International Journal of Management and Social Sciences Research (IJMSSR)

Volume 4, No. 5, May 2015

ISSN: 2319-4421

An Overview of Indian Banking Industry

Sunindita Pan, Lecturer in Economics, Loyola Academy Degree & P.G.College, Alwal, Secunderabad, Telangana

ABSTRACT
The banking sector, being the barometer of the economy,
is the reflective of the macro-economic variables. The
paper provides an in-depth analysis of evolution of Indian
banking industry. The Indian banking industry has its
foundations in the 18th century and has had a varied
evolutionary experience since then. The initial banks in
India were primarily traders banks engaged only in
financing activities. Banking industry in the preindependence era developed with the Presidency Banks,
which were transformed into the Imperial Bank of India.
The initial days of the industry saw a majority private
ownership and a highly volatile work environment. Major
strides towards public ownership and accountability were
made with nationalization in 1969 and 1980 which
transformed the face of banking in India. The role of
banking industry is very important as one of the leading
essential service sector. The significant role of banking
industry is essential to speed up the social economic
development. The industry in recent times has recognized
the importance of private and foreign players in a
competitive scenario and has moved towards greater
liberalization. From traditional banking practices during
the British Rule to reforms period, nationalization to
privatization and to the present trend of increasing
number of foreign banks, Indian banking sector has
undergone significant transformation. It is essential for
the Indian economy, striving for an accelerating
sustainable and inclusive growth in the medium to longterm, to have a healthy and growing banking system. The
emerging competition has generated new expectations
form the existing and the new customers. There is an
urgent need to introduce new products. Existing products
need to be delivered in an innovative and cost-effective
way by taking full advantage of emerging technologies.
This paper explains the changing banking scenario, the
impact of economic reforms and analyses the challenges
and opportunities of commercial banks.

Keywords:
Banking industry, nationalization, inclusive growth,
competition, economic reforms

internet/mobile banking. Consequently, the different banks

have invested considerably to increase their banking
network and their customer reach. The banking industry in
India has the potential to become the fifth largest banking
industry in the world by 2020 and third largest by 2025
according to KPMG-CII report, Indias banking and
financial sector is expanding rapidly. Indian banks have
adopted better operational strategies and upgraded their
skills. They have withstood the initial challenges and have
become more adaptive to the changing environment. In the
complex and fast changing environment, the only
sustainable competitive advantage for banks is to give the
customer an optimum blend of technology and traditional
service.
The Indian banking sector has shown strong progress over
the last decade and has supported the countrys economic
growth. However, it has seen challenging times over the
last three years driven by an uncertainty in the external
environment
including
discontinuities
in
the
macroeconomic situation, shifts in customer behavior,
regulatory changes, technology disruptions and human
capital crunch. This recent decline in banking outcomes
has further resurfaced issues with industry structure and
context and conduct of banking players. The banking
sector should emerge strong and positioned to support
Indias economic growth over the next few years. Indian
banking system could withstand multiple challenges
including the Great Depression, the 1997 Asian Financial
crisis and the 2008 sub-prime meltdown. The regulator
(RBI) never allowed banks to take excessive risks and
always remained a watchdog of the banking system.

OBJECTIVE
The main objective of this paper is to explain the changing
banking scenario and analyze the impact of banking sector
reforms on banking industry. The paper studies the
challenges and opportunities of commercial banks in
changing competitive scenario. The paper is an extension
of knowledge in banking industry and is useful for
bankers, strategies, policy makers and researchers.

METHODOLOGY
INTRODUCTION
The banking sector in India is on a growing trend. It has
vastly benefitted from the surge in disposable income of
individuals in the country. There has also been a
noticeable upsurge in transaction through ATMs and

This paper is the outcome of secondary data on Indian

banking sector collected from various sources mainly from
annual reports and periodicals of Reserve Bank of India.
The article is divided in two parts. First part includes the

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 4, No. 5, May 2015

introduction and general scenario of Indian banking

industry. The second part discuses the various challenges
and opportunities faced by Indian banking industry.

EVOLUTION OF BANKING INDUSTRY

Trigger events Beginning of institutional banking with 3 joint
stock banks
Nationalization of Imperial Bank and 20 other
Scheduled Commercial Banks
Acceptance
of
recommendations
of
the
Narasimham Committee
Hike in the FDI ceiling for banking sector and
declaration of roadmap for liberalization
Phases of evolution
1.
Pre-Nationalisation phase (prior to 1955)
Birth of joint stock banking companies
Introduction of deposit banking and bank branches

Presidency banks and other joint stock banks

formed setting the foundation of modern banking
system
2.
1990)

Era

of Nationalisation and consolidation (1955-

State Bank of India formed out of Imperial Bank

20 SCBs nationalized in two phases
Directed credit programmes on the rise
Introduction of social banking
3. Introduction of Indian Financial and Banking sector
reforms and partial liberalization (1990-2004)
Major changes in prudential regulations
Interest rates deregulated
Statutory preemption of resources eased more
private sector players came in strengthened the
system as a whole.
4. Period of increased liberalization (2004 onwards)
FDI ceiling for the banking sector increased to 74%
from 49%
Roadmap for inclusion of foreign banks declared
More liberal branch licensing policy followed

STRUCTURE
INDUSTRY

OF

INDIAN

BANKING

In India, only those banks are called Commercial Banks

which have been established in accordance with Indian
Companies Act, 1913. These banks were established in
India after the advent of East India Company. Banks of
Hindustan was first commercial bank in India. It was
stabled in 1770. The commercial banks may be classified
into:
1. Scheduled Banks
According to RBI Act, 1934, a scheduled bank is that bank
which has been included in the second schedule of

ISSN: 2319-4421

Reserve Bank. To be eligible for this concession a banks

must satisfy the three conditions It must have a paid up capital and reserves of an
aggregate value of at least Rs 5 lakhs.
It must satisfy the RBI that its affairs are not
conducted in a manner detrimental to the interests
of its depositors.
It must be corporation and not a partnership or a
single owner firms.
Public sector banks- They have either the Government of
India or the Reserve Bank of India as the major
shareholder. At present there are 27 Scheduled
Commercial (Public sector) Banks including SBI (its 5
associates) and 19 nationalized banks.
Private Banks- Private Sector banking in India has been
practiced since the beginning of banking system in the
country. The first private bank in India to be set up in the
private sector was the IndusInd Bank. In Private Sector
banks, most of the capital is in private hands. There are
two types of private sector banks in India-Old Private
Sector Banks (13) and New Private Sector Banks(7).
Foreign Banks- The Foreign banks have brought the
latest technology and banking practices in India and have
helped make the Indian banking system more competitive
and efficient. There are 43 foreign banks from 26
countries operating as branches in India and 46 banks from
22 countries operating as representative offices in India.
Most of the foreign banks in India are niche players.
2. Non-Scheduled Banks-Non-scheduled banks are those
of which the total capital is less than Rs 5 lakhs. These are
not included in the second schedule of Reserve Bank. RBI
has no specific control upon these banks. But they have to
send details of their business to RBI every month.
Banking products and services- product innovation

Banks in India have traditionally offered mass banking

products. The products of the banking industry broadly
include deposit products, credit products and customized
banking services. Most banks offer the same king of
products with minor variations. The basic differentiation is
attained through quality of service and the delivery
channels that are adopted. Innovations have been
increasingly directed towards the delivery channels used
with the focus shifting towards ATM transactions, phone
and internet banking. Market focus is shifting from mass
banking products to class banking with introduction of
value added and customized products.
In view of several developments in 1990s, the entire
banking products structure has undergone a major change.
As part of the economic reforms, banking industry has
been deregulated and made competitive. New players have
added to the competition. IT revolution has made it

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 4, No. 5, May 2015

possible to provide ease and flexibility in operations to

customers. Rapid strides in information technology have
redefined the role and structure of banking in India. Due to
exposure to global trends after information explosion led
by internet, customers-both individuals and corporate- are
now demanding better services with more products from
their banks. Financial market has turned into a buyers
market. Banks are also changing with time and are trying
to become one-stop financial supermarkets. Banks also
offer advisory services termed as private banking to high
relationship-value clients. Corporate are also deriving
benefit from the increased variety of products and
competition among the banks.
The competition between the traditional banks, with their
conventional products and the post liberalization new
entrants offering innovative products, increased. This
necessitated product innovation and differentiation for
many public sector banks in order to be competitive and
retain their market share. Product, service and
technological innovation became imperative for Indian
banks due to rising customer demands, growing market
awareness, shorter product lifecycles, changing regulatory
norms and growing competition. With the enactment of
the Depositories Act, Indian banks started providing
depository services such as demat accounts,
dematerialization re-materialization requests, transfer of

Deposits
Term deposits
Demand deposits
Current deposits
Savings deposits

securities and pledge services along with core products,

such as savings and current account.
Service innovation in banking facilitates a point of contact
to address customers banking needs and is a growth driver.
The concept of customer service in the traditional Indian
banking system was restricted to few interactions between
the bank staff and the customer, which delivered a
personal touch, established a comfort level and created a
satisfied customer. In the current banking scenario, a
direct face to face relationship is rarely referred by
customers due to lack of time. Setting up of customer care
centers, an NRI cell for servicing nonresident customers,
alert/SMS on account transaction or new products,
relationship managers for high net work individual clients,
product packaging with pricing benefits, doorstep banking,
personalized checkbooks to preferred customer groups,
cash management services for corporate customers,
electronic funds transfer facility through payments
systems such as RTGS or NEFT are few examples where
service innovation has greatly helped in improving
customer satisfaction by providing prompt delivery and
resolving customer complaints. Internet Banking, Mobile
Banking, Video Banking, direct sales agents, ATMs,
credit/debit cards have become.

Table-1
Credit
Bill purchased and discounted
Cash credit and debit cards
Term loans and personal loans
Overdraft

Growth and development of banking sector

The Indian banking industry is currently worth Rs.81
trillion (US$1.31 trillion) and banks are now utilizing the
latest technologies like internet and mobile device to carry
out transactions and communicate with the masses. This
growth can be attributed to banks shifting focus to client
servicing. Public and private sector banks are underlining

ISSN: 2319-4421

Other customized services and products

Guarantee and advisory services
Derivative and other treasury products
Insurance and investment
Para banking products
Tax advisory services

the importance of technology infrastructure in order to

improve customer experience and gain a competitive edge.
Utilizing the popularity of internet and mobile banking,
banks are increasingly adopting an integrated approach for
asset-liability match, credit and derivatives risk
management.

Table 2

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 4, No. 5, May 2015

Table 3
Indicators
Scheduled
commercial
banks,
Of which RRBs
2.
No. of reported offices
i Rural
ii Semi-urban
iii Urban
iv Metropolitan
Total
3.
Annual growth rate (%)
Aggregate deposit
Gross bankcredit
Source-www.rbi.org.in
1.

OPPORTUNITIES
GROWTH

FOR

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Commercial banks at a glance

Dec14
146

Dec13
146

Dec12
159

Dec11
166

Dec10
163

56

57

71

82

82

46,985
32,739
23,055
20,405
1,23,184

41,624
29,909
21,206
19,039
1,11,778

37,159
26,920
19,551
17,937
1,01,567

34,208
23,769
18,068
16,645
92,690

32,870
21,552
17,392
15,338
87,152

10.9
10.1

15.4
14.2

11.3
14.7

17.3
16.0

18.1
26.6

debt markets deepen, the larger corporate would

avail of advisory and capital market services form
banks to access capital markets. The revenue will
shift from traditional corporate banking to
investment banking.
5) CRM and data warehousing- Customer
Relationship Management and data warehousing
will drive the next wave of technology in banks.
There is significant potential for cross selling
amongst all categories of banks in india. Given that
cross selling is highly cost-effective as compared to
all other means of customer acquisition, banks will
adopt CRM strategies aggressively in pursuit of
cost-effective business model

SUSTAINABLE

1) Retail banking- Retail banking is typically massmarket banking where individual customers use
local branches of larger commercial banks. Services
offered include savings and checking accounts,
mortgages, personal loans, debit cards, credit cards
and so. It is characterized by multiple products
multiple channels and multiple customer groups.
2) Growing middle class- The middle income group
and lower income groups will be the largest group
of customers. They will be profitably served only
with low cost business models having low break
event ticket size of business. The rising
consumerism from the emerging middle India and
the higher purchasing power in rural India on
account
of
rising
employment
provides
opportunities for banks to look beyond the
traditional customer segments. The next decade
would witness banks experimenting with different
low cost business models, smaller cost effective
branches and new use of technology to serve this
segment profitably.
3) Mobile banking- With advent of mobile banking,
the access to banking facilities could completely get
revolutionized over the next decade. Even if 25-30
percent of mobile users have GPRS/3G activated,
there would be 250 million to 300 million
customers who would access banking services over
the mobile. We expect the Indian banking industry
to invest significant attention in technology
innovation to drive next generation framework for
transaction banking.
4) Investment banking- It will be among the fastest
growing segments in the banking industry. The
larger corporate customers expect to demand higher
support for international expansion and mergers and
acquisitions over next decade. As the wholesale

CHALLENGES FACED BY THE INDIAN

BANKS

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1)

Basel III implementation- In India, as per the

RBI, implementation of Basel III started form 1
April 2013 and will be completed in a phased
manner by 31 March 2018. The key elements of
Basel III norms are definition of capital, enhancing
risk coverage of capital, leverage ratio and liquidity
framework. In India, RBI has not published the
requirements on countercyclical capital buffer (02.5 percent of risk weighted assets), which is aimed
at ensuring that banking sector capital requirements
take account of the macro-financial environment in
which banks operate.
2) Capital mobilization-Capital mobilized by
commercial banks is the monetary value that the
mobilization of commercial banks in the market
through the operation of deposit, loan and number
of other sources. Following the financial
liberalization, some shifts have taken place in the
ownership pattern of bank deposits. As the financial
sector develops, the share of non-deposit saving
instruments tend to increase at the expense of bank
deposits. The challenge for the banks is to mobilize

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 4, No. 5, May 2015

3)

4)

5)

6)

untapped savings and to improve their services to

retain their existing depositors and attract their new
depositors.
Risk management system-To overcome the risk
and to make banking function well, there is a need
to manage all kinds of risks associated with the
banking. Risk management becomes one of the
main functions of any banking services. Risk
management consists of identifying the risk and
controlling them. The basic objective of risk
management is to maximize the profit and
optimizing the capital funds for ensuring long term
solvency of the banking organization.
Governance- Effective corporate governance is
critical to the proper functioning of the banking
sector and the economy as a whole. The executives
are very much concerned about the integrity of
accounting statements and quality of transparency
and disclosures and feel that selective leak of
sensitive information and dubious accounting
practices have been the biggest concerns from the
corporate governance perspective. While law can
control and regularize certain practices, the ultimate
responsibility of being ethical and moral remains
with the banks.
Asset quality- An asset can turn into a NPA when
the borrower defaults on his repayment of interest
or principal on agreed terms. It is often said that
general economic slowdown impinges on the
performance of banks and financial institutions,
since slump in major economic activities results in
poor recoveries and consequent deterioration in
asset quality. Trends revealed that though public
sector banks contributed to the bulk of NPAs. The
share of new private sector banks and foreign banks
has mainly contributed to the recent rise in NPAs.
Financial inclusion- Providing affordable banking
services to the lowest strata of the population is one
of the primary goals. RBI has mandated that
commercial banks achieve financial inclusion by
offering no-frills saving-bank accounts and easy
access to credit facilities through genera-purpose
credit cards. While the expectation from banks is
high, the government is also looking at non-banking
industries to come forward with a solution. It is a
strategic priority given that the customer segment in
question will be the largest in number over the next
decade and banks stand to lose this relationship.

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CONCLUSION
Indian banks have to operate in an increasingly globalised
environment due to regulatory factors, technological
factors; cross-border financial flows over which they may
not have any control. The banks should be efficiently
mobilizing required amount of capital from the market for
meeting their current and future business growth and
prudential requirements. The banks should be able to
enlarge their outreach in terms of customer base and
product choices by leveraging technology enabled
payment systems in affordable, accessible, acceptable and
assured manner. There is enormous scope for increasing
for increasing the size and capacity of the banking
structure. There is a need for reorienting the banking
structure to make it more dynamic and flexible while
ensuring safety and systemic stability. The competition
from global banks and technological innovation has
compelled the banks to rethink their policies and
strategies. Different products provided by foreign banks to
Indian customers have forced the Indian banks to diversify
and upgrade themselves to compete and survive in the
market.

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