Banks’ risk-based capital and leverage ratios improved, including those

Banking Sector Report 5th October, 2022 of SIBs. Most G-SIBs’ TLAC debt issuances to replace maturing
ineligible debt were absorbed by the markets without difficulty.
Profitability of SIBs, particularly G-SIBs, has fallen relative to other
By Shashank Gupta
banks as cross-border lending continued to expand.

Introduction What to expect from the Banking Industry?

Despite a possible uptick in interest rates in 2022, low rates in the

short term should keep interest income/ net interest margins (NIMs)
Global Banking Developments
suppressed. However, the rebound in non-interest income from
higher trading revenues and growth in fee-based businesses could be
The global economy is recovering haltingly amidst renewed surges of the pandemic in some
more pronounced and lead to overall top-line growth. In a Deloitte
jurisdictions. Taking note of some loss of pace in the second half of 2021, the International
survey of banking executives across nine major markets, 88% of
Monetary Fund (IMF) revised downwards its global growth forecast for the year to 5.9 per
respondents expect banks’ top-line revenue to improve in 2022.
cent, citing supply chain bottlenecks and rising energy prices as downside risks. The
macroeconomic outlook for advanced economies (AEs) and emerging market and developing
economies (EMDEs) is diverging, reflecting differentials in infections and vaccination. Going
forward, this gap could narrow with higher vaccination rates.

The pace of the global recovery is also contingent on policy support. While AEs provided
substantial fiscal support in 2020 and intend to extend it beyond 2021, fiscal stimuli have
either expired or scheduled to end shortly in EMDEs. Some AEs have started monetary policy
tapers in some form, while EMDEs have been compelled to tighten monetary policy
aggressively in the face of elevated inflation risks.

A new study by the World Bank has revealed that with the central banks across the world
simultaneously hiking interest rates in response to inflation, the world may be edging toward
a global recession in 2023 and a string of financial crises in emerging markets and developing
economies that would do them lasting harm. The report said that the central banks around
the world have been raising interest rates this year with a degree of synchronicity not seen
over the past five decades, a trend that is likely to continue well into next year.

World’s Largest Banks A greater focus on cost management may also help efficiency ratios
improve. Meanwhile, banks are expected to accelerate capital
During the pandemic, large banks continued to provide market making functions, distribution plans in the form of share buybacks and higher dividends
notwithstanding some evidence that few market segments experienced illiquidity. Financial in fact, three quarters of our survey respondents expect to increase
market infrastructure (FMI), particularly central counterparties (CCPs), functioned as dividends in the coming year. In line with recent performance, US and
intended. At the same time, large banks increased their support to trades and built up their Canadian banks should exhibit faster growth in profitability than other
securities holdings across an array of instruments. They have continued to actively trade in major markets, while many European banks may not see increases in
derivatives, as evidenced by increases in both the notional and gross market values of profitability until after 2022.A closer look at US banks suggests a
derivatives positions from end-2019 to mid-2020 (8.6 per cent and 33.6 per cent). strong recovery from meaningful reserve releases, positive operating
leverage, improving loan growth in certain sectors, and potential net
Global Systemically Important Banks (G-SIB) interest margin expansion. According to the Deloitte Center for
Financial Services forecast, average return on equity (ROE) in the US
banking industry’ could improve to 10.1% in 2021, tapering down a bit
in 2022 and then normalizing to 10.4% in 2025.

While uncertainty about the pandemic continues, fear of War,

inflation and therefore economic downturn is present in today’s world
but except that overall financial prospects are generally positive for
the global banking industry ahead. With the gradual recovery of global
economic activity and trade boosted by the easing of restrictions
across jurisdictions, the impact of pandemic on the global banking
sector is turning out to be muted, mainly due to asset quality
standstills in many jurisdictions as well as continuation of strong policy
support.

BIS data available since 2014 suggest that the G-SIB buckets of top 15 global banks, except Going forward however, as policymakers phase out their support,
for three China-based banks, have either shifted to become less risky or have remained stress on banking sectors may come to the fore. The areas that are
steady during the period. Thus, the regulatory push requiring G-SIBs to maintain higher likely to be most impacted by the pandemic are asset quality and
capital seems to have nudged them to reduce complexity, cross jurisdictional presence, profitability. High capital buffers have strengthened balance sheets of
interconnectedness, size and substitutability of their operations. banks following implementation of Basel III norms which may help
banks to manage stress and emerge stronger.

Indian Banking Sector

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. Indian banking industry has recently
witnessed the roll out of innovative banking models like payments and small
finance banks. RBI’s new measures may

go a long way in helping the restructuring of the domestic banking industry. 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).

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.
During FY16-FY21, bank credit increased at a CAGR of 0.29%. As of FY21, total
credit extended surged to US$ 1,487.60 billion. Demand has grown for both
In FY18-FY21, bank assets across sectors increased. Total assets across the
corporate and retail loans. Services, real estate, consumer durables and
banking sector (including public and private sector banks) increased to US$ 2.48
agriculture allied sectors have led the growth in credit.
trillion in FY21. In FY21, total assets in the public and private banking sectors
were US$ 1,602.65 billion and US$ 878.56 billion, respectively. During FY16-
In March 2022 Bank credit grew by 8.59% and the deposits were up by 8.94%.
FY21, bank credit increased at a CAGR of 0.29%. As of FY21, total credit
According to Fitch arm credit growth is expected to hit 10% in 2022-23 which
extended surged to US$ 1,487.60 billion. During FY16-FY21, deposits grew at a
will be a double digit growth in eight years. On May 20, 2022, bank credit stood
CAGR of 12.38% and reached US$ 2.06 trillion by FY21. Bank deposits stood at
at Rs. 120.27 lakh crore (US$ 1.5376 trillion).
Rs. 165.74 trillion (US$ 2.11 trillion) as of May 20, 2022.
On May 20 2022, credit to non-food industries stood at Rs. 119.74 lakh crore
According to India Ratings & Research (Ind-Ra), credit growth is expected to hit
(US$ 1.53 trillion). In FY18-FY21, bank assets across sectors increased. Total
10% in 2022-23 which will be a double digit growth in eight years. On May 20
assets across the banking sector (including public and private sector banks)
2022 bank credit stood at Rs. 120.27 lakh crore (US$ 1.5376 trillion). On May 20
increased to US$ 2.48 trillion in FY21.
2022, credit to non-food industries stood at Rs. 119.74 lakh crore (US$ 1.5308
trillion).
Bank NPAs

Market Size
Gross non-performing assets (GNPAs) of banks have hit a six-year low of 5.9% as
of March 2022. But India’s NPA ratio is one of the highest among comparable
countries. Barring Russia, which has bad loans of 8.3%, every large market has
bad loans below India. China has NPA ratio of 1.8%, while it is 2.6% for Indonesia
and 5.2% for South Africa. Most of the developed economies have NPAs below
3%.

According to the RBI, bank deposits stood at Rs. 165.74 trillion (US$ 2.11 trillion)
as of May 20, 2022. In August 2021, RBI developed Financial Inclusion Index (FI
Bad loans will continue to drop during the current financial year because of
Index) to measure the level of financial inclusion across the country. The FI-Index
higher credit growth and the transfer of legacy assets to the National Asset
increased from 43.4 in FY17 to 53.9 in FY21.
Reconstruction Company (NARCL). The RBI has forecast an improvement in the
Access to banking system has also improved over the years due to persistent bad loans under a baseline scenario of 5.3% by March 2023 following its stress
effort from Government to promote banking technology and promote expansion tests.
in unbanked and non-metropolitan regions. At the same time, India’s banking
sector has remained stable despite global upheavals, thereby retaining public
confidence over the years. Strong growth in savings amid rising disposable
income levels are the major factors influencing deposit growth.
Key Banking Statistics cash reserve ratio (CRR) and another 18% in statutory Top 5 banks in India in terms of market
liquidity ratio (SLR) compliant holdings. capitalization:
In FY21, total assets in the public and private banking
sectors were US$ 1,602.65 billion and US$ 878.56 billion, 1. HDFC Bank Ltd.
respectively. In FY21, assets of public sector banks
accounted for 64.59% of the total banking assets (including HDFC Bank is the largest bank in India,
public, private sector and foreign banks). considering the market capitalization
factor. In 2022, this private bank’s market
capitalization is Rs. 617,499 crore. HDFC
Bank Limited (headquartered in Mumbai)
has 5,103 branches and 13,160 ATMs
across 2,727 cities in India. AsiaMoney
has named HDFC Bank as the Best Digital
Bank of India. The gross NPA of HDFC is
1.36%. This banking and financial services
company has permanent employee
strength of 98,061.

2. ICICI Bank Ltd

ICICI Bank Limited is an Indian MNC

banking entity that has a market
capitalization of Rs. 266,974 crore. Its
registered office is in Vadodara (Gujarat)
and headquarters in Mumbai
(Maharashtra). ICICI Bank has 4847
branches and 14,987 ATMs across India.
It is present in 16 countries outside India
and its offshore offices are in the USA,
China, Dubai International Finance
Center, Singapore, Bahrain, South Africa,
and many more. The gross NPA of ICICI
bank is 6.7%.
In FY21, public sector banks accounted for about 57.0% of
other income. Other income’ for public sector banks stood 3. Kotak Mahindra Bank Ltd.
at US$ 17.05 billion in FY21. In FY21, ‘other income’ in the
private banking sector was US$ 12.87 billion. Kotak Mahindra Bank is the third largest
and private bank in India, in terms of
Public sector banks accounted for over 61.0% interest
Performance of Banking Stocks market capitalization. As of 2022, its
income in FY21. Interest income of public banks reached
market cap is Rs. 283,464 crore. This
US$ 96.60 billion in FY21. In FY21, interest income in the
leading private bank boasts of having a
private banking sector reached US$ 61.70 billion.
network of 1,500 branches and 2,352
ATMs across India. The Gross NPA of
As the share of advances in total assets fell, that of
Kotak Mahindra Bank is 1.9%.
investments increased in an environment of risk aversion
and limited profitable lending avenues.
4. State Bank of India

State Bank of India (SBI) is the largest

public sector bank in India. In terms of
market cap, SBI is the second largest bank
in India. As of 2022 its market
capitalization is Rs. 260,331 crore. There
are 22,010 branches and 58,415 ATMs
across India. State Bank of India has a
gross NPA of 7.53%

5. Axis Bank Ltd.

After the outbreak of the COVID-19 pandemic, equity Axis Bank has a market capitalization of
markets in India fell sharply, tracking global cues. Banking Rs. 176,669 crore. As of 2022 it makes
This resulted in a decline in the credit deposit (C-D) ratio sector stocks were hit hard, reflecting investors’ concerns Axis bank the 5th largest bank and 4th
and a corresponding elevation in the investment deposit (I- about their financial health, although the impact was not largest private bank in India. It is
D) ratio, especially in incremental terms. The credit deposit homogenous across banks and bank groups. Subsequently, headquartered in Mumbai and has 4094
ratio stood at 70.64% as of January 2022. Under Reserve in response to the policy measures initiated by the Reserve branches, 11,801 ATMs and 3,548 cash
Bank of India rules, banks must set aside 3% of deposits as Bank and the Government of India, stock prices revived. recyclers across India.
Services of Banks Kinds of Banks Small Finance Banks - This sort of bank, as the name
implies, provides loans and financial help to micro
In modern times there are many services that are industries, small farmers, and the unorganized
offered by the banks. This is done so that more and sector of society.
more customers are attracted.
Payments Banks - The Reserve Bank of India
Advancements of loans - To generate the profit they conceptualized the payments bank, a newly
give loans to the public and private organizations. developed form of banking. People who have a
Thus, in return, they get an interest paid to them which payment bank account can only deposit up to
helps them in making a profit. Rs.100,000/- and cannot apply for loans or credit
cards through this account.
Savings/ Current & Fixed Deposit - A savings account
is most suitable for people who are salaried employees Retail Banks - Retail banking, also known as
or have a monthly income, whereas, Current Accounts Central Bank - Our country's central bank is the consumer banking or personal banking, is the
work best for traders and entrepreneurs who need to Reserve Bank of India. Each country has a central provision of services by a bank to the general public,
access their accounts frequently. And fixed deposit is bank that oversees all of the country's other rather than to companies, corporations or other
used to earn extra interest but locks the fund for financial institutions. The central bank's principal banks, which are often described as wholesale
agreed period. role is to serve as the government's bank and to banking.
oversee and regulate the country's other banking
Cheque Payments - The person who holds an account Investment Banks - An investment bank is a financial
institutions.
in the bank is provided with the cheque pads. Thus, the services company that acts as an intermediary in
account holders draw cheque upon the bank when Cooperative Banks - These banks are governed by a large and complex financial transactions. An
they are required to pay the money. law enacted by the state government. They provide investment bank is usually involved when a startup
short-term loans to agriculture and related company prepares for its launch of an initial public
Collecting and paying the credit instruments - For offering (IPO) and when a corporation merges with a
industries. Cooperative banks' principal purpose is to
modern purposes, there are a variety of instruments competitor. It also has a role as a broker or financial
enhance social welfare by providing low-interest
that are used as credit instruments. This includes adviser for large institutional clients such as pension
loans.
promissory notes, bill of exchange, cheques, etc. funds.
Commercial Banks - The Banking Companies Act of
Guarantee by Banks - In modern banking, customers Credit Union - A credit union is a type of financial
1956 established the company. They function on a
are provided with the guarantee by the banks. This cooperative that provides traditional banking
commercial basis, with profit as their primary goal.
happens mostly when the customers have to deposit a services. Ranging in size from small, volunteer-only
They are owned by the government, state, or any
large fund in courts or government offices for various operations to large entities with thousands of
private company and have a unified structure. They
reasons. participants spanning the country, credit unions can
look after all sectors, from rural to urban.
be formed by large corporations, organizations, and
Consultancy - Modern banks expand their businesses other entities for their employees and members.
Regional Rural Banks (RRB) - These are unique types
and also provide consultancy services to its customers.
of commercial banks that lend to agriculture and the
rural economy at a reduced rate. RRBs were founded Types of Loans
Credit Cards - It is a service that allows the holders to
in 1975 and are governed by the 1976 Regional Rural
make the purchase of the goods and services in credit
Bank Act. Loans
using credit card.

Specialized Banks - Certain banks exist just to serve

a certain purpose. Specialized banks are the name
Secured Unsecured
for several types of financial institutions. These are
some of them:

Home Loan Personal Loans

SIDBI (Small Industries Development Bank of India) -
SIDBI can provide a loan for a small-scale enterprise
or business. Loan against
Flexi loans
property
Export and Import Bank (EXIM Bank) - EXIM Bank
stands for Export and Import Bank. This type of bank Loans against
Short-term
can provide loans or other financial help to foreign insurance
business loans
Funds Remittance- In this facility, banks provide the policies
countries that are exporting or importing goods.
customers to transfer their funds from one account to
another using cheque, drafts, etc. NABARD (National Bank for Agricultural and Rural Gold Loans Education loans
Development) – People can resort to NABARD for
Debit Cards - Debit cards withdraw the funds any type of financial support for rural, handicraft,
electronically from the cardholder accounts. To verify Loans against
village, and agricultural development. mutual funds a& Vehicle loans
the transaction and keep it safe all the debit cards shares
requires personal identification number (PIN). The Other specialist banks exist, each with a unique
other services of banks include online banking, home function to play in the financial development of the Loans against
banking, ATM services, and many more. fixed deposits
country.
Notable trends in the Indian Banking sector Wide usability of RTGS, NEFT and IMPS - Real Time Foreign banks have been able to grow business
Gross Settlement (RTGS) and National Electronic despite much lower customer coverage.
Improved risk management practices - Indian banks Funds Transfer (NEFT) are being implemented by
are increasingly focused on adopting integrated Indian banks for fund transaction. Securities Capture latent demand - Expansion in unbanked
approach to risk management. Banks have already Exchange Board of India (SEBI) has included NEFT & rural regions helps banks to garner deposits.
embraced the international banking supervision RTGS payment system to the existing list of methods Increasing tele-density and support of regulators
accord of Basel II. that a company can use for payment of dividend or have aided rural expansion.
other cash benefits to their shareholders & investors.
Most of the banks have put in place the framework Privatize Public Sector Banks (PSU) - As per the
for asset-liability match and credit and derivatives The number of transactions through immediate Union Budget 2021-22, government will disinvest
risk management. The RBI introduced new auto debit payment service (IMPS) reached 430.67 million and IDBI bank and privatize two public sector banks.
rules with a mandatory additional factor of amounted to Rs. 3.70 trillion (US$ 49.75 billion) in
authentication (AFA), effective from October 01, October 2021. Merger Execution - In March 2020, the Government
2021, to improve the safety and security of card of India merged ten public sector banks into four
transactions, as part of its risk mitigation measures. Know Your Client - RBI mandated the Know Your banks to drive credit growth, lift the slowing
Customer (KYC) Standards, wherein, all banks are economy and boost the government’s target of a US
Technological innovations - Digital assistants, social required to put in place a comprehensive policy $5 trillion economy by 2024.
media and third-party channels are projected to act framework in order to avoid money laundering
as primary channels for banking. activities. Overseas expansion - Although at a nascent stage,
private & public banks are gradually expanding
Focus on financial inclusion - Ministry of Finance, RBI Retail Direct Scheme - In November 2021, RBI operations overseas. Internationally, banks target
Government of India, launched the Financial Inclusion launched the ‘RBI Retail Direct Scheme’ for retail India-based customers and investors settled abroad.
Index. This index will measure access, usage and investors to increase retail participation in
quality to financial services. government securities. Positives in Indian Banking Sector

Department of Financial Services (DFS), Ministry of Global Hackathon - On November 09, 2021, RBI Robust Demand - Increase in working population and
Finance and National Informatics Centre (NIC), announced the launch of its first global hackathon growing disposable incomes will raise demand for
launched Jan Dhan Darshak as a part of financial 'HARBINGER 2021 – Innovation for Transformation' banking & related services.
inclusion initiative. It is a mobile app to help people with the theme ‘Smarter Digital Payments’.
locate financial services in India. Housing and personal finance are expected to remain
The hackathon will request participants to recognize key demand drivers. Indian Fin-tech industry is
Derivatives and risk management products - The and develop solutions that have the potential to estimated to be at US$ 150 billion by 2025.
increasingly dynamic business scenario & financial make digital payments accessible to the underserved,
sophistication has increased the need for customized enhance the ease of payments and user experience, The RBI's 'Payment Systems Vision 2021' document
exotic financial products. and strengthen the security of digital payments and expects the number of digital transactions to increase
promote customer protection. >4x to 8,707 crore in December 2021.
Banks are developing innovative financial products &
advanced risk management methods to capture the Growing digital transaction - RBI has taken several Business Fundamentals - Rising fee incomes
market share. steps to enable mobile payments to enhance their improving the revenue mix of banks. High net
role in digital transactions. In January 2022, Unified interest margins along with low NPA levels ensure
Consolidation - With entry of foreign banks, Payments Interface (UPI) recorded 5.95 billion healthy business fundamentals.
competition in the Indian banking sector has transactions worth Rs. 10.41 trillion (US$ 134.18
intensified. Innovation in services - Mobile, internet banking and
billion).
extension of facilities at ATM stations to improve
Banks are increasingly looking at consolidation to Higher ATM penetration - As of April 2022, the total operational efficiency.
derive greater benefits such as enhanced synergy, number of ATMs in India reached 215,677 out of
cost take-outs from economies of scale, RBI announced the launch of its first global hackathon
which 47.5% are in rural and semi urban areas.
organizational efficiency and diversification of risks. 'HARBINGER 2021 – Innovation for Transformation'
Rising rural penetration - In 2020, 43 regional rural with the theme ‘Smarter Digital Payments’.
Focus on Jan Dhan Yojana - The Government of India banks were operational in the country. RBI has
made Pradhan Mantri Jan Dhan Yojana (PMJDY) In the Union budget of 2022-23 India has announced
allowed regional rural banks with net worth of at
scheme an open-ended scheme and also added more plans for a central bank digital currency (CBDC) which
least US$ 15.28 million to launch internet banking
incentives. will be possibly know as Digital Rupee.
facilities.

Key objective of PMJDY is to increase the accessibility Strategies adopted Policy Support – There is wide policy support in the
of financial services such as bank accounts, insurance, form of private sector participation and liquidity
pension, credit facilities, etc. mostly to the low- Increased use of technology - As per Union Budget infusion.
income groups. 2019-20, the Government proposed a fully
Healthy regulatory oversight and credible monetary
automated GST refund module and an electronic
As of June 01, 2022, the number of bank accounts— policy by the Reserve Bank of India (RBI) have lent
invoice system to eliminate the need for a separate e-
opened under the government’s flagship financial strength and stability to the country’s banking sector.
way bill.
inclusion drive ‘Pradhan Mantri Jan Dhan Yojana
(PMJDY)’—reached 45.60 crore and deposits in the RBI launched the ‘RBI Retail Direct Scheme’ for retail
Cross-selling - Major Banks tend to increase income
Jan Dhan bank accounts totaled Rs. 1.68 trillion (US$ by cross-selling products to their existing customers. investors to increase retail participation in
21.56 billion). government securities.
Monetary Policy and Liquidity Management > Retail inflation forecast too retained at 6.7-per cent Maintenance of Cash Reserve Ratio (CRR)
for 2022-23. Inflation forecast for: Q2 at 7.1 per cent;
The Reserve Bank of India announced renewed rate Q3 at 6.4 per cent, Q4 at 5.8 per cent; Q1:2023-24 at The Reserve Bank on 5th May 2022 announced a hike
hikes in the August 2022 Monetary Policy committee 5 per cent. in cash reserve ratio (CRR) by 50 basis points to 4.5
review. The repo rate was hiked by 50 bps to 5.40 per per cent, effective May 21, which will take out Rs
cent. The RBI Governor Shaktikanta Das stated that > Domestic economic activity to expand, MPC 87,000crore liquidity from the system.
inflation is a primary concern, and stressed that in decided to stay focused on withdrawal of
the near term will be observing a 4 per cent inflation. accommodative stance to observe inflation CRR is a percentage of a bank’s total deposits that it
needs to maintain as liquid cash.
Shaktikanta stressed that the rupee's performance > RBI will try maintaining the stability of the rupee,
was much better than other emerging market currently; the rupee is devalued by 4.7 per cent The MPC judged that the inflation outlook warrants
economy currencies. Post the announcement, yields against the US dollar in fiscal year 2022 till August 4. an appropriate and timely response through resolute
on 10-year-old government bonds also increased. Devaluation and depreciation of rupee depends more and calibrated steps to ensure that second-round
on the US dollar's growth than the inability of the effects of supply-side shocks on the economy are
Shaktikanta Das has expressed that liquidity has Indian economy. contained and long-term inflation expectations are
substantially increased from the market. The loan- kept firmly anchored.
demand growth and the current policy rate hike are > India witnessed large portfolio outflow of USD 13.3
raising deposit rates. Thus, more banks are raising billion in FY23 up to August 3. Foreign exchange National Asset Reconstruction Company Limited
more funds for lending. The governor announced that reserves of India stays as the fourth largest (NARCL)
the FY23 GDP growth forecast has been retained at internationally and a mechanism to be implemented
7.2 per cent. Over the past three months, inflation to allow NRIs to utilize Bharat Bill Payment system for Despite several efforts, a substantial stock of legacy
has eased since the central bank hiked repo rates by payments of education and utility on behalf of their NPAs continue to be on the balance sheets of banks.
90 basis points in May and June 2022 combined, to families in the country. The forthcoming meeting of As some large accounts are fragmented across
counter rising prices. the rate-setting panel is scheduled for September 28- various lenders, aggregation of bad assets leads to
30, 2022. significant delays. NARCL, being incorporated by
Current Repo Rate September 2022 financial institutions only, will have the ability to
Banking liquidity slips into deficit after 40 months aggregate bad loans from all members of the
Repo Rate 5.40%
consortium. This would incentivize quicker resolution
Bank Rate 5.15% RBI announces VRR auction to inject ₹50,000-crore and help better value realization.
liquidity, liquidity in the banking system has swung
Reverse Repo Rate 3.35% into deficit mode after remaining in surplus mode for NARCL will initially acquire NPAs with total secured
almost 40 months. outstanding exposure of 500 crore and above,
Marginal Standing Facility 5.15%
amounting to about 2 lakh crore. Following extant
Rate
The change in the liquidity situation has come due to guidelines, it will acquire these assets through 15 per
advance tax outflows for the second quarter. This cent upfront payment in cash and 85 per cent in
also nudged up call money rate temporarily above Security Receipts.
RBI Repo Rate History
the repo rate. Liquidity deficit in the banking system
was estimated at ₹23,227 crore on Wednesday The SRs issued will be guaranteed by the
Date Rate Change government to cover the difference between the face
against previous day’s surplus of ₹ 47,936 crore, per
5-Aug-22 5.4 0.5 Bloomberg data. value of SRs and actual realization from their
resolution process for up to five years.
8-Jun-22 4.9 0.5
May-22 4.4 0.4 An amount of 30,600 crore has been earmarked for
9-Oct-20 4 0 the purpose. The NARCL has been incorporated
6-Aug-20 4 0 under the Companies Act and has been granted ARC
license by the Reserve Bank. NARCL is capitalized
22-May-20 4 0.4 through equity contributions from banks/financial
institutions (FIs), and it will also raise debt as
27-Mar-20 4.4 0.75
required. PSBs and government owned FIs will hold a
minimum of 51 per cent stake and the rest will be
with the private sector.

RBI Monetary Policy 2022: Key points National Bank for Financing Infrastructure and
Development (NABFID)
> Repo rate or key short-term lending rate increased
by 50 basis points (bps) to 5.4 per cent for the third The Government has paved the way for the
consecutive time in 2022, 140 bps hike in repo rate establishment of a development finance institution
since May 2022 to control inflation. (DFI) through enactment of National Bank for
Financing Infrastructure and Development (NABFID)
> Real GDP growth forecast: Q1 at 16.2 per cent; Q2 Act, 2021. Union Budget 2021-22 has budgeted
at 6.2 per cent; Q3 at 4.1 per cent and Q4 at 4 per 20,000 crores for it. NABFID has been entrusted with
cent. GDP growth forecast for 2022-23 retained at 7.2 the task of coordinating with relevant stakeholders to
per cent. facilitate long term infrastructure financing, including
through development of debt and derivatives market.
Credit Delivery and Financial Inclusion In October 2021, Indian Bank announced that it has inked MoUs with three
leading non-banking finance companies (NBFCs) and housing finance companies
In pursuit of the goal of sustainable financial inclusion, the Reserve Bank has (HFCs) to offer co-originate loans to priority sectors.
encouraged banks to adopt a structured and planned approach. The National
Strategy for Financial Inclusion (NSFI) 2019-24 is aimed at accelerating the level In September 2021, Central Banks of India and Singapore announced to link their
of financial inclusion across the country in a holistic and systematic manner. In digital payment systems by July 2022 to initiate instant and low-cost fund
pursuance of the recommendations made in the NSFI, significant headway has transfers.
been made on both the supply side and demand side of financial inclusion.
In August 2021, Prime Minister Mr. Narendra Modi launched e-RUPI, a person
On the supply side, provision of banking services to more than 99 per cent of the and purpose-specific digital payment solution. E-RUPI is a QR code or SMS string-
targeted villages within their 5 km radius and sensitization of more than 1.91 lakh based e-voucher that is sent to the beneficiary’s cell phone. Users of this one-
Business Correspondents (BCs) through conduct of about 32,000 programmes are time payment mechanism will be able to redeem the voucher at the service
the key achievements. provider without the usage of a card, digital payments app, or internet banking
access.
On the demand side, enhanced financial literacy and consumer grievance
redressal mechanisms are focus areas of NSFI. Against this backdrop, several Value of digital lending market in India
policy measures were initiated during 2020-21 and the current financial year so
far to ensure last mile access to financially excluded sections.

RBI Retail Direct Scheme

The Reserve Bank launched the ‘RBI Retail Direct’ Scheme on November 12, 2021
as a one-stop solution to facilitate investment in Government securities by
individual investors. The scheme enables individuals to participate in primary
issuance of government securities (G-Secs) in the non-competitive segment and
to buy/sell G-Secs in the secondary market on the NDS-OM platform.

Payments and Settlement Systems

The Reserve Bank has over the years encouraged greater use of electronic
payments to achieve a “less-cash” society. The objective has been to provide
payment systems that combine the attributes of safety, security, enhanced
convenience and accessibility by leveraging on technological solutions that enable
faster processing. Affordability, interoperability, customer awareness and
protection have been the focus areas. Over the years, banks have been the
traditional gateway to payment services.

With fast paced technological changes, this domain is no longer the monopoly of
banks. Entities such as non-banks, including Fin techs, Tec fins and Big techs are
cooperating as well as competing with banks, either as technology service
providers or direct providers of digital payment services. The regulatory
framework has encouraged diversified participation in the payments domain, Tokenization: Card transactions
while being mindful of ensuring consumer convenience, safety, security and
systemic stability. The Reserve Bank had issued a framework on card tokenization services in
January 2019. While initially limited to mobile phones and tablets, it was
Digital lending market scenario subsequently extended in August 2021 to cover other devices including Internet
of Things (IoT). In September 2021, the scope of this framework was further
India is the world's largest market for Android-based mobile lending apps,
extended by permitting card networks and card issuers to offer Card-on-File
accounting for ~82% of all online lenders worldwide. According to a study
Tokenization (CoFT) services. Additionally, the Reserve Bank advised that from
conducted by CloudSEK, a Bengaluru-based digital risk management firm, India
July 1, 2022, no entity in the card transaction / payment chain, other than the
currently has 887 active lending apps.
card issuers and / or card networks, shall store the actual card data; and any such
data stored previously will be purged.
India’s digital lending stood at US$ 110 billion in FY19. Digital lending to micro,
small and medium enterprises (MSMEs) in India is expected to reach US$ 100
Operationalisation of Payments Infrastructure Development Fund Scheme
billion by 2023.
The Payments Infrastructure Development Fund (PIDF) Scheme intends to
In the previous two years, India's BNPL industry has seen a 45-fold increase in
subsidize deployment of payment acceptance infrastructure in Tier-3 to Tier-6
transactions. In terms of market size, the segment is predicted to rise 11 times
centers with a special focus on north-eastern states. The target of the PIDF is to
from US$ 4.1 billion in 2021 to US$ 43 billion in 2025.
help deploy 10 lakh physical and 20 lakh digital acceptance devices every year in
the target geography.
In January 2022, Paytm India’s largest fin-tech company and NBFC Fullerton have
plans to expand digital lending to MSMEs.
The scheme was operationalised from January 01, 2021 for a period of three
years. As on November 30, 2021, the contribution to the scheme was 614 crore
and 77.16 lakh payment acceptance devices have been deployed.
Performance of Commercial Banks

During 2020-21, the banking sector navigated the disruptions caused by the pandemic and the economic downturn with resilience, cushioned by various policy
measures undertaken by the Reserve Bank and the Government. Asset quality improved, partly attributable to imposition of the asset classification standstill. Public
sector banks (PSBs) reported net profits after a gap of five years. More generally, the capital position of banks improved, aided by recapitalization by the government
as well as raising of funds from the market. Nonetheless, incipient stress remains in the form of increased proportion of restructured advances and the possibility of
higher slippages arising from sectors that were relatively more exposed to the pandemic. Nevertheless, with the green shoots of recovery re-emerging in H1:2021-22,
banks are expected to further shore up their financials.

Consolidated Balance Sheet of Scheduled Commercial Banks (as at the end of March 2020 & 2021)

The consolidated balance sheet of scheduled commercial banks (SCBs) accelerated during 2020-21, notwithstanding the pandemic and the contraction in economic
activity in the first half of the year. Deposit growth on the liabilities side was matched by investments on the assets side; however, credit off-take remained subdued
(Table IV.1 and Chart IV.1). Supervisory data suggest that while nascent signs of recovery are visible in credit growth, deposit growth has slowed down in 2021-22 so
far. The share of PSBs in total advances as well as in deposits has been declining since 2010-11, while private sector banks (PVBs) have been improving their share.
Historically, PVBs have relied heavily on borrowings The credit-to-GDP ratio increased to a five-year high, Chart IV.15: Lending Rate, Deposit Rate and NIM
to supplement their deposits and fuel credit growth. narrowing the credit-GDP gap India’s credit-to-GDP
On the other hand, PSBs leveraged their wide deposit ratio is still markedly lower than the G20 average. (IV
base and availability of low-cost CASA deposits to 8)
fund their lending.(IV 4)
Chart IV.8: Country Wise Credit-GDP Ratio

The financial performance of SCBs in 2020-21 was

In 2020-21, borrowings of PVBs contracted for the marked by a discernible increase in profitability as
first time since 2016-17, while those of PSBs their income remained stable but expenditure
accelerated after contracting for two consecutive declined. This was in sharp contrast with the past five The moderation in GNPA ratios of banks that began
years. Despite robust CASA deposit growth, PSBs years during which PSBs incurred losses and in 2019-20, continued during the period under review
raised higher resources through borrowings than the profitability of PVBs was declining (Chart IV.14). to reach 7.3 per cent by end-March 2021. Provisional
previous year as their credit growth accelerated over supervisory data suggest a further moderation in the
Chart IV.14: Profitability Ratios
the first three quarters of the year. (IV 5) ratio to 6.9 per cent by end-September 2021.

During 2020-21, this improvement was driven by

lower slippages, partly due to the asset classification
standstill. With the decline in delinquent assets, their
provision requirements also dropped and the net
NPA ratio of PSBs and PVBs eased from the previous
year. On the contrary, FBs reported increasing
accretions to NPAs and deteriorating asset quality
due to amalgamation of a troubled PVB with an FB
(Chart IV.19).

Chart IV.19: Asset Quality of Banks

SCBs’ credit growth has decelerated over previous

two years, largely reflecting muted demand
conditions and risk aversion. Signs of recovery
became visible in H1:2021-22. Credit growth of PVBs
decelerated from Q4: 2019-20 till Q3:2020-21 as the
pandemic took its toll. Since Q4:2020-21, however,
PVBs’ credit showed signs of revival. (IV 6)

The contraction in SCBs’ expenditure was led by a

decline in the interest expended on deposits and
borrowings on account of moderation in interest
rates and contraction in total borrowings.

Across bank groups, the transmission of policy rate

changes to term deposit rates was highest for FBs
(Chart IV.15 a). At the system level, interest earned
by banks outpaced their interest expenses, and hence
the net interest margin (NIM) improved (Chart
IV.15b).
Growth drivers of Indian banking sector

Economic and demographic drivers

Favorable demographics and rising income levels. India ranks among the top 5
economies with a GDP of US$ 2.62 trillion in 2020. The sector will benefit from
structural economic stability and continued credibility of Monetary Policy.

Policy support

The Government passed the Banking Regulation (Amendment) Bill 2017 to

empower RBI to deal with NPAs in the banking sector. The Insolvency and
Bankruptcy Code (Amendment) Ordinance, 2017 Bill was passed by Rajya Sabha
to strengthen the banking sector (as of Jan 2018).

Infrastructure financing

India currently spends 6% of GDP on infrastructure; NITI Aayog expects this

fraction to grow going ahead. As per Union Budget 2019-20, investment driven
growth requires access to low-cost capital, which requires an investment of Rs. 20
lakh crores (US$ 300 billion) every year. Mobile banking allows customers to avail banking services on the move through
their cell phones. The growth of mobile banking could impact the banking sector
Open banking ecosystem significantly. Mobile banking is especially critical for countries like India as it
promises to provide an opportunity to provide banking facilities to a previously
The open banking eco-system in India has now grown to include Non-Banking under-banked market.
Financial Company (NBFC) and other fin-tech players that have created
partnerships within the banking system. RBI has taken several steps to enable mobile payments, which forms an
important part of mobile banking; the central bank has removed the transaction
Cross-border payments limit of Rs. 50,000 (US$ 745.82) and allowed banks to set their own limits.

Visa Inc. has sought RBI’s permission to offer a new cross-border payments In May 2022, Unified Payments Interface (UPI) recorded 5.95 billion transactions
system to process trade flows to and from India. It will be offering a potentially worth Rs. 10.41 trillion (US$ 133.46 billion). National payments corporation India
cheaper, quicker and block chain-based solution now on trial. (NPCI) has plans to launch UPI lite this will provide offline UPI services for digital
payments. Payments of up to Rs. 200 (US$ 2.67) can be made using this.
Government initiatives
Strong economic growth
Government has smoothly carried out consolidation, reducing the number of
public sector banks by eight. The Government of India will invest Rs. 48,239 crore Rise in per capita income will lead to increase in the fraction of the Indian
(US$ 6.78 billion) in 12 public sector banks in FY20 to help maintain regulatory population that uses banking services. Population in 15-64 age group is expected
capital requirements and financial growth in India. The Government of India will to grow strongly going ahead, giving further push to the number of customers in
invest Rs. 5,042 crore (US$ 730.88 million) in Bank of Baroda post its merger with the banking sector. As per Economic Survey 2018-19, working age population will
two other public sector lenders, Dena Bank and Vijaya Bank. grow by 9.7 million per year in between 2021 and 2031 and 4.2 million per year
from 2031 to 2041.
Banking penetration in rural India picking pace
Gross Domestic Product per capita in India in US $
In 2019, out of 600,000 village habitations in India, only 5% have a commercial
bank branch. By April 2022, the number of outstanding debit cards stood at
920.51 million and credit cards stood at 75.16 million in India.

The agriculture credit flow stood at Rs. 1,575,398 crore (US$ 210.39 billion) in
2020-21. The target has been fixed at Rs. 1,650,000 crore (US$ 220.35 billion) for
2021-22.

The banks issued 2.70 crore of Kisan Credit Cards (KCCs) in January 17, 2022.
Agriculture requires timely credit to enable smooth functioning. However, only
one-eighth of farm households availed bank credit in 2019. Local money-lending
practices involve interest rates well above 30% therefore making bank credit a
compelling alternative.

Soaring rural tele-density paves the way for mobile banking

Tele-density in rural India surged at a CAGR of ~5.17% between 2011 and 2020.
Banks, telecom providers and RBI are making efforts to make roads into the un-
banked rural India through mobile banking solutions. As of August 31, 2021, rural
tele-density reached 60.27%.
 Rising rural income pushing up demand for banking

Gross Value Added by agriculture, forestry and fishing is at Rs. 36.16 trillion (US$
482.82 billion) in FY21. Rising incomes are expected to enhance the need for
banking services in rural areas, and therefore, drive growth of the sector.
Programmes like MNREGA have helped in increasing rural income, which was
further aided by the recent Jan Dhan Yojana.

Schemes by government

Pradhan Mantri Suraksha Bima Yojana

This scheme is mainly for accidental death insurance cover for up to Rs. 2 lakh
(US$ 2,983.29). Premium: Rs. 12 (US$ 0.18) per annum. Risk Coverage: For
accidental death and full disability - Rs. 2 lakh (US$ 2,983.29) and for partial
disability - Rs. 1 lakh (US$ 1,491.65). Gross enrolment under the scheme reached
28.37 crore as on April 27, 2022.

Pradhan Mantri Jeevan Jyoti Bima Yojana

This scheme aims to provide life insurance cover. Premium: Rs. 330 (US$ 4.92)
per annum. It will be auto-debited in one installment. Risk Coverage: Rs. 2 lakh
(US$ 2,983.29) in case of death for any reason. Gross enrolment under the
scheme reached 12.76 crore as on April 27, 2022.

Atal Pension Yojana

Under the scheme, subscribers would receive fixed pension up to Rs. 5,000 (US$
Housing and personal finance have been key drivers
74.58) at the age of 60 years (depending on their contributions). On April 27,
2022 the total numbers of subscribers were 4 crores.
Rapid urbanization, decreasing household size & easier availability of home loans
has been driving demand for housing. Personal finance, including housing
Pradhan Mantri Jan Dhan Yojana
finance, provide an essential cushion against volatility in corporate loans. The
recent improvement in property value has reduced the ratio of loan to collateral
As of June 2022, the total numbers of accounts were at 45.60 crores. Under the
value. Credit to housing sector increased at a CAGR of 13.4% from FY16 to FY20,
scheme, each & every citizen will be enrolled in a bank for opening a Zero balance
wherein, value of credit to housing sector increased from to US$ 114.10 billion in
account. Each person getting into this scheme will get Rs. 30,000 (US$ 447.49) life
FY16 to US$ 188.68 billion in FY20. India’s housing finance companies portfolio is
cover while opening the account. Overdraft limit under such account is Rs. 5,000
estimated to be at Rs. 11 lakh crore (US$ 146.71 billion) as of June 30, 2021.
(US$ 74.58).
Demand in the low & mid-income segment exceeds supply three- to four-fold.
This has propelled the demand for housing loan in the last few years. In Capital Infusion Scheme
December 2021, IIFL home loan disbursed loans disbursed loans worth Rs. 3,000
crores (US$ 400.07 million) this was a 19% growth. The Finance Ministry announced its plan to infuse Rs. 14,500 crore (US$ ) as
capital infusion in public sector banks in the fourth quarter of FY21.
Overall Assessment

Notwithstanding a sharp downturn in global as well as domestic macroeconomic conditions, the banking sector in India remained resilient, with strong profitability
indicators, and improved asset quality. Various regulatory measures initiated by the Reserve Bank in response to the pandemic played a crucial role in protecting
banks’ balance sheets, providing necessary liquidity support and stabilizing the financial sector. Additionally, the establishment of the National Asset Reconstruction
Company Limited (NARCL) by the Government of India is expected to aid the recovery process, while alleviating stress on banks’ balance sheets. Banks would need to
strengthen their corporate governance practices and risk management strategies to build resilience in an increasingly dynamic and uncertain economic environment.
With rapid technological advancements in the digital payments landscape and emergence of new entrants across the Fin-Tech ecosystem, banks have to prioritize
upgrading their IT infrastructure and improving customer services, together with strengthening their cyber security.

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