As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized 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. While the pandemic was sudden and devastatingly swift, the policy response was unprecedented and expansive in its reach. Governments and central banks across the globe fashioned measures in the form of additional fiscal spending, foregone revenues, Capita Land debt injections, contingent liabilities, and liquidity/ funding for lending adding up to US$ 16 trillion or 15.3% of world GDP. In India, a calibrated policy stimulus began with direct assistance in cash and kind to the poor and progressively broadened into a comprehensive
Package (AatmaNirbhar Bharat) to provide support to the various sectors of the economy. In 2020-21, it cumulated to 15.7% of GDP, including liquidity and other measures taken by the Reserve Bank of India (RBI).
The Indian banking industry has recently witnessed the rollout 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. 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 five in the Faster Payments Innovation Index (FPII).
The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1,485 urban cooperative banks, and 96,000 rural cooperative banks that provide financial services to the regular public such as loans, wealth management, investment services, currency exchange, safe deposit boxes and more. As of March 2021, the total number of ATMs in India increased to 213,572.
- The asset of public sector banks stood at INR. 107.83 lakh crore (US$ 1.52 trillion) in FY20.
- During FY16-FY20, bank credit grew at a CAGR of 3.57%. As of FY20, total credit extended surged to US$1,698.97 billion.
- During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$1.93 trillion by FY20. Credit to non-food industries stood at INR. 53 trillion (US$ 1.44 trillion), as of January 15, 2021. Non-food industries grew at 5.7% in January 2021 as against an increase of 8.5% in January 2020.
As per the BFSI research report states that PSBs accounted for more than 80% of SCBs’ GNPA till FY19. Over the last couple of years, the PSBs registered a substantial contraction in their GNPA amount as they are expected to be around INR. 6.0 lakh crore at the end of March 2021 as compared with INR. 6.8 lakh crore as of the end of March 2020. GNPA amount of PVBs had remained within INR. 2 lakh crore from September 2017 till September 2019. Unlike the PSBs, the PVBs have recorded a rise in their GNPA amount from INR. 1.8 lakh crore in March 2018 which breached the INR. 2 lakh crore levels in December 2019 but subsequently are expected to have retreated to around INR. 1.96 lakh crore by the end of March 2021. Secured Governance strategy designed to minimize the revenue loss of the banking sector. The value and valuation strategy offers sophisticated funding mechanism and tailored to the economic growth and generate huge employment opportunity.
- In December 2020, in response to the RBI’s cautionary message, the Digital Lenders’ Association issued a revised code of conduct for digital lending.
- As of February 27, 2021, the number of bank accounts opened under the government’s flagship financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’ reached 41.93 crore and deposits in Jan Dhan bank accounts stood at more than INR. 1.70 lakh crore (US$ 23.07 billion).
- On November 6, 2020, WhatsApp started UPI payments service in India on receiving the National Payments Corporation of India (NPCI) approval to ‘Go Live’ on UPI in a graded manner.
- In October 2020, HDFC Bank and Apollo Hospitals partnered to launch the ‘HealthyLife Programme’, a holistic healthcare solution that makes healthy living accessible and affordable on Apollo’s digital platform.
- In March 2020, the Government of India merged ten public sector banks into four banks to drive credit growth, lift the slowing economy and boost the government’s target of a US$5-trillion economy by 2024.
- In March 2020, the State Bank of India (SBI), India’s largest lender, raised US$100 million in green bonds through private placement.
- In February 2020, the Cabinet Committee on Economic Affairs gave its approval for the continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year beyond 2019-20 – till 2020-21 to those RRBs which are unable to maintain minimum Capital to Risk-weighted Assets Ratio (CRAR) of 9% as per the regulatory norms prescribed by RBI.
- The NPAs (Non-Performing Assets) of commercial banks recorded a recovery of 4 lakh crore (US$ 57.23 billion) in the last four years including a record recovery of INR. 156,746 crore (US$ 22.42 billion) in FY19.
- In February 2021, Unified Payments Interface (UPI) recorded 2.29 billion transactions worth 4.25 lakh crore (US$ 57.68 billion).
- According to the RBI, India’s foreign exchange reserve reached US$605.008 billion as of June 04, 2021.
- To improve infrastructure in villages, 204,000 points of sale (PoS) terminals have been sanctioned from the Financial Inclusion Fund by National Bank for Agriculture & Rural Development (NABARD).
- The number of transactions through immediate payment service (IMPS) increased to 55 million in volume and amounted to INR. 2.88 trillion (US$ 39.57 billion) in value in January 2021.
|Sl. No.||Category||Number of Branches||Number of ATMs|
|1||Public Sector Banks||92,559||137,113|
|2||Private Sector Banks||36,674||73,369|
|4||Regional Rural Banks||22,289||─|
|5||Local Area Banks||81||─|
|6||Small Finance Bank||5,102||2,128|
Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there was no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. India is one of the top 10 economies in the world, where the banking sector has tremendous potential to grow. The last decade saw customers embracing ATM, internet, and mobile banking. India’s banking sector is currently valued at INR. 81 trillion (US$1.31 trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third-largest by 2025, according to an industry report.
The face of Indian banking has changed over the years. Banks are now reaching out to the masses with technology to facilitate greater ease of communication, and transactions are carried out through the Internet and mobile devices. A bank is a financial institution that provides banking and other financial services to its customers. A bank is generally understood as an institution that provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. A banking system also referred to as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout the day. The banking system in India should not only be hassle-free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India’s banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role—accepting deposits and lending funds from these deposits.
Now, the existing situation has created various challenges and opportunities for IndianCommercial Banks. In order to encounter the general scenario of the banking industry, we need to understand the challenges and opportunities lying with the banking industry of India.
United Payments Interface (UPI)
UPI transaction volume and value have witnessed a contraction in February 2021 — the first time since April last year. From 2302.73 million transactions involving INR. 431,181.89 crore processed in January 2021, the number of transactions declined to 2,292.90 million worth INR. 425,062.76 crore in February 2021, according to the data from the National Payments Corporation of India (NPCI). UPI transactions in April last year had declined to 999.57 million amounting to INR. 151,140.66 crore from 1,246.84 million transactions worth INR. 206,462.31 crore in the preceding month.
However, the year-on-year growth in UPI transactions stood at 73% in February 2021 even as the value nearly doubled by 91%. February 2020 volume stood at 1,325.69 million transactions worth INR. 222,516.95 crore. The number of banks going live on UPI also increased from 146 in February 2020 to 213 in February 2020. UPI transactions had ended 2020 on a high note with the total value storming past the INR. 4-lakh-crore mark in December to INR. 4.16 lakh crore across 2,234.16 million transactions.
Growth Rates in Select Payment Systems (numbers in %) Key Challenges in the Banking Sector of India
Developing countries like India still have a huge number of people who do not have access to banking services due to scattered and fragmented locations. But if we talk about those people who are availing of banking services, their expectations are rising as the level of services is increasing due to the emergence of Information Technology and competition. Since foreign banks are playing in the Indian market, the number of services offered has increased and banks have laid emphasis on meeting customer expectations.
- Rural Market: Banking in India is generally fairly mature in terms of supply, product range, and reach, even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong, and transparent balance sheets relative to other banks in comparable economies in their region.
- Management of Risks: The growing competition increases the competitiveness among banks. But, the existing global banking scenario is seriously posing threats for the Indian banking industry. We have already witnessed the bankruptcy of some foreign banks.
- Global Banking: It is practically and fundamentally impossible for any nation to exclude itself from the world economy. Therefore, for sustainable development, one has to adopt an integration process in the form of liberalization and globalization as India spread the red carpet for foreign firms in 1991. The impact of globalization becomes a challenge for domestic enterprises as they are bound to compete with global players. If we look at the Indian Banking Industry, then we find that there are around 300 foreign bank branches operating in India, which becomes a major challenge for Nationalized and private sector banks. These foreign banks are large in size, technically advanced, and having a presence in the global market, which gives more and better options and services to Indian traders.
Non – performing Asset (NPAs)
The Reserve Bank of India’s (RBI) macro stress tests show the gross non-performing assets (NPAs) of commercial banks to jump from 9.3% in September 2019 to 9.9% in the next year. This finding is based on a baseline scenario that assumes the continuation of the current economic situation in the future. The GDP is down to 4.5% in the second quarter of the financial year 2019-20 and is expected to hover around 5% for the entire fiscal.
The public sector banks, that control two-third of the banking sector in terms of deposits and advances, would see their NPAs increase to 13.2% by September 2020, from 12.7% in September 2019. The private banks, however, may see their NPAs increase to 4.2% from 3.9% in the same period. The foreign banks, which control less than 5% of the total banking assets, will see NPAs rise to 3.1% from 2.9% during this one-year period.
The asset quality deterioration will also have a direct impact on the capital ratios. The RBI report says the capital adequacy ratio of 53 banks is projected to decline to 14.1% by September 2020 from 14.9% in September 2019. In fact, there will be as many as three banks that would see their capital adequacy falling below the minimum regulatory level of 9% by September 2020. This is while assuming no further capital is infused into these banks.
Currently, credit growth in the industry has already weakened because of a slowdown in key sectors of the economy, especially real estate, construction, auto, etc. The loans and advances have slowed from 13.2% in March 2019 to 8.7% in September 2019. In the recent past, retail growth actually compensated for the loss in corporate lending growth, but a slowdown in some key retail assets like auto and real estate is now impacting the retail asset’s story. In fact, there are also concerns around the asset quality in retail because of job losses, stagnant income, and no job creation in the economy.
According to the RBI report, the credit growth of PSBs has declined to 4.8% year-on-year in September 2019, from 9.6% in March 2019. The credit growth of private sector banks has moderated to 16.5% from 21%.
- Intense Competition: The RBI and Government of India kept the banking industry open for the participants of private sector banks and foreign banks. The foreign banks were also permitted to set up shop in India either as branches or as subsidiaries. Due to many new players have entered the market such as private banks, foreign banks, non-banking finance companies, etc. The foreign banks and new private sector banks have spearheaded the hi-tech revolution. For survival and growth in a highly competitive environment banks have to follow prompt and efficient customer service, which calls for appropriate customer policies and customer-friendly procedures.
- Timely Technological up-gradation: Already electronic transfers, clearings, settlements have reduced translation times. To face competition it is necessary for banks to absorb the technology and upgrade their services.
While much of the growth has been focused on retail consumer businesses, like payments and lending, new technologies have the potential to drive unprecedented transformations and competitive shifts in commercial and wholesale markets as well. The same technologies that enable new entrants to compete with established incumbents are also changing how incumbents themselves operate, manage information, and engage with customers.
Over the years, the need for credit in MSMEs is increasing. However, the credit allocation to the small firms has not been up to the mark. According to RBI, MSMEs have faced a decline in lending for more than 2 years since 2015. Moreover, the Micro-Units Development and Refinance Agency (MUDRA) scheme which aims to provide credit for expanding existing small businesses hasn’t been successful either. The loans are majorly extended to well-performing sectors.
Fifty-seven banks, including six cooperative banks, were subjected to IT examinations to assess their level of cybersecurity preparedness and compliance with the circulars, advisories, and alerts on cybersecurity issued by the reserve bank from time to time. Targeted thematic examinations were also carried out, focusing on applications, infrastructure, and systems used by the banks. During the year, three cyber drills were conducted on hypothetical scenarios as tabletop exercises for informing banks’ prospective reviews of Cyber Crisis Management Plans/Incident Response Mechanisms.
During the year, key risk indicators were revised to ensure that banks provide a more accurate quantitative indication of cyber risk posture and adequacy of cyber controls implemented by banks. Banks were advised to ensure that members of the Board, senior management, and CXOs (viz., Chief information officer, Chief Technology Officer, Chief RiskOfficer, and Chief Information Security Officer)undergo mandatory certification in IT and cybersecurity.
The number of cases of frauds reported by banks increased by 15% in 2018-19 on a year-on-year basis, with the amount involved rising by 73.8%, though mostly related to occurrences in earlier years.
Secured Governance advocates a pragmatic approach of taking Advantage of Valuation of Assets Created
Indian banks — particularly public sector banks — are loaded down with many problems including non-performing loans are one of the major problems. This means that they find it difficult to grow their new lending to industry, and growth suffers. The financial industry should put in place a robust system to solve the NPA problem of the banking sector. Secured Governance is a novel strategy that consists of promoting infrastructure (Banking HUB) development that integrated with all key supporting sectors such as transport, power, telecom, healthcare, education, etc. This is not new. We all know when development takes place there is valuation in the property. Who benefits from this? More often than not it is incidental and taken advantage of by land and property sharks. Imagine a model where this valuation can be plowed back into the project and also benefit the people around. First, the development cost of the Financial HUB is reduced, and can actually be at negligible cost to the government if carefully planned. Next, the population sees it as benefitting them and so they participate more enthusiastically, helping with the early completion of the project rather than being an impediment. The strategy provides a generic
pathway to capture a part of the increased value by the investment made by private stakeholders and helps the repayment of loans for infrastructure (HUB) development. This mechanism helps to reduce the GNPA ratio drastically.
Supporting Sectors of Secured Governance Financial HUB
Benefits of Secured Governance in Banking Industry
- funding to the projects could be minimized through SG concept;
- A healthy Secured Governance system is essential for public and private sector banks. To improve the efficiency and profitability of banks the NPA needs to be reduced and controlled.
- Enhance financing strategies and public-private collaboration through SG;
- Leads towards cost reduction, increase efficiency, improve productivity, and Contour economically the procedures & banking practices.
- Creative (Bankers) and innovative (private entrepreneur) actors come together to identify links and connections that can help find unexpected solutions to complex challenges and unleash the power of collective innovation;
- Drawing effectively public funding and support can unleash the Techno-Economic growth of the nation.
Secured Governance – Project Development & Bank Funding
The secured Governance concept focuses on strengthening the Private Public Partnership while substantially reducing governmental involvement. Government plays a supervisory and monitoring role rather than getting entangled into the nitty-gritty of big projects. The majority of the investments will be made by private entities which would definitely require huge bank funding. Now since most of the developmental work comes under public infrastructure and services the banks may not be in a position to fund such projects. We propose that Govt. against this infrastructure can grant more FSI to the private stakeholders for other projects in the same zone giving way to smooth flow of funds.
Value and Valuation of the allied projects will make it a self-sustaining mechanism while bringing unprecedented growth and development for the nation.
Supporting Productivity Enhancements by Technology Enhancements
- Foster collaboration across functional, Service, Agency, and national high performance computing communities;
- New and advanced technologies can provide a wide range of productivity-enhancing benefits, including increased efficiency, cost reduction, increased speed, greater reach, and increased reliability of processes and transactions.
Case study for growth through Smart Banking HUBs
The banks could actively get associated in the upcoming Smart Hubs which are planned to go till Village level through Secured Governance. Depending on the size and types of banks they could prioritize the locations and set up Business development centers. A case to consider is the 24 Smart Cities coming up in the Mumbai Nagpur Super Expressway where they have set up a Secured Governance Advisory committee that is getting this massive project off the ground. Here each of these could be a developmental and profit center for the selected banks for each Major Hubs as also the Minor ones. The selected banks would provide their various services and assist upcoming Indian and international enterprises to come up as also benefit from the huge appreciation of the property prices as the project goes
This model could be multiplied to have the banks greater participation as a catalyst for growth keeping up their financial interest which could get them greater monetary benefit to be of use for their growth to international frontiers.
- Secured governance acts as a catalyst for reducing Non-performing assets (NPAs) in the banking sector drastically. Value of banking HUB which grows many folds.
- Banking HUB ─ A city or area that is considered to be a focal point for the Banking & Financial associated services. Synergy, or the potential financial benefit achieved through the combining of the banking sector with industries. The Special Purpose Vehicle (SPV) becomes an indirect source of financing for banks by attracting independent equity investors to help purchase the debt obligations.
- These HUBs are home to all types of public & private industries and enterprises. The financial services or functions will be provided by the banking industry to all business enterprises.
- Banks could provide loans to public and private industries for investment in infrastructure development.
- The banking industry could furnish CA, CPA (Certified Public Accountant) services such as auditing, bookkeeping, payroll processing, and tax return preparation.
Financial HUBs could minimize the losses of the banking sector and would keep them healthy and India on the global map with them as Centre of excellence in the Financial & IT/ITeS Services. The impacts of HUB on values could recoup the private investment of infrastructure development and minimize the loan repayment. Moreover, it will create huge employment opportunities in the field of the financial service industry in India.
The Financial HUB’s value refers to financial gains from the appreciation of vicinity land as a result of Public-Private Participation. The HUB will be an emerging global financial HUB for which first time in India, designed to be at or above par with a globally benchmarked economic growth center. Companies from Financial Services, Technology, and all other services sectors will be targeted as potential occupants within the city.
Dr. P. Sekhar
Global Smart City Panel,
Former CMD Central Bank & Ex. Chief Executive Indian Banks Association