As of 2022, more than 80% of the Indian population has a bank account in comparison to 17% in 2009.
Advantage India
Robust
Demand
* According to the EY 2021 NextWave Global Consumer Banking Survey explored consumers’ primary financial relationships and found that FinTechs and neobanks are gaining ground.
* That demand seems particularly strong when it comes to the critical need of protecting consumer data, where incumbent banks have a trust advantage. Some super apps may also turn to banks for access to banking licenses and to meet other regulatory requirements.
* Indian Fintech industry is estimated to be at US$ 150 billion by 2025. India has the 3rd largest FinTech ecosystem globally.
* BCG predicts that the proportion of digital payments will grow to 65% by 2026.
Innovation in
Services
* In the recent period, technological innovations have led to marked improvements in efficiency, productivity, quality, inclusion and competitiveness in the extension of financial services, especially in the area of digital lending.
* Digitalization of Agri-finance was conceptualized jointly by the Reserve Bank and the Reserve Bank Innovation Hub (RBIH). This will enable delivery of Kisan Credit Card (KCC) loans in a fully digital and hassle-free manner.
* In Union Budget 2023, the KYC process will be streamlined by using a 'risk-based' strategy rather than a 'one size fits all' approach.
* In September 2023, Hitachi Payment Services launched India's first-ever UPI-ATM with NPCI.
Business
Fundamentals
* The Indian banking industry has been on an upward trajectory aided by strong economic growth, rising disposable incomes, increasing consumerism and easier access to credit.
* Digital modes of payments have grown by leaps and bounds over the last few years. As a result, conventional paper-based instruments such as cheques and demand drafts now constitute a negligible share in both the volume and value of payments.
Policy
Support
* The RBI has launched a pilot to digitalize KCC lending in a bid for efficiency, higher cost savings, and reduction of TAT. This is expected to transform the flow of credit in the rural economy.
* In November 2022, RBI launched a pilot project on central bank digital currency (CBDC).
* In Union Budget 2023, a national financial information registry would be constructed to serve as the central repository for financial and ancillary data.
* In March 2023, India Post Payments Bank (IPPB), in collaboration with Airtel, announced the launch of WhatsApp Banking Services for IPPB customers in Delhi.
Snapshot Showcase Infographics Reports
Last updated: Feb, 2024
Introduction
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.
Indian Fintech industry is estimated to be at US$ 150 billion by 2025. India has the 3rd largest FinTech ecosystem globally. India is one of the fastest-growing Fintech markets in the world. There are currently more than 2,000 DPIIT-recognized Financial Technology (FinTech) businesses in India, and this number is rapidly increasing.
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.
Market Size
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 October 2023, the total number of micro ATMs in India reached 15,30,287. Moreover, there are 1,25,969 on-site ATMs and Cash Recycling Machines (CRMs) and 93,771 off-site ATMs and CRMs.
Banks added 2,796 ATMs in the first four months of FY23, against 1,486 in FY22 and 2,815 in FY21. 100% of new bank account openings in rural India are being done digitally. BCG predicts that the proportion of digital payments will grow to 65% by 2026.
In 2023 (till December 1st, 2023), total assets in the public and private banking sectors were US$ 1688.15 billion and US$ 1017.26 billion, respectively. In 2023 (till December 1st, 2023), assets of public sector banks accounted for 58.32% of the total banking assets (including public, private sector and foreign banks).
Public sector banks accounted for over 57.48% of interest income in 2023 (till December 1st, 2023). The interest income of public banks reached US$ 102.51 billion in 2023 (till December 1st, 2023). In 2023 (till December 1st, 2023), interest income in the private banking sector reached US$ 70.07 billion.
India's digital lending market witnessed a growth of CAGR 39.5% over a span of 10 years. The Indian digital consumer lending market is projected to surpass US$ 720 billion by 2030, representing nearly 55% of the total US$ 1.3 trillion digital lending market opportunity in the country.
According to RBI’s Scheduled Banks’ Statement, deposits of all scheduled banks collectively surged by a whopping Rs.1.75 lakh crore (US$ 2,110.87 billion) as of December 1st, 2023.
According to the BCG Banking Sector Roundup Report of 9M FY23, credit growth is expected to hit 18.1% in 2022-23 which will be a double-digit growth in eight years.
Non-food bank credit registered a growth of 17.6% in November 2022 as compared with 7.1% a year ago on the back of robust credit demand from the segments such as services, industry, personal, and agriculture and allied activities, according to RBI’s statement on Sectoral Deployment of Bank Credit.
Investments/Developments
Key investments and developments in India’s banking industry include:
- In December 2023, ICICI Prudential Life Insurance and Ujjivan Small Finance Bank forged the Bancassurance Partnership.
- In October 2023, AU Small Finance Bank announced the acquisition of Fincare Small Finance Bank in an all-share deal and to merge it with itself.
- According to data released by the National Payments Corporation of India (NPCI), UPI transactions reached 10.241 billion until August 30th, 2023.
- In September 2023, Hitachi Payment Services launched India's first-ever UPI-ATM with NPCI.
- In September 2023, the Reserve Bank of India is likely to bring in CBDC in the call money market.
- In July 2023, Mahindra and Mahindra acquires minority stake in RBL Bank.
- In July 2023, State Bank of India to acquire 100% stake of SBI Capital in SBICAP Ventures for US$ 85.25 million (Rs. 708 crore).
- In June 2023, State Bank of India to acquire entire 20% stake of SBI Capital Markets in SBI Pension Funds.
- In April 2023, HDFC Bank to acquire 20% or more in Griha Pte subsidiary of HDFC Investments.
- M&A activity with an India angle hit a record US$ 171 billion in 2022.
- In April 2022, IDFC to sell Mutual Fund Business to Bandhan-Financial Holdings led Consortium for US$ 550.23 million (Rs. 4,500 crore).
- In March 2022, aggressive Axis Bank acquired Citi's India consumer business for US$ 1.6 billion.
- In December 2022, HDFC Bank to buy 7.75% stake in fintech start-up Mintoak.
- 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
- On 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
- Bank accounts opened under GoI Pradhan Mantri Jan Dhan Yojana have deposits of over ~US$ 25.13 billion in beneficiary accounts. 51.11 crore beneficiaries banked till December 15th, 2023.
- In September 2023, IREDA partners with banks to boost renewable energy projects in India.
- In March 2023, India Post Payments Bank (IPPB), in collaboration with Airtel, announced the launch of WhatsApp Banking Services for IPPB customers in Delhi.
- In October 2022, Prime Minister Mr. Narendra Modi inaugurated 75 Digital Banking Units (DBUs) across 75 districts in India.
- In Union Budget 2023, a national financial information registry would be constructed to serve as the central repository for financial and ancillary data.
- In Union Budget 2023, the KYC process will be streamlined by using a 'risk-based' strategy rather than a 'one size fits all' approach.
- National Asset reconstruction company (NARCL) will take over, 15 non-performing loans (NPLs) worth Rs. 50,000 crore (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 crore (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.
- The RBI has launched a pilot to digitalize KCC lending in a bid for efficiency, higher cost savings, and reduction of TAT. This is expected to transform the flow of credit in the rural economy.
- The RBI has launched a pilot to digitalize KCC lending in a bid for efficiency, higher cost savings, and reduction of TAT. This is expected to transform the flow of credit in the rural economy
- 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, higher cost savings, and reduction of TAT. 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.
Road Ahead
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 disbursem*nts. 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).
References:Media Reports, Press releases, Reserve Bank of India, Press Information Bureau, www.pmjdy.gov.in, Union Budget 2023-24, Economic Survey 2023-24
Note: Conversion rate used in November 2023, Rs. 1 = US$ 0.012, * - according to an FIS report, # - Microfinances Institution Network
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