As per RBI data, the Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions. Among these institutions, public-sector banks control nearly 80 percent of the market. The Indian Banking industry is currently worth Rs. 92 trillion and is poised for further growth in the next decade. An IBA-FICCI-BCG report has predicted that India’s gross domestic product (GDP) growth will make the Indian banking industry the third largest in the world by 2025.According to the report, the domestic banking industry is set for an exponential growth in the coming years with its assets size poised to touch USD 28,500 billion by the turn of the 2025.

Notwithstanding, the banking industry is facing some major challenges.


Some of the threats and challenges are enumerated below:

1.Low Banking Penetration
This is evident from the data furnished below:

  • Loans-to-GDP ratio is low (62 per cent) relative to many of its emerging markets peers as well as developed economies such as the US and UK.
  • Limited banking penetration in India is also evident from low branch per 100,000 adults ratio. Branch per 100,000 adults in India stands at 747 compared to 1,065 for Brazil and 2,063 for Malaysia.
  • Of the 600,000 village habitations in India only 5 per cent have a commercial bank branch.
  • Only 40 per cent of the adult population has bank accounts.
  • Debit card holders constitute only 13 per cent of the population and only 2 per cent have a credit card.
  • 51.4 per cent of nearly 89.3 million farm households do not have access to any credit either from institutional or non-institutional sources.
  • Agriculture requires timely credit to enable smooth functioning. However, only one-eighth of farm households avail bank credit.

2. Asset Quality Concerns

Gross Non-Performing Assets (GNPAs) and Net Non-Performing Assets (NNPAs) for the Indian banking system as a whole stood at 4.45% and 2.36% of total advances respectively as per RBI data. According to industry estimates, gross NPAs for Indian banks are expected to rise to 5.9% of total advances for FY16 compared to 4.4% in the previous fiscal year. On a standalone basis, the impaired asset ratios do not appear as alarming but when one considers the total Stressed Assets Ratio (Gross NPA + Restructured Loans to Gross Advances) for the Indian banking system, which stands at 10.9%; the situation is distressing.

3.  FinTech tipping point

Antony Jenkins, former CEO of Barclays, has predicted that banks globally are facing their own ‘Uber moment’ due to the rapid growth of financial technologies (Fintech). In the developed economies, physical branches are being left obsolete by popular new FinTech start-ups. It is predicted that developed market banks could cut branch numbers by as much as 50% over the next 10 years. In China, top FinTech companies (such as Alipay or Tencent) often have as many, if not more, clients than the top banks. Indian Banks will also need to face this threat in the not too distant future.

RBI has set FY 2016-17 as the year when NPAs are to be wiped off the books. It will require Herculean efforts from banks, in particular PSBs, to achieve this target and conclusively dispel fears of any ‘Lehman Moment” in the Indian Banking System.

Blog by

Dr. Abhinav D. Jog
Professor & HOD-Finance
Faculty Member, Indira School of Business Studies, Pune.

This article is an extract from Paper published in ASIAN JOURNAL OF RESEARCH IN BANKING AND FINANCE (Published: Sep 2016 Volume: 6 Issue: 9 Pages: 1-8)

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