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:: 48 India

Background Paper Indian Banking
48 India 10/10/2008 1:32:42 PM

Executive Summary

The banking industry is one of the prominent indicators of the health of an economy. A banks ability and freedom to borrow from other banks and lend to corporates has a great impact on the growth rate of the economy. Deregulation of US banks in the 1970s was followed by a drastic change in US banking banks became larger and better diversified. Soon banks of other developed nations also began to operate in more competitive markets. Developing countries also followed suit in the last decade of the 20th century.

Similar to the US, the Indian banking industry too has undergone several changes since the initiation of financial sector reforms in 1992. Deposits and credit have grown at a fast pace driven by the booming economy, increasing disposable income and increased corporate activity; credit penetration has increased significantly though it remains way below the numbers in developed markets; and foreign banks have set the trend in product and service innovation.

The future of Indian banking looks quite exciting with

  • Competition intensifying which would lead to consolidation, though foreign banks are likely to jump into the fray only by 2009
  • New regulations pertaining to corporate governance and BASEL II coming into effect which would make the banking infrastructure more robust and transparent
  • Technology being adopted aggressively by banks to make processes efficient and cost-effective, provide services 24X7 and analyse customer data to offer products and services tailor-made to suit their tastes new segments emerging which would enable banks to tap into new markets and offer new products and services product and service innovation by banks (both foreign and Indian), offering the customer greater choice

Indian Banking An Overview

Post-liberalisation, the banking industry in India has grown at a fast pace. Increased economic activity coupled with de-regulation has further strengthened the position of Indian banks. By the end of March 2006, the total deposits held by the scheduled commercial banks stood at INR 21 lakh crores, a growth of 15.8 percent over 2005 and a compound annual growth rate (CAGR) of 14.9 percent since 2001-02. Moreover, the growth has not been restricted to any specific sector, all sectors (public sector, private sector and foreign) have shown good growth. The total loans and advances offered by commercial banks grew by 36 percent between March 2005 and March 2006 to reach INR 15 lakh crores, recording a CAGR of 23.6 percent since 2001-02.


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