The Financial Services industry is being “flattened” under the influence of several forces.
Technology is leveling the playing field by creating disruptive business models. Increasing consumer sophistication is forcing the pace of business innovation. Armies of people entering the global talent and consumer markets are creating vast new opportunities across the financial supply chain. The plummeting cost of information processing is leading to an information glut.
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‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows.
With the credibility of the Indian banking system on a high, a number of Indian banks are now leveraging it to expand overseas. Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's. To meet the challenges of going global, the Indian banking sector is implementing internationally followed prudential accounting norms for classification of assets, income recognition and loan loss provisioning.
The scope of disclosure and transparency has also been raised in accordance with international practices. India has complied with almost all the Core Principles of Effective Banking Supervision of the Basel Committee.
Some Indian banks are also presenting their accounts as per the U.S. GAAP. The roadmap for adoption of Basel II is under formulation. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India.
The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalising on the strength of their huge networks and customer bases.
On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The system is slowly moving from a regime of “large number of small banks” to “small number of large banks.” The new era will be one of consolidation around identified core competencies.
In India, one of the largest financial institutions, ICICI, took the lead towards universal banking with its reverse merger with ICICI Bank a couple of years ago. This trend may lead to promoting the concept of a financial super market chain, making available all types of credit and non-fund facilities under one roof or specialized subsidiaries under one umbrella organization.
Scheduled Commercial Banks (SCB's) in India are categorized into five different groups according to their ownership and / or nature of operation. These bank groups are (i) State Bank of India and its associates (ii) other nationalized banks (iii) regional rural banks (iv) foreign banks and (v) other Indian SCB's (in the private sector).
The banking sector witnessed strong growth in deposits and advances during the year 2004-05. As of March 2005, the number of commercial banks stood at 289. The aggregate deposits of SCB's increased from US$ 331 billion in March 2004 to US$ 374 billion in March 2005, credit increased from US$ 185 billion to US$ 242 billion, and investments swelled from US$ 149 billion to US$ 162 billion.
Net domestic credit in the banking system has witnessed a steady increase of 17.5 per cent from US$ 445 billion on January 21, 2005 to US$ 523 billion on January 20, 2006. The growth in net domestic credit during the current financial year up to January 20, 2006 was 14.4 per cent. Nationalized banks were the largest contributors to total bank credit at 47.8 per cent as of September 2005.
While foreign banks contribution to total bank credit was low at 6.7 per cent, the contribution of State Bank of India and its associates accounted for 23.8 per cent of the total bank credit. Credit extended by other SCB's stood at 18.9 per cent.
Indian banks, particularly private banks, are riding high on the retail business. ICICI Bank and HDFC Bank have witnessed over 70 per cent year-on-year growth in retail loan assets in the second quarter of 2005-06. Annual revenues in the domestic retail banking market are expected to more than double to US$ 16.5 billion by 2010 from about US$ 6.4 billion at present, says a McKinney study.
The home loan sector is also on a smooth course. The average loan size of home finance companies is increasing. HDFC, the second largest player in the home finance business. For ICICI Bank, which is the largest player in the business, the average ticket size is about US$ 13,467 – US$ 15,711 and has increased by 10-15 per cent over last year.
Foreign banks are working on expanding their bases in the country. The Ministry of Finance and Reserve Bank of India have agreed to allow foreign banks to open 20 branches a year as against 12 now. At present, 40 odd foreign banks have over 225 branches in India. At the end of 2004-05, the total assets of foreign banks aggregated US$ 30 billion or 6.9 per cent of the assets of all scheduled commercial banks. They will also be allowed 74 per cent stake in private banks. After 2009, the local subsidiaries of foreign banks will be treated on par with domestic banks.
