March 6, 2018

Banking Industry



Must know facts:

  • As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.
  • The Indian banking system consists of 27 public sector banks, 26 private sector banks, 46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913 rural cooperative banks, in addition to cooperative credit institutions.
  • During FY06–17, deposits grew at a CAGR of 12.03 per cent and reached 1.54 trillion by FY171.
  • Strong growth in savings amid rising disposable income levels are the major factors influencing deposit growth.
  • I have just indicated all thats relevant from basic investor education perspective. People interested to keenly understand banking metrics, you can download – ‘Handbook of Statistics on Indian Economy 2016-17’ released by RBI in September 2017, which is available at bottom of this page.


Influencing Factors for price change:

  1. Movement in banking stocks is well judged when its seen in line with movement of Indices like NIFTY BANK, NIFTY PSU BANK, NIFTY PVT BANK.
  2. Banking regulation amendments issued by Ministry of Finance from time to time, is certainly an important pointer that could affect stock movements. For Ex: PSU banks recap policy, privatisation of banks, Potential mergers & acquisitions.
  3. Primary data which states the health of banks such as – the value of banks’ gross nonperforming assets (GNPA) and restructured assets data are extremely important. RBI’s credit policy meets that dictates changes to CRR, Repo, Reverse repo rates is a key.
  4. The push for digitisation, new policies favour financial inclusion to promote competition by allowing new domestic players to set up payments banks – are important banking parameters which are taken into account for a relative judgement.


Understanding the Industry:

The Indian banking sector is broadly classified into scheduled and non-scheduled banks. The scheduled banks are those included under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified into: nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs); foreign banks; and other Indian private sector banks. The term commercial banks refers to both scheduled and non-scheduled commercial banks regulated under the Banking Regulation Act, 1949.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

Public-sector banks are more exposed to industry sectors with a higher share of nonperforming loans than their private-sector counterparts are. These state-owned institutions have deep networks and control 70 percent of banking’s asset base. rom 2009 to 2016, the government made capital infusions of $15 billion into them. But over the years, value has steadily shifted toward private-sector institutions, whose share of the sector’s assets has grown to 25 percent, from 21 percent, in the past decade.1 (Foreign banks account for the remaining 5 percent.) The division is more apparent in the value banks created from 2006 to 2016: private banks have grown faster and generated far more value for their shareholders, with their share of market cap increasing from about 40 percent to nearly 70 percent in the same period. (report by Mckinsey)

Loan growth in fiscal year 2017 has remained anemic—the banks’ credit books shrank by 4 percent in the past quarter. With the balance sheets of major Indian companies continuing to be under stress, the volume of corporate loans fell by 3 percent from April to December 2016. Roughly 40 percent of the outstanding debt is to companies whose interest-coverage ratio is less than one,2 making debt repayment difficult. Overall, the recovery of wholesale-banking loans seems difficult in the medium term. (report by Mckinsey)

The Indian government’s decision to demonetize the currency—about 85 percent of it ceased to be legal tender on November 8, 2016—led to a surge in the current and savings-account (CASA) deposits of the country’s banks. Slow loan growth, combined with the higher CASA, has pushed down the banks’ credit-deposit ratios, a standard measure of loans to deposits. If credit offtake fails to pick up, these factors could affect the banks’ net interest income.

The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments Innovation Index (FPII).* In August 2017, Global rating agency Moody’s announced that its outlook for the Indian banking system was stable. In November 2017, Global rating agency Moody’s upgraded four Indian banks from Baa3 to Baa2.


Estimated Market Size:

Public-sector banks control more than 70 per cent of the banking system assets, thereby leaving a comparatively smaller share for its private peers. Banks are also encouraging their customers to manage their finances using mobile phones.

As the Reserve Bank of India (RBI) allows more features such as unlimited fund transfers between wallets and bank accounts, mobile wallets are expected to become strong players in the financial ecosystem.

The unorganised retail sector in India has huge untapped potential for adopting digital mode of payments, as 63 per cent of the retailers are interested in using digital payments like mobile and card payments, as per a report by Centre for Digital Financial Inclusion (CDFI).


Road Ahead:

The bank recapitalisation plan by Government of India is expected to push credit growth in the country to 15 per cent and as a result help the GDP grow by 7 per cent in FY19.

Public sector banks are lining up to raise funds via qualified institutional placements (QIP), backed by better investor sentiment after the Government of India’s bank recapitalisation plan and an upgrade in India’s sovereign rating by Moody’s Investor Service.

The further easing of norms, such as permission to set up wholly owned subsidiaries, makes it easier for foreign banks to enter India’s banking sector. Although processes are evolving, regulatory interventions point to the emergence of a digital, inclusive, and interoperable financial-services market in India.

The Government of India is planning to introduce a two percentage point discount in the Goods and Services Tax (GST) on business-to-consumer (B2C) transactions made via digital payments. Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit and debit cards in the market shortly. The cards, which use near field communication (NFC) mechanism, will allow customers to transact without having to insert or swipe.


–    Article by Suman Adithya Rao (SEBI Certified Research Analyst, Management Graduate in Entrepreneurship & Small Business Management)
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Top Stocks in the industry:

Private Sector Banks – HDFC Bank, ICICI Bank, Kotak Mahindra, Axis Bank, IndusInd Bank & many more.

Public Sector Banks – SBI, Bank of Baroda, PNB, Canara Bank, IDBI Bank, Vijaya Bank & many more.

(Please note above stocks are not recommendations, they are purely for information purpose only)

Information Source / References: IBEF, Mckinsey report on Indian Banking, The Economic Survey 2016–17/17-18, Agricultural and Processed Food Products Export Development Authority (APEDA), Department of Commerce and Industry, Union Budget 2017–18, Press Information Bureau, Ministry of Statistics and Programme Implementation, Press Releases, Media Reports,RBI, IBEF,


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