• Home
• /
• Supplements

Indian Banking and Finance Industry Rising to the Occasion

From featuring among the top five banks globally, to reducing bad loans, embracing technology, the industry is fuelling the Indian economy

There are a few pivotal eras in the timeline of the Indian banking industry since the independence of the country. The first arguably was the nationalisation of banks, which started in 1969; the second and more far-reaching in its impact was the liberalisation of the sector, which started soon after opening up of the economy in the 1990s, and transformed the socialist financial landscape of the country. The third happened about two decades later with the launch of UPI and BHIM services. The move paved the way for digitalisation of payment methods, followed by the era of mergers of major public sector banks, and the launch of Neo banks. And now, this decade is all about going bigger and digital.

Finance moving into a higher gear

The recent merger of HDFC mortgage lender with HDFC Bank has created a behemoth capable of challenging the largest American and Chinese lenders. The merged entity, HDFC Bank, is now the fourth largest bank globally in terms of market capitalisation, just behind JP Morgan Chase & Co, Industrial and Commercial Bank of China, and Bank of America. Even at this scale and size, HDFC Bank aspires to double its size over a period of next four years. The bank’s aspirations are reflective of the depths of buoyant Indian economy that is tipped to be the fastest growing one for the next three years.

This is a very significant development on its own, indicating the rising strength of the Indian financial system on the world economic map. Domestically, the rise of such a mammoth entity will create more competition among the top public and private sector banks.

Besides, Indian banks, in general, are having a good run. The industry has largely remained insulated from a global crisis in the industry with their heavy reliance on the local markets. The bad-loan ratio at Indian banks is at a decade low of 3.9 per cent, at the end of March 2023, as per the Reserve Bank of India’s Financial Stability Report. The central bank expects the ratio to fall further to 3.6 per cent by March 2024.

In contrast to the global financial system, “the financial sector in India has been stable and resilient, as reflected in sustained growth in bank credit, low levels of non-performing assets and adequate capital and liquidity buffers,” RBI Governor Shaktikanta Das wrote in the report.

The central bank is confident that local lenders are well-capitalised and would be able to comply with the minimum capital requirements even under adverse stress scenarios, reflecting the strength of the banking industry.

Another data worth looking at is the net interest margin (NIM). NIM for the top four private lenders in India are among the highest in Asia at above 4 per cent.

Technology as an enabler of change

Technology has helped transform banks and the way they operate but surely tech-driven disruptions and innovations are not restricted to the banking industry. The non-banking financial companies too are embracing new-age technology to become more lithe and widespread in reach.

The financial services industry is keenly watching India’s richest man Mukesh Ambani’s Jio Financial Services, a shadow bank, which will be listed on the Indian bourses in next few months, and could emerge into India’s own Ant Group Co. over time. The company has signalled its ambitions beyond lending, announcing a deal with BlackRock, the world’s largest money manager, to each invest $150 million in an asset management venture.

Shadow banks offer regulated bank-like services such as loans, but without taking deposits. These are crucial lifelines for millions of borrowers in India who do not have access to credit from conventional banks because they are considered higher risk.

Greater access to credit means more consumption and hence greater economic activity. The latest data from the Central Bank shows this trend. Consumers are borrowing more. The amount of personal loans made by conventional banks increased by 19.2 per cent to $500 billion in the 12 months to May. Lending by banks to shadow banks is rising even faster — up 27.6 per cent year-on-year in May. Lending by shadow banks rose 31.3 per cent in March compared with the same month of 2022.

Technology and digitalisation are changing how Indian consumers transact. In a span of seven years, India, which has primarily been a cash-based economy, now has the biggest volume of real-time digital payments worldwide, accounting for more than 40 per cent of all such transactions.

Besides, the borrowers also have easy access to credit with the convenience and security of UPI. This has been a game-changer for industries such as the micro, small, and medium enterprises, which contribute 30 per cent to the Indian GDP, but often face a shortfall in supply of credit estimated between $250 billion and $300 billion.

Tech has been an enabler for financial inclusion and expansion of digital payments and, in turn, the economy. These disruptions are taking place on the strength of a much larger consuming class that finance has helped create along the way. The rise of digital banking solutions and digital payments have brought the unbanked population into its fold and expanded the scope of economic activity. A recent report by PhonePe and Boston Consulting Group notes India's digital payments market will more than triple from $3 trillion to $10 trillion by 2026. This dynamism is consequently propelling India to become the third largest economy by 2027, and second largest by 2075, overtaking the US, according to Goldman Sachs.

The Indian banking and finance industry has had its fair share of highs and lows. Only continued success of various stakeholders in the banking and finance industry will show if the financial landscape has truly changed.