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Beneficial Banking

Banking is one of the main sectors that help the money on its journey to prosperity in countries like India which had an estimated population of 1.295 billion in 2014, according to the World Bank. Of this population, about 68 per cent lived in rural  and 32 per cent in urban areas. According to the India census of 2011, 54.4 per cent of rural households – and 67.8 per cent of urban households – in India are availing of banking services in the country.

Until the 1980s, the Indian financial system was strictly controlled. Interest rates were administered by the Government of India. Formal and informal parameters governed asset allocation, and strict controls limited entry into and expansion within the financial sector. Banks’ profitability was low, NPAs were comparatively high, capital adequacy was diminished, and operation flexibility was hindered.

In 1991, the Government of India began an economic reform program which was focused on the financial sector and substantially changed the banking industry in India. The objectives of the economic reforms included enhancing the role of finance in promoting growth and economic development of the country. 

The first phase of the reform process began with the implementation of the recommendations of the Narasimham Committee I. Following that, various reports were submitted by the Narasimham Committee II and the Tarapore Committee on Capital Account Convertibility, which lead to the second phase of reforms on capital adequacy requirements, asset classification and provisioning, risk management and merger policies, deregulation of interest rates, the emergence of a liberalised domestic capital market, and the entry of new private sector banks have progressively intensified competition among banks.

During 2014-2015, performance of the Indian banking sector remained subdued and experienced a slowdown in balance sheet growth in 2014-2015, a trend that had set in since 2011-2012. The slowdown was most notable in the case of bank credit, which dipped to a single-digit figure during the year. 

While profits of the banking sector turned around from an absolute decline in the previous year, this positive growth was on account of a decline in the growth of operating expenses rather than a rise in the growth of income of the banks. Notwithstanding the increase in profit growth, the return on assets (RoA), a common indicator of financial viability, did not show an improvement in 2014-2015.

Even though the reach and scope of banking has increased in India, the demand for financial services remains unsatiated. Only approximately 40 per cent of adult population has formal bank accounts. Many of the measures and steps taken by the RBI in recent years reaffirmed its commitment to financial inclusion. These steps included the issuance of licenses to two applicants for the universal bank license identified on the basis of their business plans aimed at achievement of financial inclusion and “in-principle” approvals to 10 applicants for the payments bank license and 11 applicants for the small finance bank license.

Global financial stability risks have risen since October 2015. The outlook has deteriorated in advanced economies because of heightened uncertainty and setbacks to growth and confidence, while declines in oil and commodity prices and slower growth have kept risks elevated in emerging markets. Within the emerging world, however, the Indian economy appears to be quite resilient, given a modest recovery in the economy, declining inflation and buoyant capital flows that helped in maintaining the external sector balance. 

The Indian banking sector remains underpenetrated in comparison to other countries. The USA is 197 per cent, Japan (188 per cent), South Africa (152 per cent), China (14250, UK (139 per cent), Brazil (67 per cent), Russia (59 per cent) and India (52 per cent). 

Deposit accounts with commercial banks per 1,000 adults in India increased from 734 in 2012 to 1,358 in 2014 according to RBI. However, only 45 per cent of the urban residents and 32 per cent of the rural residents in India had bank accounts as at January 7, 2014. The Government of India has taken certain measures to improve these statistics. For instance, on August 28, 2014, it introduced a scheme for comprehensive financial inclusion known as Pradhan Mantri Jan Dhan Yojana (PMJDY). 

As of December 9, 2015, 195.2 million accounts have been opened and 166.7 million RuPay debit cards have been issued under PMJDY.The number of ATMs and points-of-sale in India increased significantly in recent years. The number of ATMs and points-of-sale increased at a CAGR of 20.10 per cent and 18.63 per cent, respectively, from 95,686 and 660,920 in fiscal 2012 to 199,100 and 1,308,981 in fiscal 2016, respectively.

The Indian banking sector has grown at a healthy pace, as deposits with scheduled commercial banks have grown at a CAGR of 16.56 per cent during fiscal 2007-2015 and reached Rs 88.99 trillion in Fiscal 2015. The aggregate deposits with schedule commercial banks increased by 14.6 per cent in March 2014, as compared to 14.2 per cent in March 2013. The growth of aggregate deposits with scheduled commercial banks, however, decelerated to 10.9 per cent in March 2015 from 14.6 per cent in March 2014.

Growth in deposits has been mainly driven by strong growth in savings, rising disposable income and increased access to the banking system due to persistent government efforts to promote banking-technology and promote expansion in unbanked and non-metropolitan regions. 

The assets base for the Indian Banking sector has continued to expand in recent years. Total banking sector assets increased at a CAGR of 13.98 per cent from Rs 40,756.47 billion as at end of March 2011 to Rs 68,784.73 billion as at end of March 2015.

Over the years, RBI’s credit delivery system has been scaled up and expanded with innovations that reach out to the diverse financing needs of society. More recently, the effort has been to spread the economies of scale and scope and experience gained in urban and semi-urban areas to geo-chartical regions and sections of society that asymmetric credit markets tend to exclude in view of their lack of pricing power. 

In Fiscal 2014-2015, the focus was on improving the availability of credit to micro, small and medium enterprises (MSMEs) revising priority sector guidelines to foster greater inclusiveness and enhancing the flow of credit to agriculture.

Agriculture credit is one of the major drivers of agriculture production in India. The Government of India set a target of Rs 8,000 billion for agriculture credit during the year 2014-2015. Against this target, all banks in India disbursed Rs 8,406 billion as at the end of March 2015, meeting the target set by the Government of India. Led by the performance of commercial banks, the actual flow of credit to the agriculture sector has been consistently higher that the target in recent years.

However, credit extended by cooperative banks and regional rural bank (RRBs) was below their respective targets. The beginning of the microfinance movement in India could be traced back to the commencement of the Self Help Group – Bank Linkage Programme (SHG-BLP), which was started as a pilot project established by NABARD in 1992. SHG-BLP is a savings-led credit product for the unbanked poor. 

Through SHG-BLP, Self Help Group (SHG) encourages SHG members to open individual bank accounts for depositing their surpluses. In addition, banks provide credit to SHGs as cash credit or overdraft for a longer operational tenure instead of the present fixed tenor term loans. This provides considerable flexibility to SHGs in meeting their frequent credit needs and helps them in reducing their cost of borrowing. Other microfinance programmes, such as microfinance institutions also emerged subsequently in the country. 

In January 2010, the RBI advised all public and private sector banks to submit a board-approved three-year Financial Inclusion Plan (FIP) starting in April 2010. They were advised to devise FIPs congruent with their business strategy and comparative advantage and to make FIPs an integral part of their corporate plans. These plans include: Self-set targets for rural brick and mortar branches opened, business correspondents deployed, coverage of unbanked villages, no frills accounts opened, Kisan credit cards and general credit cards issued, as well as other products designed for financially excluded segments. The implementation of these plans was closely monitored by the RBI on a monthly basis through a quantitative reporting format. 

RBI’s continues its efforts towards universal financial inclusion. On August 28, 2014 the Government of India launched a scheme for comprehensive financial inclusion known as Pradhan Mantri Jan Dhan Yojana (PMJDY) with the objectives of providing universal access to banking facilities, providing basic banking accounts with overdraft facility and RuPay debit cards to all households, conducting financial literacy programmes, creation of credit guarantee fund, micro-insurance and unorganised sector pension schemes. 

The objectives are expected to be achieved in two phases over a period of four years up to August 2018. Banks are also permitted to avail of the RBI’s scheme for subsidy on rural ATMs. As of December 9, 2015, 195.2 million accounts have been opened and 166.7 million RuPay debit cards have been issued under PMJDY. 

Given the boost provided by the PMJDY, banking penetration has increased, particularly in rural areas. However, significant numbers of bank outlets operate in branchless mode through business correspondents (BCs) and facilitators. Dominance of BCs in the rural areas can be gauged from the fact that almost 91 per cent of the banking outlets were operating in branchless mode as on March 31, 2015.
“With a large part of India needing banking and armed with cutting edge technology and architectural strategy, we looked at creating a business banking model that will highlight this which is the need of the hour” said Vishwavir Ahuja, ED, MD and CEO, RBL Bank Ltd, while launching RBL Bank Limited’s its public issue of equity shares at Rs 224 to Rs 225 each – totally aggregating upto Rs 8,325 million – on August 19, 2016. “The market is looking for good issues and, as one of India’ fastest-growing private sector banks in last six years, our strategy focuses on mutually-beneficial partnerships to extend one’s footprint beyond the branch network, and also pursuing inorganic growth initiatives including equity investments and acquisitions,” he added. 

To further strengthen the financial inclusion efforts and increased the penetration of insurance and pension coverage in the country, the Government of India has launched social security and insurance schemes, namely, Pradhan Mantri Jeevan Jyoti Bima Yojana , Pradhan Mantri Suraksha Bima Yojana and Atal Pension Yojana, in May 2015.

As on December 16, 2015, 92.6 million beneficiaries have been enrolled under the Pradhan Mantri Suraksha Bima Yojana and 29.2 million have been enrolled under Pradhan Mantri Jeevan Jyoti Bima Yojana. Further, 1.3 million account holders have been enrolled under Atal Pension Yojana.

The shares of ATMs in rural and semi-urban area have been rising, though urban and metropolitan centres still dominate. In 2015, about 44 per cent of the ATMs were located in rural and semi-urban centres.


Fiscal 2015 has witnessed key policy reforms, aimed at aiding growth revival and surmounting the structural constraints in the economy. In the recent past, the economy faced testing times with issues like lower growth, high levels of inflation and widening current account deficit escalated by an unsupportive external environment. With its desirable concomitants of mild inflation and manageable current account balance, signaling improvements in macro-economic stability.

The Indian economy has one of the highest real GDP growth rates. India’s real GDP growth is expected to be at 7.3 per cent in Fiscal 2015 and accelerate to 7.8 per cent in Fiscal 2016 and 7.9 per cent in Fiscal 2017.
The Indian economy was the third largest economy in terms of GDP at purchasing power parity in 2014-2015, according to IMF. At current prices, India reached a gross saving rate of approximately 32.0 per cent of GDP at market prices and a gross capital formation rate of 33.1 per cent in 2014-2015. 

Per capita GDP in India grew from an estimated $5,300 in 2012 to an estimated $5,800 in 2014. The increase in per capita income has created increasing wealth and positively affected disposable incomes. This has had a significant investment multiplier effect on the economy leading to increasing consumerism and wealth creation and thus positively impacting savings.

  During Fiscal 2013-2014, amid slow growth and high inflation, the Indian economy had to contend with serious challenges to external stability emanating from an unsustainably high current account deficit, capital outflows and consequent exchange rate pressures. 

Several measures taken by the RBI and Government of India helped stabilize the economy. Investors’ perceptions of India improved in early 2014, due to a reduction of the current account deficit and expectations of post-election economic reform, resulting in a surge of inbound capital flows and stabilization of the rupee.

Real GDP growth improved from 6.9 per cent in 2013 to 7.3 per cent in 2014 and is expected to be around 7.3 per cent, 7.8 per cent and 7.9 per cent in 2015, 2016, 2017 and 2018, respectively, as a result of better governance, transparent, effective and efficient regulatory and legal regimes, improvement in technical efficiency, institutional improvements, improved labor mobility and other reforms.

The outlook for India’s long-term growth is moderately positive due to a young population and corresponding low dependency ratio, healthy savings and investment rates, and increasing  integration into the global economy, according to data from World Bank, RBI Annual Report and MO Finance.

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