Banks and banking in India have been classified into various groups. In its activities, each group has its own set of advantages and disadvantages. They have their own distinct target audience. Some work exclusively in the rural sector, while others work in both rural and urban settings. The majority of them only serve cities and major towns.
The banking industry is one of the most essential financial pillars of the financial sector, and it is critical to the economy’s functioning. It is critical for a country’s economic development that its trade, industrial, and farm funding needs are handled with greater commitment and responsibility. As a result, a country’s progress is inextricably related to the development of banking. In today’s economy, banks should be viewed as development leaders rather than money merchants. They play a crucial role in deposit mobilization and credit disbursement to many sectors of the economy.
The Reserve Bank of India (RBI), commercial banks, cooperative banks, and development banks make up India’s banking system (development finance institutions). The core of India’s financial system is these institutions, which serve as a meeting point for savers and investors. Banks play a vital role in the development of poor countries by mobilizing resources and efficiently allocating them.
The features of the Indian banking system:
Deals with Money
A bank’s main characteristic is that it handles all financial transactions. You can put your money in a bank account, for example, to store it safely, and you will be interested in the money you save in the account.
Provides Loans
Banks gain additional money by providing loans for a variety of products. The bank earns the additional funds by lending money to the qualifying person at predetermined rates.
Banks now provide loans for a variety of purposes, including study loans, vehicle loans, housing loans, personal loans, and so on.
Withdrawal and payment facilities
Customers can use a bank’s numerous payment and withdrawal services to receive their money quickly and easily. Customers can use cheques and draughts to withdraw money, as well as ATMs established by banks at various sites throughout the city.
Internet services
Modern banks now provide internet services, which is another element of a bank. The growth of the internet and its integration into the banking industry has made it even easier for customers to do numerous transactions.
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.
The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks.
In recent years India has also focused on increasing its banking sector reach, through various schemes like the Pradhan Mantri Jan Dhan Yojana and Post payment banks. Schemes like these coupled with major banking sector reforms like digital payments, neo-banking, a rise of Indian NBFCs and fintech have significantly enhanced India’s financial inclusion and helped fuel the credit cycle in the country.
The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level five in the Faster Payments Innovation Index (FPII).
India’s Unified Payments Interface (UPI) has also revolutionized real-time payments and strived to increase its global reach in recent years.
The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks in addition to cooperative credit institutions As of September 2021, the total number of ATMs in India reached 213,145 out of which 47.5% are in rural and semi urban areas.
Banking Sector in India - Updates
Compared to the world's developed nations, 40% of the world's total digital transactions happen in India.
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalized 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.
The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks.
In 2020-2022, bank assets across sectors increased. Total assets across the banking sector (including public and private sector banks) increased to US$ 2.67 trillion in 2022.
In 2022, total assets in the public and private banking sectors were US$ 1,594.51 billion and US$ 925.05 billion, respectively.
Key investments and developments in India’s banking industry include:
Merger &Acquisition activity with an India angle hit a record US$ 171 billion in 2022. As per report by Refinitiv, Domestic M&A activity saw record levels of activity in 2022 at US$ 119.2 billion, up 156.3% from 2021. Companies like HDFC Bank, HDFC, Ambuja Cements, ACC, Adani Group Biocon, Mindtree, L&T Infotech, AM/NS, Essar Ports were involved in M&A deals in 2022
In June, 2022, the number of bank accounts—opened under the government’s flagship financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’—reached 45.60 crore and deposits in the Jan Dhan bank accounts totaled Rs. 1.68 trillion (US$ 21.56 billion).
In April 2022, India’s largest private bank HDFC Bank announced a transformational merger with HDFC Limited.
On November 09, 2021, RBI announced the launch of its first global hackathon 'HARBINGER 2021 – Innovation for Transformation' with the theme ‘Smarter Digital Payments’.
In November 2021, Kotak Mahindra Bank announced that it has completed the acquisition of a 9.98% stake in KFin Technologies for Rs. 310 crore (US$ 41.62 million).
In October 2021, Indian Bank announced that it has acquired a 13.27% stake in the proposed National Asset Reconstruction Company Ltd. (NARCL).
In July 2021, Google Pay for Business has enabled small merchants to access credit through tie-up with the digital lending platform for MSMEs—FlexiLoans.
In February 2021, Axis Bank acquired a 9.9% share in the Max Bupa Health Insurance Company for Rs 90.8 crore (US$ 12.32 million).
In December 2020, in response to the RBI’s cautionary message, the Digital Lenders’ Association issued a revised code of conduct for digital lending.
On November 6, 2020, WhatsApp started UPI payments service in India on receiving the National Payments Corporation of India (NPCI) approval to ‘Go Live’ on UPI in a graded manner.
In October 2020, HDFC Bank and Apollo Hospitals partnered to launch the ‘HealthyLife Programme’, a holistic healthcare solution that makes healthy living accessible and affordable on Apollo’s digital platform.
In 2019, banking and financial services witnessed 32 M&A (merger and acquisition) activities worth US$ 1.72 billion.
In April 2020, Axis Bank acquired additional 29% stake in Max Life Insurance.
In March 2020, State Bank of India (SBI), India’s largest lender, raised US$ 100 million in green bonds through private placement.
In February 2020, the Cabinet Committee on Economic Affairs gave its approval for continuation of the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory capital to RRBs for another year beyond 2019-20 - till 2020-21 to those RRBs which are unable to maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9% as per the regulatory norms prescribed by RBI.
Government Initiatives
National Asset reconstruction company (NARCL) will take over, 15 non-performing loans (NPLs) worth Rs. 50,000 crores (US$ 6.70 billion) from the banks.
National payments corporation India (NPCI) has plans to launch UPI lite which will provide offline UPI services for digital payments. Payments of up to Rs. 200 (US$ 2.67) can be made using this.
In the Union budget of 2022-23 India has announced plans for a central bank digital currency (CBDC) which will be possibly known as Digital Rupee.
National Asset reconstruction company (NARCL) will take over, 15 Non-performing loans (NPLs) worth Rs. 50,000 crores (US$ 6.70 billion) from the banks.
In November 2021, RBI launched the ‘RBI Retail Direct Scheme’ for retail investors to increase retail participation in government securities.
The RBI introduced new auto debit rules with a mandatory additional factor of authentication (AFA), effective from October 01, 2021, to improve the safety and security of card transactions, as part of its risk mitigation measures.
In September 2021, Central Banks of India and Singapore announced to link their digital payment systems by July 2022 to initiate instant and low-cost fund transfers.
In August 2021, Prime Minister Mr. Narendra Modi launched e-RUPI, a person and purpose-specific digital payment solution. e-RUPI is a QR code or SMS string-based e-voucher that is sent to the beneficiary’s cell phone. Users of this one-time payment mechanism will be able to redeem the voucher at the service provider without the usage of a card, digital payments app, or internet banking access.
As per Union Budget 2021-22, the government will disinvest IDBI Bank and privatise two public sector banks.
Government smoothly carried out consolidation, reducing the number of Public Sector Banks by eight.
In May 2022, Unified Payments Interface (UPI) recorded 5.95 billion transactions worth Rs. 10.41 trillion (US$ 133.46 billion).
According to the RBI, India’s foreign exchange reserves reached US$ 630.19 billion as of February 18, 2022.
The number of transactions through immediate payment service (IMPS) reached 430.67 million and amounted to Rs. 3.70 trillion (US$ 49.75 billion) in October 2021.
As per the Union Budget 2023-24, the RBI has launched a pilot to digitalize Kisan Credit Card (KCC) lending in a bid for efficiency and higher cost savings. This is expected to transform the flow of credit in the rural economy.
As per the Union Budget 2023-24, digital banking, digital payments and fintech innovations have grown at a rapid pace in the country. Taking forward this agenda, and to mark 75 years of our independence, it is proposed to set up 75 Digital Banking Units in 75 districts of the country by Scheduled Commercial Banks.
Additionally, the government proposed to introduce a digital rupee or a Central Bank Digital Currency (CBDC) which would be issued by the RBI using blockchain and other technologies.
The government also proposed to bring all the 150,000 post offices under the digital banking core business to enable financial inclusion.
As per the economic survey 2022-23, the permission by RBI to lending institutions to grant a total moratorium of 6 (3+3) months in case of payment failure due between 1st March 2020 to 31st August 2020, infusion of US$ 9.1 billion (Rs. 75,000 crore) for Non-Banking Financial Corporations (NBFCs), Housing Finance Companies (HFCs) and Micro Finance Institutions (MFIs), among others, have also contributed to the revival of the real estate sector. The permission by RBI to lending institutions to grant a total moratorium of 6 (3+3) months in case of payment failure due between 1st March 2020 to 31st August 2020, infusion of US$ 9.1 billion (Rs. 75,000 crore) for Non-Banking Financial Corporations (NBFCs), Housing Finance Companies (HFCs) and Micro Finance Institutions (MFIs), among others, have also contributed to the revival of the real estate sector.
According to the Economic Survey 2022-23, Over the last few years, the number of neo banking platforms and global investments in the neo-banking segment has also risen consistently. Neo-banks operate under mainstream finance's umbrella but empower specific services long associated with traditional institutions such as banks, payment providers, etc.
Conclusion
Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to growth in the banking sector.
All these factors suggest that India’s banking sector is poised for robust growth as rapidly growing businesses will turn to banks for their credit needs.
The advancement in technology has brought mobile and internet banking services to the fore. The banking sector is laying greater emphasis on providing improved services to their clients and upgrading their technology infrastructure to enhance customer’s overall experience as well as give banks a competitive edge.
In recent years India has experienced a rise in fintech and microfinancing. India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion by FY23 driven by the five-fold increase in digital disbursements.
The Indian fintech market has attracted US$ 29 billion in funding over 2,084 deals so far (January 2017-July 2022), accounting for 14% of global funding and ranking second in terms of deal volume.
By 2025, India's fintech market is expected to reach Rs. 6.2 trillion (US$ 83.48 billion).
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