reach out to the customers in cost effective way.
  • Uses of ATMs, internet banking, mobile banking, cloud and analytics hold significant potential in India.

Key Market Players

Top Public Sector Banks


Top Private Sector banks


Top Foreign Banks



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