1.

1 Industry profile

1.1 Introduction to Banking Sector

India's banking sector is the foundation of the nation's financial system and is essential to the
expansion and advancement of the Indian economy. Today's banks are developing into financial
service hubs that provide everything from simple savings accounts to sophisticated investment
products and digital solutions, so they are no longer merely passive lenders or safe havens for
public funds.

Public and private sector banks, foreign banks, cooperative banks, regional rural banks, and,
more recently, small financing and payment banks, all play different roles in India's financial
ecosystem.

Banking is fundamentally about trust and intermediation, which involves receiving cash from
depositors and directing them to borrowers and businesses. However, in modern India, banking
has expanded beyond those criteria. Banks currently act as:

Financial advisors help clients with insurance, investments, and asset management.

Technology platforms include smartphone apps, AI chatbots, UPI, and online banking.
Government partners are responsible for disbursing subsidies, pensions, and DBTs, as well as
advancing inclusion agendas such as PMJDY.

The financial industry also serves as an important policy lever. When the Reserve Bank of India
increases repo rates or CRR, the banks are responsible for carrying the ripple effects to the street
level, from EMI modifications to loan eligibility.

India's banking sector is vast:

• More than 100 scheduled commercial banks

• There are thousands of cooperative banks and NBFCs.
• Penetration into villages, tier-3 cities, and even remote tribal areas

1.2 Structure of Banking industry

1.2.1 SCHEDULED COMMERCIAL BANK

These are banks designated in the Second Schedule of the RBI Act of 1934 that meet capital
adequacy and governance standards. These are the backbones of the banking industry.

(A) Public Sector Banks (PSBs):

Government owns over 51%.

Examples include State Bank of India, Punjab National Bank, and Bank of Baroda.

Strengths: Large network, rural presence, and strong public trust.

Challenges include bureaucracy, sluggish technology uptake, and NPA concerns.

(B) Private sector banks.

Private entities own and administer the assets.

Examples include HDFC Bank, ICICI Bank, and Axis Bank.

Strengths: Technology-driven, customer-focused, and aggressive marketing.

Challenges include high target pressure and an emphasis on urbanization.

(C) Foreign banks with Indian branches.

Examples include HSBC, Standard Chartered, and Citibank.

Strengths include global product offerings and a business focus.

Challenges: Limited rural presence and stringent rules.

1.2.2 REGIONAL RURAL BANK

Sponsored by PSBs but operating in rural and semi-rural areas.

Objective: To assist farmers, rural craftsmen, and underprivileged groups.

Lower interest rates and targeted funding for farmers and micro-entrepreneurs.

1.2.3 COOPERATIVE BANK

These member-owned financial organizations are often smaller and more localized.

Divided into Urban and Rural Cooperative Banks.

Strengths: Significant local penetration.

Risks include governance issues and dual regulation (by the RBI and state registrar).

1.2.4 SMALL FINANCE BANK

Introduced in 2015 to help bridge the gap between large commercial banks and non-bank
financial companies.

Serve unbanked individuals, MSMEs, small businesses, and migrant labor.

Examples are AU Small Finance Bank, Ujjivan SFB, and Equitas SFB.

The unique proposition is a combination of traditional banking and inclusion-driven ambitions.

Regulatory scope: Can accept deposits, lend, offer insurance, and mutual funds, just like a
traditional bank, but with a focus on financial inclusion.

1.3 DEVELOPMENT OF BANKING

INDUSTRY
Prior to 1991, the financial system was dominated by public-sector banks under strict
government control. Limited inventiveness.

Post-liberalisation (1991 onwards): entry of private players, implementation of prudential

regulations, and computerisation.

2000s to Present: Rapid digitisation, mobile banking, financial inclusion programs, and the
growth of neo-banking and fintech collaborations.

The Digital India initiative, as well as the rise of UPI, mobile wallets, and embedded finance,
have revolutionized the delivery and consumption of banking services.

1.4 PESTEL Analysis

A. Political aspect

Regulatory Environment: AU SFB is subject to the Reserve Bank of India's (RBI) rules and must
abide by the rules pertaining to Small Finance Banks, which include rules for financial inclusion,
priority sector lending, and capital adequacy.

Government Programs: AU gains from a number of financial inclusion programs, like as

PMJDY, or Pradhan Mantri Jan Dhan Yojana

India Stand-Up

India Digital

Taxation and Reforms: AU's long-term plans have benefited from stable political government,
which has helped sustain a predictable tax system and a progressive banking reform agenda.

Political Stability: India's political climate fosters reforms and economic expansion, which helps
to create a safe working environment for financial institutions such as AU.

B. Economic aspect
Interest Rates: AU's lending rates and profit margins are directly impacted by changes in the
RBI's repo rate. Customers may have to pay more to borrow money if interest rates rise

Post-COVID Economic Recovery: Loan defaults and non-performing assets (NPAs) are being
reduced by the slow recovery of industries like MSME and transportation, which are important
borrower segments for AU.

Increased inflation has an impact on consumer savings and loan repayment ability. AU must
appropriately handle its lending practices.

Growth in Rural and Semi-Urban Areas: These regions serve as AU's main markets, and the
company's clientele is growing because of urbanization and growing rural incomes.

C. Social element

Low Financial Literacy: A large portion of AU's clientele is drawn from underserved financial
markets. In order to increase outreach and lower risk, the bank funds financial literacy and
awareness initiatives.

Demographic Advantage: AU is being forced to innovate by the growing demand for tech-
enabled financial services from India's youthful, internet-savvy populace.

Building strong local trust and loyalty among borrowers is made possible by AU's deep roots in
North and West India, where it began as an NBFC in 1996.

Changing Customer Expectations: AU must constantly improve its services in response to

growing consumer demands for quick, paperless, and mobile-first banking.

D. The role of Technology

Digital Infrastructure: AU has invested much in:

AU 0101 App for Mobile

Opening an account online

Platforms for digital financing

AI/ML for detecting fraud and evaluating credit

Fintech Partnerships: To increase its product reach, speed up onboarding, and implement digital
KYC, AU partners with fintechs.

Cybersecurity: In order to safeguard consumer data and stop fraud, AU needs to make significant
investments in strong cybersecurity given the rise in digital transactions.

Customer Self-Service: To appeal to the digital-first generation, the bank provides video KYC,
WhatsApp banking, and chatbots.

E. Legal aspect

RBI Adherence: AU must adhere to a number of compliance regulations, including:

Maintenance of CRR/SLR

Guidelines for Priority Sector Lending (75% of loans must be PSL)

Mandatory disclosure requirements and audits

Data Protection Laws: The way AU gathers and handles consumer data may be impacted by
India's increasingly stringent data privacy laws (Digital Personal Data Protection Act, 2023).

Consumer Rights: AU must adhere to fair lending, repossession, and other policies and resolve
customer complaints under the Banking Ombudsman Scheme.
NBFC Legacy Checks: As a converted NBFC, AU is continuously monitored to guarantee a
smooth transition to a universal banking system.

1.5 Major player

CATEGORY BANK NAME KEY FEATURES / STRENGTHS
PUBLIC State Bank of Largest bank in India, strong rural reach,
SECTOR India (SBI) wide branch network, government trust
BANKS factor
 Punjab National Focused on MSMEs & agriculture, strong
Bank (PNB) legacy and customer base in North India
Bank of Baroda Post-merger expansion, corporate
(BoB) banking, growing digital initiatives
Canara, Union, Mid-size PSBs with regional dominance
Indian Bank and improving tech adoption
PRIVATE HDFC Bank Leader in retail banking, digital
SECTOR excellence, profitability, and CRM
BANKS systems
ICICI Bank Strong corporate and retail mix, early tech
adopter, wide range of financial products
Axis Bank Known for branding, youth-focused
offers, and cross-selling strategies
Kotak Mahindra Focused on premium customers, wealth
Bank management, and digital experience
SMALL AU Small Finance Largest SFB, strong in semi-urban/rural
FINANCE Bank markets, full product suite, CRM + Smart
BANKS RM usage
Equitas SFB South India-focused, micro loans,
emerging tech platform
Ujjivan SFB Focused on financial inclusion for urban
poor, known for fast onboarding
Jana, ESAF, Emerging SFBs with growing rural
Suryoday SFB outreach and niche products
FOREIGN HSBC, Standard Operate in metros, cater to HNIs & MNCs,
BANKS Chartered, DBS, focused on premium services
Citi

1.6 Current Trends

 The banking business is changing rapidly due to technological improvements, changing client
expectations, and regulatory requirements. Here are the most recent trends shaping the sector:

1. AI Integration Banks are rapidly using AI to improve customer service, streamline operations,
and strengthen security. Generative AI, in particular, is being used to provide more
personalized customer experiences and better decision-making processes.

2. Digital First Banking The transition to digital-first strategy continues, with many banks
providing extensive online and mobile banking services. This strategy addresses the increased
demand for convenient, 24/7 access to financial services. Fortune India

3. Cryptocurrency and Blockchain Adoption Financial organizations are looking into blockchain
technology because of its potential to improve transaction security and efficiency.
Additionally, the adoption of cryptocurrencies and stablecoins is influencing the development
of new financial products and services.

4. Open banking. Open banking programs encourage collaboration between banks and fintech
startups, resulting in more innovative and customer-focused financial solutions.
This trend provides individuals with more control over their financial information.

5. Regulatory Evolution. Regulatory organizations are responding to the changing financial

world by revising frameworks to accommodate emerging technology and hazards. For
example, the European Union is debating the adoption of Basel III standards, while the UK's
Financial Conduct Authority is exploring revisions to disclosure laws to improve customer
information. Source: Reuters

6. Financial Inclusion. Technological advancements are allowing banks to reach underserved

groups, giving financial services to people who were previously excluded from the regular
banking system.
7. Evolution of Payment Systems. The payments sector is undergoing significant transformation,
with the incorporation of technology such as AI and the adaption to new regulatory contexts.
Financial institutions are investing in updating payment infrastructures to match changing
customer behaviors and expectations. American Banker

8. Hybrid Banking Models. While digital banking is becoming more popular, traditional branches
continue to hold value. A hybrid strategy that mixes digital and in-person banking is emerging
as a means to cater to a variety of consumer preferences.