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Indian Banking: A Promising Future

(Hong Kong, 28 September 2010)

Address

By

Mr. M V Nair

Chairman & Managing Director, Union Bank of India


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Indian Banking: A Promising Future

Ladies and Gentlemen,

1. I am honoured to address this august gathering. Around the world, finance is

one important common thread between the members of the Chamber of

commerce and representatives of the banks. I have, therefore, decided to

speak on the future of Indian Banking. The theme of my address is Indian

Banking: Preparing to deliver Decade's Promise.

2. In India there is a well diversified financial system which is dominated by

banking industry. Commercial Banks are the dominant players in this space.

As of December 2009, there were 169 scheduled commercial banks (SCBs)

in the country, with a network of 82,511 branches. This includes 27 public

sector banks, 31 private sector banks and 34 foreign banks operating through

branch route. 45 foreign banks are also operating in India through

representative offices. Deposit of SCBs as of March 26, 2010 was

Rs.4492825 crore while Bank Credit stood at Rs.3244788 crore.

Resilience during the Financial Crisis

3. It is interesting to note that when financial crisis hit the developed western

world in 2008 and the shock waves spread to most other countries, Indianbanking system could withstand the shocks and remain stable. Indian banks

have remained resilient even during the height of the subprime crisis and the

consequent financial turmoil. The financial reforms process undertaken since


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1991 has made the banking sector healthy, sound, well capitalized and

competitive.

4. The counter-cyclical macro prudential regulations have been in place evenbefore the crisis started, like risk weights, exposure & provisioning norms.

However, the global financial crisis was a testing time for the banking sector in

India. The direct effect of the crisis on Indian banks was almost negligible

because of limited exposure to complex derivatives. The fundamental

characteristics of Indian economy and also banking sector in India helped in

weathering the severe impact of world crisis.

5. The government and Reserve Bank have been taking counter-cyclical

measures even prior to the crisis, which proved beneficial. The government

announced the farm loan waiver in its budget of February 2008 and

implemented sixth pay commission award for central government employees

before crisis hit India. Also, its flagship schemes like Mahatma Gandhi

National Rural Employment Guarantee Scheme (MNREGS) and Jawaharlal

Nehru Urban Renewal Mission (JNNURM), which were started much prior to

the onset of crisis, helped generate demand during the period of crisis.

Besides, several fiscal measures were taken during the crisis to ameliorate

the demand deficiency. These measures, which formed around 3.3% & 3.9%

of GDP in 2008-08 and 2009-10 respectively, included cut in taxes, increased

public expenditure on subsidies and sector-specific stimulus measures.

Similarly, RBI, besides being ahead of curve in taking counter-cyclic

measures, also announced monetary steps for ensuring the availability of

credit to needy sectors at affordable rates in a comfortable liquidity

environment. Thus, pre-crisis counter-cyclical measures and co-ordinated

steps by the fiscal and monetary authorities during the period of crisis helped

India withstood the global crisis.


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Progress of Banks in India: At A Glance

6. The total assets size of Indian banking industry has increased more than five

times between March 2000 and March 2010, from US $ 250 billion to more

than $ 1.3 trillion, registering a CAGR growth of 18% compared to average

GDP growth of 7.2% during the same period. Consequently, the ratio of

commercial banking assets to GDP increased to nearly 100 per cent. The

business of banks to GDP ratio has almost doubled from 68% to 135%. The

growth has been profitable with improvement in efficiency and productivity.

7. The return on assets of scheduled commercial banks (SCBs) was 0.6% in

2000-01 and increased to 1.1% by 2009-10. Gross non-performing assets to

gross advances declined to 2.5% from 11.4%, reflecting improved asset

quality. The capital strength, as measured by the capital adequacy ratio, has

also improved from 11.4% in 2000-01 to 14.6% in 2009-10. Banks have

added more than 14000 branches and 41000 ATMs to their network in the last

decade, besides broadening the scope of delivery channels to internet

banking, mobile banking and call centre. Banks have rolled out technology to

the advantage of the customers. The growth of Indian banks in the last

decade was much higher than its preceding decade and there is no doubt that

the present decade would offer even more exciting opportunities.

Opportunities Ahead

8. The Indian Banking story is still unfolding along with Indias growth story.

Economic growth of India is likely to average at double-digit for the current

decade. The factors supporting this growth would also be the catalysts for the


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banking sector be it retail, corporate or rural banking. The biggest

advantage for Retail Banking will be Indias demographic profile with a

declining dependency ratio. There is a sizeable growth in urban middle class

and expected to continue at an accelerated pace in this decade. Around 70-75 million new middle income household may emerge by 2020. A McKinsey

study reports that by 2017, the average consumption in rural India will equal

that of urban India in 2005. Consequently, Indias labour force will grow at a

higher rate than population growth and hence the ratio of working age

population to total population will be on the upswing. The population will be

more urban, rich and educated. This will lead to increased flow of savings to

the banking system and a demand for retail and personal banking serviceslike housing loans, wealth management, insurance, asset management etc.

According to estimates put forth by Boston Consulting Group (BCG), Indias

mortgage loan and wealth management business will grow 10 times from now

till 2020.

9. Micro, small and medium enterprises (MSME) have played a very significant

role in India achieving its current robust overall economic growth. These

enterprises are future of any economy. SMEs also enhance inclusive growth

by the manner in which they evolve, leverage local resources and innovate to

create products and services. This sector accounts for 45 per cent of the

manufactured output, 8 per cent of the GDP, 40 per cent of all exports from

the country and employs nearly 65.9 million people which is next only to the

agriculture sector. The opportunity for banks lie in the fact that only 4-5% of

MSMEs are covered by institutional funding given that approximately 95% of

villages are not covered by banks.

10. Another significant opportunity for Indian banks is to partake in the

infrastructure investment. About US $ 1 trillion of investment in social and


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economic infrastructure is estimated in the country over next 5-7 years. In

todays scenario, 50% of funding to infrastructure sector is through banks.

11. There is yet another opportunity in largely unexplored but bankablepopulation of India. The report of National Sample Survey Organization of

India revealed that more than half of farmer households in the country do not

have access to credit, either from institutional or non-institutional sources.

Only 27% of total farm households are indebted to formal sources. Out of the

6,00,000 habitations in the country, only 30,000 have a commercial bank

branch. This requires deepening of banking markets. Financial inclusion is a

crucial driver for such growth. Thus, banks will have new class of customers

to serve over the next decade.

Thank you.

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