Introduction

India is one of the top 10 economies globally, with vast potential for the banking sector to grow. The last
decade witnessed a tremendous upsurge in transactions through ATMs, and Internet and mobile banking.
In 2014, the countrys Rs 81 trillion (US$ 1.34 trillion) banking industry is set for a greater change. Two
new banks have already received licences from the government. Furthermore, the Reserve Bank of
Indias (RBI) new norms will provide incentives to banks to spot potential bad loans and take corrective
steps that will curb the practices of rogue borrowers.
The Indian governments role in expanding the banking industry has been significant. Through the
Financial Inclusion Plan (FY 1013), banking connectivity in the country increased more than three-fold to
211,234 villages in 2013 from 67,694 at the beginning of the plan.
Banks are also looking at new ways to attract customers. In September, 2013, ICICI bank leveraged the
popularity of the social platform, and launched its Facebook banking service, Pockets. The service
enables customers to transfer funds and pay bills from within the website.

Market Size
The revenue of Indian banks increased four-fold from US$ 11.8 billion to US$ 46.9 billion during the
period 20012010. In the same period, the profit after tax increased from US$ 1.4 billion to US$ 12 billion.
In 201213, Indian banks had 170 overseas branches (163 in 201112) while foreign banks had 316
branches in India (309 in 201112).
Credit to housing sector grew at a compound annual growth rate (CAGR) of 11.1 per cent during the
period FY 200813. Total banking sector credit is expected to grow at a CAGR of 18.1 per cent (in terms
of INR) to touch US$ 2.4 trillion by 2017.

Recent Developments
Infrastructure Development Finance Company (IDFC) and Bandhan Financial Services Pvt Ltd have been
chosen among a field of 25 banks by the RBI to set up banks. In-principle approval has been given to
the banks, which are both non-banking finance companies. While Mumbai-based IDFC is categorised as
an infrastructure finance company, Kolkata-based Bandhan is a microfinance establishment.
Bandhan covers 5.5 million customers, nearly all of them women whose loans average Rs 10,000. The
bank seeks to continue catering to a rural and unbanked customer base from its current branch network.
"Why go after the same person and ask him to get another account? Why not just go after those who do
not have any bank accounts," said Mr Chandra Shekhar Ghosh, the banks Managing Director.
Banks and housing finance companies (HFCs) together enjoyed a 20 per cent growth in home loans in
FY 201314, according to Mr RV Verma, Chairman and Managing Director, National Housing Bank.
Home loans disbursed by banks and HFCs collectively grew by Rs 1.60 trillion (US$ 26.59 billion) in FY
201314 to reach Rs 9.60 trillion (US$ 159.58 billion) at the end of the fiscal. We expect the growth (in
home loans) to continue. There is every reason to believe that, said Mr Verma.
Jammu and Kashmir (J&K) Bank is looking at opportunities to increase its presence outside the country.
The bank is likely to establish branches in London and Dubai to strengthen its relationships with current
customers who have business interests in Europe and West Asia. We have a number of business
relationships in these countries and it makes sense for us to have a presence there, said Mr Mushtaq
Ahmad, Chairman and Chief Executive Officer, J&K Bank.
Indian banks operating abroad enjoyed a higher credit growth in comparison to foreign banks operating in
India, as per an RBI survey on international trade in banking services for 201213. According to the
survey, growth of credit extended by Indian banks branches operating overseas grew by 31.7 per cent to
Rs 585,570 crore (US$ 97.36 billion); credit extended by foreign banks based in India increased 27.5 per
cent to touch Rs 307,700 crore ($51.15 billion).
Strong growth in agriculture and services sectors as well as the personal loans segment has helped push
bank credit growth during the period AprilNovember, 2013 to 7.2 per cent, compared to 6.6 per cent
during the same period of 2012, according to a report by credit rating agency CARE Ratings. During the
period, loans to the agri sector grew by 5.2 per cent compared to 2.3 per cent in 2012. "Higher growth in
credit to agriculture may be attributed to the expected better kharif crop which has been announced by
the Ministry of Agriculture," according to the report.
ICICI Bank is looking at different ways to maximise the digital opportunity for growth. The bank is doubling
the number of cities it covers with 'tablet banking' and offering its customers services such as video
conferencing, so they can talk to the money managers from the comfort of their homes. "The idea is
thinking ahead of your customer. Not just what they may want today but what could they want tomorrow,"
said Mr Rajiv Sabharwal, Executive Director, ICICI.
Bank of India (BoI) launched its card-less cash withdrawal facility in March 2014. Under this service, a
BOI customer can transfer money to anyone, using the banks ATMs or through Internet banking. The
sender has to provide the beneficiarys mobile number, a sender code, and the amount through internet
banking or text message. The beneficiary, after receiving a code from the bank can visit any BOI ATM
with instant money transfer facility and withdraw the money within a fortnight of the transfer.
Simple steps such as memorising one's PIN, lowering credit limits on cards, using virtual cards and
deactivating transactional services connected to a mobile number could bring down bank frauds, says
experts. Regular changing of the password can also save an account from attacks. If there is a change in
the email or phone number, it should be immediately updated with the bank," said a cyber-crime
investigation specialist.

Government Initiatives
The RBI has issued extra guidelines for banks giving gold metal loans (GMLs). To safeguard against
fraud, the central bank has asked lenders to check the credit worthiness of borrowers; collateral securities
against the loan; and trade cycle of the manufacturing activity, before sanctioning the loans. "Lack of
proper monitoring mechanism and not ensuring end use of GML has resulted in certain instances of
frauds/misuse related to GML by certain unscrupulous jewellers," stated the RBI in a notification.
The Cabinet Committee on Economic Affairs (CCEA) has given the green signal to a proposal to increase
foreign holding in Axis Bank from 49 per cent to 62 per cent. The move could bring in overseas
investment of nearly Rs 7,250 crore (US$ 1.20 billion) into the country. The CCEA nod is dependent on
FIIs holding capped at 49 per cent.

Road Ahead
Indias banking sector has the potential to become the fifth largest banking sector globally by 2020 and
the third largest by 2025. The industry has witnessed discernable development, with deposits growing at
a CAGR of 21.2 per cent (in terms of INR) in the period FY 0613; in FY 13 total deposits stood at US$
1,274.3 billion.
Today, banks are turning their focus to servicing clients. Banks in the country, including those in the
public sector, are emphasising on enhancing their technology infrastructure, in order to improve customer
experience and gain a competitive edge. The popularity of internet and mobile banking is higher than ever
before, with Customer Relationship Management (CRM) and data warehousing expected to drive the next
wave of technology in banks. Indian banks are also progressively adopting an integrated approach to risk
management. Most banks already have in place the framework for assetliability match, credit and
derivatives risk management.


To use a clich, there will be a tectonic shift in the Indian banking landscape in 2014. Both the body and the soul of
the Rs.80 trillion banking industry will change. A set of new banks will get the regulators approval, some foreign
banks operating in India may decide in favour of local incorporation to get near-national treatment, and new norms for
early recognition of financial distress and faster resolution and recovery will help curb rising bad assets and improve
the health of the banking system. As an offshoot, Indian firms, especially those operating in the infrastructure space
and adding to the growing pile of bad loans at banks, will become more aggressive in selling assets to shrink debt. In
2013, close to a dozen Indian companies either sold or made their intention clear to sell assets, to pare at least
Rs.3.5 trillion worth of debt, as rising interest costs and diminishing margins took their toll on growth. This trend will
intensify in 2014. Reserve Bank of India (RBI) governor Raghuram Rajan, a former chief economist with the
International Monetary Fund (IMF), has been talking about offering banking licences on tap. This might happen in the
future, but, until now, this has been a once-in-a-decade phenomenon. Following the nationalization of 14 large banks
in 1969 and six in 1980, RBI has so far given licences to only 12 banks in two phases, including the conversion of a
cooperative bank into a commercial bank. In the first round, the banking regulator issued licences to 10 private sector
banks in 1994, shortly after the nation embraced economic liberalization under the P.V. Narasimha Rao-led Congress
government. In the second round, licences were issued to two banksYes Bank Ltd and Kotak Mahindra Bank Ltd
in 2004. In the past, RBIs stated objective behind giving licences to new banks was to introduce competition in the
sector, largely dominated by government-owned banks. This time, the prime focus is to promote so-called financial
inclusion, or increasing the reach of financial services to the unbanked population. Then finance minister Pranab
Mukherjee, in his February 2010 budget speech, had announced that RBI would open up the sector and issue fresh
licences with the objective of spreading banking services wider in a nation where roughly 50% of the adult population
does not have access to them. After issuing a discussion paper and receiving public feedback on it, RBI issued the
guidelines on new banking licence in February 2013 and set a 1 July deadline for applications. A panel of four,
headed by former RBI governor Bimal Jalan, has been scrutinizing the applications. IMFs financial access survey of
2011 gives us a fair idea about how critical financial inclusion is in India. In every 1,000km stretch, India has 30.43
bank branches and 25.43 automated teller machines (ATMs). In contrast, China has 1,428.98 branches and 2,975.05
ATMs. Similarly, there are 10.64 bank branches and 8.9 ATMs for every 100,000 of the population in India. The
comparable figures for China are 23.81 and 49.56. Finally, bank deposits in India constitute 68.43% of the nations
gross domestic product (GDP) and credit 51.75% against Chinas 433.96% and 287.89%, respectively. To expand
banking services in a nation of 1.2 billion people, one needs deep-pocketed promoters, and this is why corporations
have been allowed to apply for banking licences, but not too many of them seem to be interested. The Tata group
withdrew its application for a banking licence, leaving 25 applicants in the race and only three of them belong to the
corporate sectorthe Aditya Birla Group, the Bajaj Group and Anil Ambanis Reliance Group. Tata is not the first
business house to have a change of heart. The Mahindra and Mahindra Group, too, decided not to apply for a
banking licence, saying RBIs norms were not conducive for large and successful non-banking financial companies to
turn into banks. According to the licensing norms, the new bank will have to be listed within three years, bringing
down the promoters shareholding to 40%. Within 10 years, this holding must be further pared to 20%, and by the
12th year to 15%. This is a big deterrent as the promoters will not be able to reap the benefits of the value they
create. How many licences will be given is anybodys guess at this point, but one thing is for sure: armed with
technology, the new banks will shift the playing field from the cities to rural India and add a new dimension to the rural
consumption story. At a parallel level, some old and big foreign lenders may set up wholly owned subsidiaries in India
because they will get near national treatment by the regulator when it comes to opening branches. Foreign banks
with complex structures and banks that do not provide adequate disclosure in their home jurisdiction as well as
systemically important ones will have to convert their local units into subsidiaries. Systemically important banks are
those whose assets account for at least 0.25% of the total assets of all commercial banks. At least 12 foreign banks,
including Bank of America Corp., Barclays Plc, Citibank NA, Deutsche Bank AG, Hong and Shanghai Banking Corp.
Ltd, DBS Bank Ltd and Standard Chartered Plc, fall into this category. Those banks that started operations in India
before August 2010, however, have the option to continue their business through the branch mode, but they will be
incentivized to follow the local incorporation route. One of the incentives is allowing foreign banks to buy private
sector banks in India. If indeed that happens, banking will never be the same in India. While new banks and locally
incorporated foreign banks will rewrite the rules of the game, RBIs initiative to clean up bad loans will add strength to
the banking system. The combination of bad and restructured loans is at least 10% of total banking assets in India.
The new norms will give incentives to banks to detect the first sign of a loan turning bad and take remedial steps and,
at the same time, they will make life difficult for rogue borrowers. At the next stage, RBI will probably focus on
reforming state-run banks that account for about 70% of banking assets, but lack the skill to manage them and arent
smart enough to say no when it comes to taking exposure to some sectors. Overall, 2014 will be action-packed;
banks cannot ask for a more exciting time.

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