Banking Sector In India

1. Introduction
“Finance and banking are the backbone of trade, industry, and
business. Today, the financial business fills in as the groundwork of
contemporary business. Any country's capacity to foster lies
vigorously in its financial area.”

 The Indian banking industry has been on an upward trajectory

aided by strong economic growth, rising disposable incomes,
increasing consumerism and easier access to credit. (slide –
intro)
 ▪ India is one of the fastest-growing Fintech markets in the
world. There are currently more than 2,000 DPIIT-recognized
Financial Technology (FinTech) businesses in India, and this
number is rapidly increasing.
 India is set to become the third-largest domestic banking
sector by 2050.
 As of March 22, 2024, bank credit stood at Rs. 164.34 lakh
crore (US$ 1,968 billion).
 Access to the banking system has also gotten better over time
as a result of the continuous endeavors by the Government to
boost banking technology and facilitate growth in
underbanked and nonmetropolitan areas.
 Banks added 2,796 ATMs in the first four months of FY23,
against 1,486 in FY22 and 2,815 in FY21.
 ▪ Indian banking has benefited from high savings rates and
growth in savings as well as disposable income growth.
 Currently, there are 52.08 crore beneficiaries holding an
amount of US$ 27.56 billion (Rs. 2.29 trillion) in their
accounts.
 According to the RBI, bank deposits stood at Rs. 209.36 trillion
(US$ 2507.62 billion) as of May 3, 2024.
 According to RBI’s Scheduled Banks’ Statement, deposits of all
scheduled banks collectively surged by a whopping Rs 2.04
lakh crore (US$ 2,452 billion) as on FY24
 The Indian digital consumer lending market is projected to
surpass US$ 720 billion by 2030, representing nearly 55% of
the total US$ 1.3 trillion digital lending market opportunity in
the country
 The value of the digital lending market in India was US$ 270
billion in 2022. By 2023, the digital lending market reached
 worth around ~ US$ 350 billion. Most of the market was
served by fintech firms and NBFCs.
 India's digital lending market witnessed a growth of CAGR
39.5% over a span of 10 years.
 ▪ Public sector banks accounted for over 57.48% of interest
income in 2023.

▪ The interest income of public banks reached US$ 102.4 billion

in 2023.

▪ In 2023, interest income in the private banking sector reached

US$ 70 billion.
2. Industry Analysis using Porter’s 5 forces model

Porter's Five Forces model applies to the Indian banking industry:

a. Rivalry Among Existing Competitors

The Indian banking sector is highly competitive, with numerous
public, private, and foreign banks vying for market share. This
intense rivalry has led to improved customer service, innovative
products, and competitive pricing.

b. Threat of New Entrants

The threat of new entrants is moderate. High capital
requirements and strict regulations act as barriers to entry, but
the rise of fintech companies has lowered barriers in some areas.
 c. Bargaining Power of Suppliers
Suppliers in banking are primarily depositors. Their bargaining
power is low as banks compete aggressively for deposits through
interest rates and services. However, large corporate clients may
have more negotiating power due to their significant deposit
amounts.

d. Bargaining Power of Buyers

The bargaining power of buyers (customers) is high. With many
banking options available, customers can easily switch banks for
better rates or services. This has pushed banks to focus on
enhancing customer experience and offering competitive
products.

e. Threat of Substitute Products

The threat of substitutes is increasing with the rise of alternative
financial services such as peer-to-peer lending, digital wallets,
and cryptocurrencies. These alternatives can offer lower costs
and greater convenience, challenging traditional banks.Overall,
the Indian banking sector is characterized by intense
competition, moderate barriers to entry, low supplier power, high
customer power, and a growing threat of substitutes. Banks must
strategize to maintain their competitive edge in this dynamic
environment.

3. Industry Analysis using PESTEL Framework

A PESTEL analysis examines the macro-environmental factors
affecting the industry:
1. Political Factors: The banking sector is heavily influenced by
government policies and regulations. The Reserve Bank of India
(RBI) plays a crucial role in regulating the banking industry, ensuring
stability and trust in financial systems.
2. Economic Factors: Economic growth directly impacts the banking
sector. India's GDP growth has been robust, leading to increased
demand for banking services. However, inflation and economic
downturns can adversely affect loan repayment rates and
profitability.
3. Social Factors: A growing middle class and increasing financial
literacy are driving the demand for banking services. The shift
towards digital banking is also notable, with more customers
preferring online transactions over traditional banking. ( show per
capita gdp increase)
4. Technological Factors: Rapid technological advancements have
transformed the banking landscape. Digital banking, mobile
payments, and fintech innovations are reshaping how banks operate
and interact with customers.
5. Environmental Factors: Banks are increasingly focusing on
sustainable practices and financing green initiatives. Regulatory
pressures and consumer expectations are pushing banks to adopt
environmentally friendly policies.
(show SDG – re 100, Green Financing)
6. Legal Factors: Compliance with various laws and regulations,
including the Banking Regulation Act and the Prevention of Money
Laundering Act, is essential for banks.

4. Major Trends

Focus on Jan Dhan Yojana

▪ Amounting to Rs. 2,28,057 crore (US$ 27.32 billion) 52.30 crore
number of total beneficiaries banked till May 2024.
▪It provides an avenue for the poor to bring their savings into the
formal financial system, an avenue to remit money to their families
in villages besides taking them out of the clutches of the usurious
money lenders.

Focus on UPI
 Digital payments have significantly increased in recent years,
because of coordinated efforts of the Government and RBI
with all the stakeholders, UPI volume for FY24 (until May)
recorded to 27,338. According to the Boston Consulting
Group, PhonePe has 47% of UPI market share followed by
Google Pay (at 34%) in FY23 (April-December). Financial
transactions via digital channels accounted for 92% of the
overall transactions. Out of which, the total share of UPI
transactions was 42% in 9M FY23.
 As on April 2024, there were 581 banks actively using UPI.
The total number of Digital transactions as on December
2023, amounted to 15.08 billion, with a total value of Rs. 2.1
trillion (US$ 25.27 billion).

5. Success Defining Metric

Key Metrics in Banking
1. Net Interest Margin (NIM): This metric measures the difference
between the interest income generated by banks and the amount of
interest paid out to depositors, relative to the total earning assets. A
 higher NIM indicates better profitability from interest-earning assets,
which is a primary revenue source for banks.

2. Return on Assets (ROA): ROA indicates how effectively a bank is

using its assets to generate profit. It is calculated by dividing net
income by total assets. A higher ROA signifies better asset
management and profitability.
3. Return on Equity (ROE): This metric assesses a bank's
profitability by revealing how much profit a bank generates with the
money shareholders have invested. It is calculated as net income
divided by shareholders' equity. A higher ROE indicates efficient
management and strong financial performance.
4. Loan-to-Deposit Ratio (LDR): The LDR measures a bank's
liquidity by comparing its total loans to its total deposits. A high
ratio may indicate that a bank is lending aggressively, while a low
ratio suggests a more conservative approach to lending and a
greater reliance on deposits.

6. Key Success Factors of Banking in India

Key success factors in the Indian banking industry are shaped by a combination of
technological advancements, customer-centric strategies, regulatory support, and economic
conditions. Here are the main factors contributing to the success of banks in India:

1. Digital Transformation
The Indian banking sector is undergoing significant digital transformation, driven by the need
to modernize operations and enhance customer experiences. Banks are investing heavily in
technologies such as artificial intelligence, blockchain, and cloud computing to streamline
processes, improve security, and offer personalized services. This shift is critical for
maintaining competitiveness in a rapidly evolving market[3][4].

2. Customer-Centric Approach
A strong focus on customer satisfaction is essential. Banks are increasingly adopting a
'customer-first' strategy, which involves understanding customer needs and preferences to
deliver seamless and personalized banking experiences. This includes enhancing service
delivery through digital platforms and improving customer interaction processes[4][5].

3. Regulatory Support
The regulatory environment in India, led by the Reserve Bank of India (RBI), plays a crucial
role in shaping the banking landscape. Initiatives such as the digitalization of lending processes
and the introduction of a national financial information registry are designed to enhance
efficiency and transparency within the banking system. Such regulatory support fosters a
conducive environment for growth and innovation[2][3].

4. Economic Growth and Consumer Demand

 The overall economic growth in India, characterized by rising disposable incomes and
increasing consumerism, has bolstered demand for banking services. The expansion of the
fintech sector, projected to reach a valuation of $150 billion by 2025, reflects the growing
integration of technology in financial services, which is vital for banks to tap into new
customer segments and enhance service offerings[2].

5. Innovation and Adaptability

Banks that prioritize innovation and adaptability are more likely to succeed. The ability to
quickly respond to changing market conditions and customer expectations is crucial. This
includes continuous improvement in service offerings and the adoption of new technologies to
enhance operational efficiency and customer engagement[4][5].

6. Strong Risk Management Practices

Effective risk management is fundamental to the success of banks. This involves not only
managing financial risks but also addressing cybersecurity threats and regulatory compliance
challenges. Banks that implement robust risk management frameworks are better positioned to
navigate uncertainties and maintain customer trust[3][5].

7. Employee Competence and Engagement

Investing in employee training and development is essential for fostering a skilled workforce
capable of driving innovation and delivering high-quality customer service. Engaged
employees who are well-versed in the latest technologies and customer service practices
contribute significantly to a bank's success[1][3].

In summary, the key success factors for the banking industry in India revolve around
embracing digital transformation, focusing on customer satisfaction, leveraging regulatory
support, capitalizing on economic growth, fostering innovation, maintaining strong risk
management practices, and investing in employee development. These elements collectively
enhance the resilience and competitiveness of banks in the dynamic Indian market.

7. Key Components of the Banking Industry Value Chain

The banking industry value chain consists of several interconnected activities that create value
for customers and the bank itself. Here are the main components:

### Customer Acquisition and Onboarding

- Attracting new customers through marketing and advertising
- Onboarding customers and opening accounts[1][3]

### Product Development and Management

- Designing and developing banking products like loans, deposits, credit cards, etc.[1]
- Managing product lifecycles and optimizing product mix[1]

### Sales and Distribution

- Selling banking products through branches, online, mobile apps, etc.[1]
- Maintaining sales channels and optimizing distribution[1]

### Funding and Liquidity Management

- Raising funds through deposits, wholesale markets, etc.[1]
- Managing liquidity and interest rate risk[1]
 ### Credit Risk Management
- Assessing credit risk for loans and other products[1]
- Managing credit risk through underwriting, monitoring, collections, etc.[1]

### Operations and Technology

- Processing transactions and maintaining core banking systems[1][3]
- Ensuring operational efficiency and scalability[1]

### Customer Service and Relationship Management

- Providing customer support through branches, call centers, digital channels[1][3]
- Building long-term customer relationships and loyalty[1]

### Regulatory Compliance and Risk Management

- Complying with banking regulations and guidelines[1][3]
- Managing operational, compliance, and reputational risks[1]

By optimizing each stage of this value chain, banks can enhance efficiency, reduce costs,
improve customer experience, and ultimately drive profitability and growth. Adopting a value
chain approach helps banks stay competitive in the rapidly evolving banking landscape.

8. India vs US Banking industry

Industry Level Compariosn
Average ROE for Indian Banks (2000-2024)
 2000-2007: The ROE for Indian banks was generally robust, averaging around 15-20% during
this period, driven by strong economic growth and banking reforms.
 2008-2014: Post-global financial crisis, the ROE dipped, averaging around 10-15% as banks
faced asset quality issues and increased provisioning.
 2015-2020: The ROE gradually improved again, averaging approximately 12-15% as banks
recovered from previous challenges.
 2021-2024: Recent data suggests that Indian banks have seen ROEs in the range of 15-16%,
indicating a strong recovery and profitability in the sector.
 Average ROE for U.S. Banks (2000-2024)
 2000-2007: U.S. banks enjoyed high ROEs, averaging around 15-20% before the financial
crisis hit.
 2008-2014: Following the crisis, ROE plummeted, averaging between 5-10% due to significant
losses and regulatory changes.
 2015-2020: The ROE began to recover, averaging about 10-12% as the economy stabilized.
 2021-2024: Recent reports indicate that U.S. banks have achieved ROEs of around 12-14%,
with some banks exceeding this range, especially in 2021 when it reached approximately 14%.
Summary of Average ROE
 India: Average ROE over 24 years is approximately 12-16%.
 U.S.: Average ROE over 24 years is approximately 10-14%.
In conclusion, while both countries have experienced fluctuations in ROE due to economic
conditions and regulatory changes, Indian banks have generally maintained a higher average
ROE compared to their U.S. counterparts over the past two decades.

Comparing top 5 banks in both the economies that define

the industry

Summary Table of Average ROE (2000-2024)

Bank Average ROE (%)

JPMorgan Chase 12-15

Bank of America 8-15

Citigroup 6-12

Wells Fargo 10-14

Goldman Sachs 10-20

These averages reflect the banks' performance over the

specified period, highlighting their ability to generate profits
relative to shareholders' equity.

Indian Banks

Here is a summary table of the average Return on Equity

(ROE) for the specified Indian banks from 2000 to 2024:
 Average ROE
Bank (%)

State
Bank of
India
(SBI) 12.5

HDFC
Bank 15.5

ICICI Bank 11.5

Axis Bank 4.5

Kotak
Mahindra
Bank 11.5