Banking industry in India rapidly embracing digitisation

The demand for retail and corporate loans has increased in account of growth in service, real estate, consumer durable, agriculture, etc. The contribution of the banking sector to GDP is more than 7-8% of GDP.

  • Definition / Scope
  • Market Overview
  • Market Risks
  • Top Market Opportunities
  • Market Drivers
  • Market Restraints
  • Industry Challenges
  • Technology Trends
  • Regulatory Trends
  • Market Size and Forecast
  • Market Outlook
  • Competitive Factors
  • Key Market Players
  • Strategic Conclusion
  • References
  • Appendix

Definition / Scope

Banking industry is a network of financial institutions that act as intermediaries to transfer funds from the ultimate saver to the ultimate user of funds. It provides services like depositing money, extending loans, managing risk, transferring funds, etc.

The core function of the bank is to hold financial assets and invest those assets in order to create more wealth. Banks and its activities are highly regulated by the government.

Market Overview

India’s banking industry is backbone to the economy. The Indian banking industry is governed by the Banking Regulation Act of India, 1949. According to the World Bank Report, India’s banking sector is on high growth path with around 3.5 ATMs and less than seven branches per 100,000 people.

The Reserve Bank of India is the central bank in India that controls the entire banking system and keeps the reserve of all commercial banks. The banking industry in India consists of Scheduled and Unscheduled banks. Scheduled banks are those banks that have been included in the Second Schedule of Reserve Bank of India Act, 1934. 

They have to fulfil conditions like having paid up capital and reserves of at least 0.5 million. They are further classified into Commercial banks and Co-operative banks. The scheduled commercial banks include public sector banks, private sector banks, foreign banks and regional rural banks.

Market Risks

Banks are exposed to different types of risks in the market such as market risk, credit risk and operational risk, liquidity risk, etc.

Default Risk – Default risk is measured by NPAs to gross advances. A higher NPL ratio indicates a higher proportion of problematic loans in a bank’s overall portfolio and increases its exposure to credit risk. There is always a risk of default on a debt in a bank that may arise because of borrower failing to make payments.

Market Risk – Market risk refers to loss arising due to decline in interest rates, poorer liquidity conditions, decline in credit quality, volatility, etc. It is measured by the ratio of interbank borrowings to total borrowings. A high value means banks relies more on interbank borrowing and faces higher risk arising from change in interest rates.

Liquidity Risk – Liquidity risk is the risk that banks faces of insufficient liquidity in order to meet its liabilities. It is measured by the liquidity buffer or the ratio of liquid assets to total assets. A higher ratio indicates lower liquidity risk for bank.

Top Market Opportunities

Untapped Market – Large numbers of people do not have bank accounts in India. This indicates large untapped market for bank players. India still has 19 crores adults with no bank accounts. 

Strong Macroeconomic Variables – The macroeconomic variables of India seem to be strong. GDP has increased from 6.6 to 7 percent over the few years and IMF shows growth trend of 7.7 percent by 2020. The country is in the midst of a digital revolution the on-going disruptive changes point to possibilities for both new entrants and existing banks.

Demographic Shifts – The biggest opportunity for the Indian banking sector is the Indian consumers. The Indian consumers represents a market for wise range of products and services- he needs a mortgage to finance his house, a bank account, credit card for purchase, auto loan for car, pension plan, insurance policy, etc.

The expansion and upward mobility of the middle class have transformed retail banking in India. Consumer companies have already tapped in to this opportunity and now it is for the banks to make the most of opportunity to deliver this solutions to the market.

Market Drivers

High Growth – The growth of the bank is correlated with the growth of overall economy. India is one of the fastest growing economies in the world. The Indian economy grew 8.2 percent year-on-year in the second quarter of 2018. The robust growth of the economy will be backed by the growth of infrastructure, industry, service and agriculture. This is expected to boost the corporate credit growth in the economy and provide opportunities to banks.

Rising Per Capita Income – The rising per capital income pushes the demand of credit. With more income and disposable income, consumers show willingness to take credit to buy range of products and durable goods.

Mobile Banking – Mobile banking has driven the growth of banking industry exponentially by increasing productivity and acquiring new customers, mainly who live in rural areas. Mobile channel is expected to become the second largest channel of banking after ATMs.

Financial Inclusion Program – Under financial inclusion programs, RBI is trying to tap untapped market, especially rural areas where people do not have bank accounts. The RBI has taken initiatives like Financial Literacy Programs, using ICT to spread banking awareness among such people. The Dhan Jan Yojana of the government helped to bring additional 31 crores Indians into formal banking system by March 2018. 

Technology Innovation – The innovation in banking services like ATMs, mobile banking, online banking, e-banking, have helped in reaching to mass customers.

Market Restraints

Capital requirement – Banks in India have to comply with Basel III standards since 2013. The full implementation is expected by 2019. As per the Basel III standard, banks in India have to maintain minimum Tier-1 capital to 7 percent of the lenders’ risk weighted assets and the total capital at 9 percent. Additionally, 2.5 percent capital conservation buffer is to be maintained, taking the requirement to 11.5 percent of the risk weighted assets.

Licensing requirement – Before establishing a bank, one must get banking license from RBI by going through all the regulations and protocols. The requirements are strict and take lot of time. The last licenses were issued to Kotak Mahindra Bank and Yes Bank in 2003 and 2004 respectively.

Industry Challenges

Rural market – The reach in rural India still remains a major challenge for private and foreign banks. Though some of the banks are adopting inorganic growth strategy to increase reach in rural market, the substantial reach by many players will take lot of time. Also, the services that are available in banks at cities are not available in rural areas.

Human Resource Management – As public sector banks are having more employees retired, a vacuum is created at middle and senior level. Experienced people are being replaced by relatively low experience or freshers. The absence of middle management can have serious impact on bank’s decision making process. Also, the training cost is very high in banking sector.

Competition – Due to similar kind of services offered by banks, large numbers of players are entering the industry. This intensifies the competitions, resulting into decreased market share for each player. Banks need to equip themselves to operate in the increasingly competitive environment.

Asset Quality – The non-performing assets (NPA) or bad debt is in inclining trend due to slowdown in economic activity. Also, the banks have been aggressive in lending loans due to which loans have turned non-performing and impacting the profitability of the banks.

Technology Trends

  • Banks have adopted internet tools to reach out to their customers and provide them easy and comfortable banking service.
  • The online banking is used for non-account related matters like bills payment, balance enquiry, ticket bookings, statements, etc. The online banking helps in saving cost as the cost of doing transaction at a teller ranges from US$ 0.65-0.81 while in case of online it is only US$ 0.032 – 0.048.
  • Banks like ICICI has been forward in introducing social media based banking apps. ‘Pockets’ by ICICI allows its customers to have the convenience of banking while they are on Facebook.
  • Mobile banking is expected to become the second largest channel of banking after ATMs. Mobile banking is acting as branch less banking and reducing the need for physical infrastructure and human resources. The new 4G and smart technology is helping to grow the usage of mobile tremendously.
  • The digital revolution and entry of disruptive Fin Tech players has led to phenomenal growth of digital payments. India is evolving from cash-dependent economy to a cashless one. P2P payments, real-time payments, mobile wallets are key elements in payments value chain witnessing fast development. Banks are increasing investments in payment infrastructure and block chain is expected to be a game changer.
  • A centralized database was key issue in India. But, with the issue of Aadhaar (a 12-digit bio metric based unique identity number), it emerged as an important instrument in payment. Aadhaar can have impact on beneficiary identification and authentication. Jhan Dhan accounts seeded with Aadhaar card can be used for direct
  • transfer into bank accounts reducing the dependent on cash.
  • Indian banks are gradually piloting block chain technologies in their operations. During 2016-17, Indian banks, especially large private sector banks, started experimenting with block chain for transactions in international trade finance and bill discounting.

Regulatory Trends

  • The RBI has taken initiative that gives commercial banks freedom to open branches in tier-I cities without seeking central bank’s approval.
  • The RBI has relaxed the norms for banks borrowing through foreign currency. For banks borrowing exceeding half the unimpaired tier-I capital made on or before November 30, 2013, for availing of RBI’s swap facility, the central bank lowered the maturity requirement from three years to a year.
  • The Government of India launched Post Payments Bank and has opened branches across 650 districts to achieve the objective of financial inclusion as of September, 2018.

Market Size and Forecast

There are 27 public sector banks, 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks in Indian banking industry. The total lending has been increased at a CAGR of 10.94 percent and total deposit has been increased at a CAGR of 11.66 percent in the FY07-18.

The retail credit market increased from US$ 181 billion on December 2014 to US$ 281 billion on December 2017. India’s retail credit market is the fourth largest in emerging economies.

Competitive Factors

The main factors on which banks compete in the market are technology innovation, interest rate and good customer service. Technology innovations like ATMs, mobile banking, internet banking etc. play a very important role for customers when choosing bank.

Customers also prefer to deposit their money in banks that offers high interest rate on deposits. A good customer service helps in the retention of customers.

Key Market Players

State Bank of India (SBI) is the largest and oldest bank in India. Forbes has ranked this bank at the 217th position in its “Fortune Global 500” list which includes the names of the largest corporations all over the world in 2017. HDFC is the second largest bank in India with 87,555 employees.

ICICI bank is the third largest bank with 74,096 employees. Punjab National Bank and Canara Bank are the fourth and fifth largest bank respectively. Bank of Baroda is the second largest nationalized bank and Industrial Development Bank of India is the largest commercial bank of India.

Strategic Conclusion

The Indian banking sector has shown strong progress over the last decade and has supported the country’s economic growth. After the demonetization and GST, the Indian economy is moving towards normalcy.

The Indian government’s effort to encourage digital identification and cashless transaction are driving change throughout the economy. The uncertainty in external environment, regulatory changes, shift in consumer behavior, technology disruptions are some of the challenges for the banks.

However, the banking industry can withstand these multiple challenges with support and effort from government and banking players themselves.




  • ATM – Automated Teller Machine
  • CAGR – Compound Annual Growth Rate
  • FY – Fiscal Year
  • GDP – Gross Domestic Product
  • GST – Goods and Service Tax
  • IMF – International Monetary Fund
  • NPA – Non-performing Assets
  • NPL – Non-performing Loans
  • RBI – Reserve Bank of India
  • US – United States

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