The Indian banking sector has been on a higher trajectory growth along with the Indian economy. In this age of globalisation, foreigners are also making investments in India and so Indian banks are planning global strategies. Most of the cost components in banking industry are expected to decrease except interest expended. In major parts of the cost, interest expended, as a percentage of interest earned is estimated to surge by 145 basis points. Staff costs reduced by 298 basis points due to better management and increased recoveries by banks, whereas other operating expenses increased by 110 basis points. Tax estimated is likely to decrease by 20 basis points. Net bank credit increased by Rs466 billion to touch Rs24.08 trillion as on June 2008, according to the data from the Reserve Bank of India. The total bank credit comprised food credit, which increased by Rs63 billion to touch Rs507.21 billion; and non-food credit increased by Rs403.44 billion to touch Rs23.57 trillion. Much of the deposit growth could be due to poor performance by the stock market could have prompted investors to go to banks, resulting in an increase in both time and demand deposits. Aggregate deposit with commercial banks was running at Rs33.08 trillion as on June 2008.
The Reserve Bank of India (RBI) hiked the Cash Reserve Ratio (CRR) by 25 basis points to 9.00% with effect from August 2008, and left key interest rates unchanged in its annual monetary and credit policy for the year 2008-09. The hike in the CRR, the mandatory amount that banks have to keep with the RBI, followed a two-stage rise earlier in April to 8.0%, and the second hike took effect May 10, 2008. As the Indian banking industry continues its rapid growth along with rise in financial services penetration in the Indian economy, the industry’s profit is likely to simultaneously surge ahead. The profit pool of the Indian banking industry is estimated to increase US$20 billion in 2010 and further to US$40 billion by 2015. Simultaneously, driven by the expansion of the middle class population, increase in private banks and the burgeoning national economy, the domestic credit market of India is estimated to grow to US$23 trillion by 2050 favouring India to emerge as the third largest banking hub.
The banking industry worldwide is facing a tough time due to the failure of financial system in the biggest economy i.e. US. This is due to the subprime mortgage lending by the investment banks of US. This has led to the failure of banks world over and now interbank lending has come to a halt as the banks credit worthiness is under question. This crisis has led to a liquidity crunch in the entire economies world over. The banks are facing the major challenge as the liquidity crunch prevails and the capital markets crashing down. The India banks are also facing the same heat. The capital markets have crashed down by 50% and people are looking forward to the banking industry for liquidity. To add to the woes, the government policies are also affecting the performance of the bank. The farm loan waiver and the fertilizer subsidy are not yet released by the government and these burdens are being borne by the banking industry. The inter bank borrowing market is also not doing so well as the bank credit worthiness is under question and no bank has surplus funds to lend to other banks. However, the RBI is making efforts to improve the scenario by reducing the CRR rate to 6.5% to inject the liquidity in the markets.
Currently, India has 88 scheduled commercial banks, 28 public sector banks, 29 private banks and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75% of total assets of the banking industry and the private and foreign banks hold of 18.2% and 6.5%.
High volatility in equity and money markets would not offer any opportunity for banks to make treasury gains; in fact some of the banks could report losses in treasury operations. Banks having direct exposure to equity market may report slightly higher losses rather exposure through mutual fund schemes. In bond market there is hardly any scope to make capital gains in increasing interest rate scenario. Expected increase in lending rates by banks after they are done with deposits rates hikes, some delinquencies (on advances based on floating rates) may occur due to increased interest payments required to be made by the borrowers. After the banks complete their deposit rates hike exercise, they would increase their PLRs or lending rates for specific advances resulting into some comfort on net interest margin front, but the banks would have to be very selective. As a result in the medium-term, yield on funds would improve but asset quality turn out to be bad in later days. The RBI’s measures of a hike in repo and cash reserve ratio will help tackle the problem of money supply and also stop credit growth, as per the targets set by the central bank. As the Indian banking industry continues its rapid growth along with rise in financial services penetration in the Indian economy, the industry’s profit is likely to simultaneously surge ahead. The profit pool of the Indian banking industry is estimated to increase US$20 billion in 2010 and further to US$40 billion by 2015. Simultaneously, driven by the expansion of the middle class population, increase in private banks and the burgeoning national economy, the domestic credit market of India is estimated to grow to US$23 trillion by 2050. With such a favorable scenario, India is likely to emerge as the third largest banking hub in the world in near future.