India Finance Profile 2012

Since liberalisation, the government has approved significant banking reforms. While some of these relate to nationalised banks (like encouraging mergers, reducing government interference and increasing profitability and competitiveness), other reforms have opened up the banking and insurance sectors to private and foreign players.

Currently, banking in India is generally 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 of Asia.The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate.

Currently, India has 88 scheduled commercial banks (SCBs) — 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.They have a combined network of over 53,000 branches and 17,000 ATMs. The public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the National Bank of India being established as "The Bank of Bengal" in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the majority active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865.

The Indian economy is highly developed and deep. It has been exhaustively reformed since 1991. National banks are still dominant, however, the public sector absorbs a considerable share (41%) of bank resources and around 40% of bank credit is still directed to priority sectors. Profitability of public and private banks, which already mostly meet Basel II standards, has increased. The share of non-performing loans has declined to a trickle. The stock markets are efficient, well developed and buoyant. The majority glaring deficit is still the under-development of facilities for corporate debt.

By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers.

Liberalisation

In the early 1990s the then Narsimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as World Trust Bank (the first of such new generation banks to be set up)which later amalgamated with Oriental Bank of Commerce,UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid increase in the economy of India, kickstarted the banking sector in India, which has seen rapid increase with strong contribution from amount the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where amount Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India quite. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.Amount this led to the retail boom in India. People not just demanded additional from their banks but as well received additional.

Current situation

With the increase in the Indian economy expected to be strong for quite some time-especially in its services sector-the request for banking services, especially retail banking, mortgages and investment services are expected to be strong may as well expect M&As, takeovers, and many sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold additional than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

Market-based competition Market competition is assured in most sectors of the economy. Once massive, regulation density has been markedly reduced in a lot of sectors, with the exception of agriculture and the labor, housing and land markets. Business transactions with the government are however still cumbersome, costly and time-consuming. Several hundred products are still reserved for exclusive production by the small-scale sector, obstructing their employment potential. The regulation of foreign and large local companies was dismantled. The investment regime now ranks part the majority liberal in Asia.

Anti-monopoly policy Sector concentration indices are still high, despite government endeavors to the contrary during the last few decades. Privatization of public companies came to a standstill and was not always followed by sufficient regulation of the new ventures, allowing windfall profits for new owners. Legal procedures for the restructuring and liquidation of sick private or public companies are inadequate, time-consuming and inefficient, thereby obstructing the switch of economic assets to additional productive uses. The weak protection of shareholders encourages risky company strategies.

Liberalization of foreign trade Trade barriers have been lowered but are still not on par with the standard in competitor nations in Asia. Moderate tariff rates (average 14%) and the near complete abrogation of non-tariff barriers are compensated to a certain degree by the massive use of anti-dumping measures, where India ranks near the top. Customs clearance has improved but is still additional time-consuming than in comparable economies.

Commercial Banking Statement Q1 2011