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Introduction

As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. The central bank granted in-principle approval to 11 payments banks and 10 small finance banks in FY 2015-16. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

Market Size

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. Public-sector banks control nearly 80 percent of the market, thereby leaving comparatively much smaller shares for its private peers. Banks are also encouraging their customers to manage their finances using mobile phones.

Standard & Poor’s estimates that credit growth in India’s banking sector would improve to 11-13 per cent in FY17 from less than 10 per cent in the second half of CY14.

Healthy Growth of Banking Sector - Deposits

• During FY06–16, deposits grew at a CAGR of 11.47 per cent and reached 1.46 trillion in FY16.
• Strong growth in savings amid rising disposable income levels are the major factors influencing deposit growth.
• Deposits under PradhanMantri Jan DhanYojana (PMJDY), have also increased. As of October 2016, US$ 6,755.5 million were deposited, while 249.8 million accounts were opened.

Healthy Growth of Banking Sector - Credit

• Credit off-take has been surging ahead over the past decade, aided by strong economic growth, rising disposable incomes, increasing consumerism and easier access to credit.
• In March FY16, total credit extended surged to US$ 1,016 billion.
• Demand has grown for both corporate and retail loans; particularly the services, real estate, consumer durables and agriculture allied sectors have led the growth in credit.

Offers protection in adverse conditions.

Our initial study of PradhanMantriFasalBimaYojana (PMFBY) shows it offers hope to banks lending to agriculture in adverse conditions. The new scheme has seen ~100% increase in the sum insured in FY2017, greater interest from private insurance players and higher participation of farmers. Strict timelines, mandatory use of technology and a relatively transparent mechanism amenable to quick/easy audits could effectively reduce the risk of sharp rise in impairments for banks. 

Significant increase in outlay; more than the cumulative allocation in all previous years

There are some positive signs that the lending to agriculture is taking a better form that should lower the “volume” risk associated to famers as new schemes offer greater protection. The government has modified the crop insurance program under the new scheme, PMFBY, which is seeing greater levels of participation by all segments. The government has budgeted to spend `130 bn in FY2017 for the scheme as compared to the initial budget of `55 bn, which is ~6X increase over FY2016 and similar to the total funds allocated to the scheme since FY1997. The budget for FY2018 is lower at `90 bn but we wait to see the year end given that the focus is to increase the area under the scheme to ~50% over the next two years from ~25% currently.

100% increase in sum insured gives comfort, but a few more years needed to ensure stability

We are seeing some early success of the scheme as there has been more than 100% growth in premium in FY2017 across key players like Agriculture Insurance Corporation, ICICI Lombard,HDFC Ergo. The total sum insured has doubled in the Kharif crop for 2016 to `1.4 tn and one should expect this to have increased further as some bottlenecks resulted in select states that did not implement it last year. The government is extending this scheme for non-loan farmers as well giving a wider business opportunity for private insurers. FY2017 may not be a good test case as there is likely to be lower claims given the bountiful rainfall witnessed. Private insurance companies gave away a substantial portion of risk to reinsurers and we need a stronger reinsurance market till market players get confident in the underlying data.

Banks stand to benefit as well; a weak monsoon is probably of lesser concern

The key objective of the note is to understand the impact on bank’s portfolio given the spate of debt waiver announcements. In a prudish manner, the success of this scheme will imply that volume related risks have been taken away. This also implies banks are relatively better off during the weak monsoon but a surplus monsoon, as in FY2017 creates ‘price-risk’ where the current solution is not effective. A strong commodity derivatives market along with adequate infrastructure for post-harvest storage could be useful to address a part of these risks.

Investments/developments

Key investments and developments in India’s banking industry include:

• RBL Bank Limited, an Indian private sector bank, has raised Rs 330 crore (US$ 49.6 million) from a UK-based development finance institution CDC Group Plc, which will help RBL to strengthen the capital base to meet future requirements.
• The State Bank of India (SBI) signed an agreement with The World Bank for aRs 4,200 crore (US$ 625 million) credit facility, aimed at financing grid connected rooftop solar photovoltaic (GRPV) projects in India.
• JP Morgan Chase, the largest bank in United States by assets, plans to expand its operations in India by opening three new branches in Delhi, Bangalore and Chennai in addition to its existing branch in Mumbai.
• Canada Pension Plan Investment Board (CPPIB), an investment management company, has bought a large stake in Kotak Mahindra Bank Ltd from Japan-based Sumitomo Mitsui Banking Corporation.
• India’s first small finance bank called the Capital Small Finance Bank has started its operations by launching 10 branch offices in Punjab, and aims to increase the number of branches to 29 in the current FY 2016-17.
• FreeCharge, the wallet company owned by online retailer Snapdeal, has partnered with Yes Bank and MasterCard to launch FreeCharge Go, a virtual card that allows users to pay for goods and services at online shops and offline retailers.
• Exim Bank of India and the Government of Andhra Pradesh has signed a Memorandum of Understanding (MoU) to promote exports in the state.
• Kotak Mahindra Bank Limited has bought 19.9 per cent stake in Airtel M Commerce Services Limited (AMSL) for Rs 98.38 crore (US$ 14.43 million) to set up a payments bank. AMSL provides semi-closed prepaid instrument and offers services under the ‘Airtel Money’ brand name.
• Ujjivan Financial Services Ltd, a microfinance services company, has raised Rs 312.4 crore (US$ 45.84 million) in a private placement from 33 domestic investors including mutual funds, insurance firms, family offices and High Net Worth Individuals (HNIs)).
• India's largest public sector bank, State Bank of India (SBI), has opened its first branch dedicated to serving start-up companies, in Bengaluru.
• Global rating agency Moody's has upgraded its outlook for the Indian banking system to stable from negative based on its assessment of five drivers including improvement in operating environment and stable asset risk and capital scenario.