Banking Sector

Index
1. Industry Overview

2. Industry Drivers

3. Major Players: Comparative Analysis

4. Covid-19 and The World After

5. Monetary Policy Updates

6. Government Regulations

7. Valuation Methodology for Banks

8. Credit Risk Management for Banks

9. Fintech Sector Report

10. Glossary

2
 Banking Sector

Industry Overview
Indian banking industry in 1995 reveals a clear Exhibit 1: Structure of Indian Banking Industry
dominance of nationalized banks as the primary
financial services providers, with limited
participation from old private sector banks.
However, the landscape changed with the
emergence of private sector banks offering
improved services, leading to intensified
competition with PSBs. India's middle-income
economy, boasting a vast population and the
world's 5th largest GDP, heavily relies on its
banking sector to facilitate credit, investment, and
infrastructure development. The pivotal role of the
Reserve Bank of India (RBI) as the primary
regulator is instrumental in overseeing the diverse
network of banks and non-banking financial
companies (NBFCs)

Commercial bank acts as a financial intermediary,

bridging the gap between depositors and
borrowers. It accepts deposits from individuals and
businesses, creating credit by offering loans to
those in need. These vital functions facilitate
economic activity and investment. Alongside Small Finance Banks (SFBs) were introduced in
deposit acceptance and credit creation, commercial 2015 with a minimum paid-up voting equity capital of
banks offer treasury, payment services, investment Rs. 200 crore. They are required to maintain Cash
products, and advisory assistance. Their primary Reserve Ratio (CRR) and Statutory Liquidity Ratio
objective is to earn profits through interest on loans, (SLR) as mandated by the Reserve Bank of India
investments, and other revenue streams. Public (RBI). SFBs must extend 75% of their Adjusted Net
Sector Banks have the government as the majority Bank Credit (ANBC) to priority sectors and at least
owner, while Private Sector Banks are 50% of their loan portfolio should consist of loans up
predominantly owned by private entities. to Rs. 25 lakh. The main objective of SFBs is to
Commercial banks' role in mobilizing funds and promote financial inclusion by providing banking
providing financial services contributes significantly services to underserved and unbanked areas in India.
to economic growth and stability. Examples of SFBs in India include AU Small Finance
Bank and Utkarsh Small Finance Bank
Regional Rural Banks (RRBs) were established in
India in 1975 to provide banking services to rural Primary Credit Societies (PCS) are local
areas and promote rural development. They cooperative societies formed by a group of individuals
operate at the regional level and are jointly owned residing in a specific locality. These societies consist
by the Central Government, State Government, and of both borrowers and non-borrowers who are
a sponsoring bank. interested in each other's business affairs A
payments bank operates on a smaller or restricted
Co-operative banks are small-sized financial scale compared to traditional banks. It does not take
entities where members are both owners and credit risks and is limited in its banking operations – it
customers. They operate under the principles of cannot provide loans or issue credit cards. Payments
cooperation, with open membership, democratic banks can accept demand deposits (savings and
decision-making, and mutual help. Unlike current accounts) but not time deposits. Additionally,
commercial banks, co-operative banks lack a profit they are prohibited from setting up subsidiaries for
motive. They are regulated by the Reserve Bank of non-banking financial services activities
India and registered under the States Cooperative
Societies Ac

2
 Banking Sector

MACRO OUTLOOK

India’s GDP grew at 7.2% in FY23 and is forecasted Credit grew by 15.6% YoY in May 2023 compared
to grow between 5.3% to 6.5% in FY24. Most rating to 12.7% last year. Exhibit 1 shows the year-on-year
agencies have revised the GDP forecast upwards growth in credit provided to major sectors. Retail
which is a positive sign for strong economic growth. credit has seen a significant increase owing to
Key BFSI indicators grew at a healthy rate. The value increased demand for housing and vehicle loans.
and volume of transaction conducted through UPI Agricultural credit gained momentum because the
grew 47% and 65% respectively YoY in March 2023. Government provided credit at lower than market
Assets under management in Mutual funds have rates and its higher target of providing credit to this
increased 5% YoY in March 2023, displaying sector. Industrial credit, which has seen a decline,
sustained investor confidence. The deposits and was supported by benefits from Emergency Credit
credit grew by 10.3% and 15.4% YoY in March 2023. Line Guarantee Scheme (ECLGS) and production-
However, insurance premium collection dropped 6% linked incentive scheme (PLI). Services sector
YoY in March 2023, largely driven by drop in life witnessed credit growth due to recovery in credit
insurance collection. This impact can be attributed to given to NBFCs, commercial real estate and trade
the removal of tax exemption for ULIPs on premiums sectors.
exceeding ₹ 2,50,000 in the FY23 budget. Taxation
As per the Consumer Confidence Survey conducted
on maturity for life insurance policies having an
by the Reserve Bank of India (RBI), consumers hold
annual premium more than ₹ 5,00,000 proposed in
a positive outlook regarding the current economic
the FY24 budget is likely to further reduce premium
situation and household income. Moreover, they
collection.
express optimism about the future, suggesting that
DEPOSIT GROWTH households are likely to increase their discretionary
spending. This positive sentiment is expected to
Deposits grew by 10.3% YoY in March 2023 contribute to double-digit growth in the credit card
compared to 8.9% last year. The rise in interest rates and housing segments. Additionally, the industry
coupled with the withdrawal of indexation benefits in credit, with a credit share of over 25%, is projected
the amended Finance Act 2023 has made term to grow significantly, supported by increased
deposits more attractive relative to debt mutual government spending on capital expenditure. As a
funds, resulting in increased inflows to deposits. The result, overall credit expansion is anticipated to be
decision of RBI to withdraw ₹2000 notes from considerable. LKP Securities estimates credit
circulation is also expected to increase deposits. growth to reach approximately 15% for FY24.
However, the deposit growth lags behind the credit
growth rate which can be attributed to two main Exhibit 2: Sectoral Deployment of Bank Credit YoY
reasons. First, the increasing interest of households
in equities and mutual funds as a result of increased
risk appetite and rise in financial literacy. Second, the
post-tax returns of fixed deposits are not lucrative,
often being less than the rate of inflation.
The faster expansion of credit compared to deposit
has resulted in an increase of CDR and could impede
bank’s ability to provide credit. Consequently, banks
may have to increase interest rates to attract new
deposits, which will have a negative impact on NIM.

CREDIT GROWTH
11.7%
16.0%

12.7%
21.4%

16.3%
19.2%

12.7%
15.6%
8.8%
6.0%

Credit is broadly classified into Food Credit and Non-

Food Credit in India. Food credit refers to the loan Agriculture Industry Services Loans Overall
given to Food Corporation of India to procure food (Retail)
grains. The remaining credit is classified as Non-food 2022 2023
credit and constitutes bulk of the credit share. Source: RBI, July 2023

3
 Banking Sector

NIM OUTLOOK Exhibit 3: Industry Loan Split

NIM is the ratio of Net Interest Income to Average

2% 2%
Invested Assets. It is the difference between
interest

income earned and interest paid to deposit,

30%
expressed as a percentage of assets. It is used to
measure the profitability of a bank. 34%
In FY23, the industry average NIM grew by 3.2%
despite the repo rates being hiked by 250 bps. This
is because 70% of the industry loans are floating
based. Floating interest rate means the interest rate
charged on the loan is pegged to a benchmark rate
such as the repo rate and is subject to periodic 32%

revision by the bank. MCLR and EBLR are the 2

major methods of determining floating rates and is
applicable to 94% of all floating loans (Exhibit 2). Fixed Floating - MCLR
Floating - EBLR Floating - Base Rate
Marginal Cost of Funds-based Lending Rate Floating - Other
(MCLR), is the minimum rate at which a bank can
Source: BCG
lend money. Its calculation takes into account four
key factors: tenor premium, marginal cost of funds, interest rates. This means that the interest rates on
negative carry on the CRR and operating costs. these loans can adjust with changes in the overall
External Benchmark Lending Rate (EBLR), where interest rate environment. On the other hand,
banks link the interest rates to an external investments, which are more susceptible to interest
benchmark such as RBI's Repo Rate, the rate risk, form a smaller portion (around 26%) of
Government of India's 3-month or 6-month the assets in the banking system. Additionally, on
Treasury Bill yields. It is reset at least once every 3 the liabilities side, the bulk of the funding comes
months, thereby passing the change in external from deposits, which are typically fixed-rate and
rates quickly to the borrower. have an average maturity of 1-3 years. This means
that the cost of funding for banks remains relatively
Approximately 48% of floating loans are EBLR,
stable even if interest rates fluctuate.
therefore the increase in interest rates was quickly
passed on to the borrower. At the same time the Higher systemic interest rates: Historically, the
lag in interest hike on deposits increased the benchmark interest rates (e.g., repo rate) in India
spread, having a positive impact on NIM. have been higher compared to some other
countries like the US. When interest rates are
In FY24, the NIM is expected to stay flat as the
generally higher, the sensitivity of the investment
spread between lending and deposit rates narrow.
portfolio to mark-to-market (MTM) losses is lower.
The increased interest towards term deposits and
In other words, the potential losses on the
consequent reduction in current / savings account
investment portfolio due to interest rate changes
balances will reduce CASA, adding to the
are relatively smaller when rates are already
downward pressure on NIM.
higher.
RESILIENCE OF INDIAN BANKING SECTOR Prudent regulations on investment portfolio:
AMID GLOBAL BANKING TURMOIL RBI has set regulations on the investment portfolio
of banks. It allows banks to hold a limited portion
The resilience of Indian banks can be attributed to (up to 23%) of their net demand and time liabilities
the following reasons: (NDTL) under the held-to-maturity (HTM) bucket.
Balance sheet construct: The composition of Investments classified under the HTM category are
assets and liabilities on the balance sheet of Indian not subject to interest rate risk because they are
banks contributes to their insulation from interest carried at their original acquisition cost, and any
rate risk. The majority of the assets (approximately mark-to-market fluctuations do not impact the
56%) are loans, which are often tied to floating bank's profit and loss statement.

4
 Banking Sector

MAJOR PLAYERS: COMPARITIVE ANALYSIS -BANKING

Exhibit 4: SBI yet again topped the charts in the banking sector showing robust growth in the year. It is over 2
times larger than the second in line, the largest private bank HDFC who showed commendable growth in it’s own
right. Overall, all major banks recorded increases in deposits and advances owing to improvements in banking
systems due to AI advancements in the sector.

45,00,000

40,00,000

35,00,000

30,00,000

25,00,000
In Rs. Cr

20,00,000

15,00,000

10,00,000

5,00,000

0
SBI HDFCB ICICI Axis Kotak IndusInd Bandhan RBL
Total Deposits 44,23,778 18,83,395 11,80,841 9,46,945 3,61,273 3,36,438 1,08,069 84,886
Total Advances 32,69,242 16,00,586 10,19,638 8,45,303 3,59,107 2,89,924 1,09,122 70,209

Source: Company Total Deposits Total Advances

Exhibit 5: SBI’s ROE catapulted to the top of the banking sector due to exceptional profit in the year. Other banks
maintained their levels showing normal growth levels. Bandhan bank leads the NIM frontier as it is the largest
microfinance institution in the country since 2015. Margins are higher here because of high risks involved. This
level of margin is not seen in commercial banking.

25 8

7
20
6

5
15

4
ROE (%)

NIM (%)

10
3

2
5
1

0 0
SBI HDFCB ICICI Axis Kotak IndusInd Bandhan RBL
ROE 19.43 17.4 15.89 18.84 14.36 13.52 11.8 6.5
NIM 3.37 4.1 3.92 4.02 5.4 3.84 7.21 3.84

ROE NIM
Source: Company

5
 Banking Sector

MAJOR PLAYERS: COMPARITIVE ANALYSIS -BANKING

Exhibit 6: The downside of high margins in microfinance for Bandhan bank is the high NPA the bank has to face.
These NPA levels are also not common in commercial banking. SBI was able to curtail it’s NPA from previous levels
due to rigid overseas credit monitoring. HDFC, the second largest bank maintains exceptionally low levels of NPA
due to high customer engagement and therefore is able to pick early signals of default.

4.5
3.9
4
3.37
3.5

3 2.81

2.5 2.35

1.98
(%)

2 1.8

1.44
1.5
1.1 1.12
1
1 0.87
0.59 0.49
0.48 0.4
0.5 0.27

0
Bandhan RBL ICICI SBI IndusInd Kotak Axis HDFCB
GNPA 3.9 3.37 2.81 2.35 1.98 1.8 1.44 1.12
NNPA 1 1.1 0.48 0.87 0.59 0.4 0.49 0.27

GNPA NNPA
Source: Company

Exhibit 7: Bandhan Bank’s operating segment forces it to maintain high capital levels as compared to other
banks. In the commercial segment, Kotak is known to maintain a large capital which is somewhat prudent but
makes it miss on investment opportunities as money is tied up. SBI has maintained a low capital level as it keeps
a more liquid base to finance small expansion projects.

25
21.8
20.6
19.3 19.76
20 18.34 18.7
17.6 17.64 17.86
16.4 16.92
15.96
15.25
(%)

14.68
15 14.02

10.27
10

0
SBI HDFCB ICICI Axis Kotak IndusInd Bandhan RBL
CET 10.27 16.4 18.34 14.02 20.6 15.96 18.7 15.25
CAR T1 14.68 19.3 17.6 17.64 21.8 17.86 19.76 16.92

CET CAR T1
Source: Company

6
 Banking Sector

COVID-19 AND THE WORLD AFTER

The Black Swan events
The Indian economy however, displayed resilience
The COVID-19 pandemic put economies around during this period. The fiscal and monetary policy
the world under tremendous stress. Production measures helped maintain the growth rates while
closures, commodity shortages, supply chain keeping the inflation within reasonable levels. This
disruptions and numerous other issues plagued resilience was reflected in the banking sector as well,
the economy, the effects of which were felt deeply with credit growth reaching a 11-year high. There has
by the banking sector. Credit growth dropped to been a significant decline in Gross Non-Performing
5.3% in FY21 with a reduction in corporate loans Assets (GNPA) and credit cost and an increase in Net
as capex plans were put on hold. By March 2021, Interest margin (NIM) raising the overall profitability of
7.48% of loans given by Indian banks were banks
declared as NPA’s. There were fears of increased Exhibit 9: Net Interest Margin (%)
delinquency and slippages due to cash crunch
faced by companies raising the credit risk. 3.4
3.2
H1FY22 though initially marred by second wave of 3.2
COVID-19, saw economic activity picking up pace
3 2.9 2.9
towards the end, with GDP growth projections of 2.8
9.5% for Q2FY22 given by IMF. GST collections 2.8 2.7
as well as jobs provided under MGNREGA
scheme saw an uptick. Rail freight and E-way 2.6
bills, steel, passenger vehicles and may other 2.4
sectors saw substantial growth during this period. FY19 FY20 FY21 FY22 FY23
Source: BCG sectoral Report
The momentum from H1FY22 was carried forward
in H2FY22 as well however, towards the end in Exhibit 10: Return on Assets(%)
February, another disruption shook economies
world over once again – the Russia Ukraine War. 1.5
Both Russia and Ukraine are major commodity
1.1
producers and the disruption of supply resulted in
1 0.8
a steep rise in prices of various commodities,
0.6
especially oil and natural gas. The accommodative
0.5
monetary policy adopted by US Federal Reserve,
European Central Bank and various other central -0.03 0
banks combined with rising global prices gave a
0
boost to the already rising inflation. FY19 FY20 FY21 FY22 FY23
-0.5
Exhibit 8: India Inflation Rate (%) Source: BCG sectoral Report

8 Exhibit 11: GNPA(%)

7 6.67
6.18 10
6 5.51
8 9.2
5 4.76 8.5
4 3.6 6 7.4
3.43
3 5.9
4
2 3.9
2
1
0 0
2017 2018 2019 2020 2021 2022 FY19 FY20 FY21 FY22 FY23
Source: Statista Source: BCG sectoral Report

7
 Banking Sector

MONETARY POLICY UPDATE: 2023

RBI Rate Change
Impact on new borrowers
The Consumer Price Index (CPI), which is a
The increase in Repo rate will result in increased
measure of inflation in India, reached a peak of
interest costs for banks which will be passed on to
7.79% in May 2022 fueled by a rise in commodity
borrowers in the form on higher interest rates on
prices due to the Russia Ukraine war. In response
loans. The impact on credit growth will however
to the rising inflation, RBI changed its monetary
vary depending on sector and various other
policy stance from accommodation to withdrawal
factors as well. Despite the increase in interest
with a view to keep inflation within the target range
rates, credit growth hit an 11 year high in FY23.
(2-6%) while also supporting growth.
This growth was primarily led by increase in
The shift in RBI’s stance was visible in the unsecured loans, housing loans, auto loans, etc.
subsequent rate hikes implemented with the last Apart from that, increased working capital
rate hike being of 25 bps in February 2023 bringing requirements in certain industries and declining
the Repo rate to 6.5% compared to 4% in February value of Indian Rupee have also affected credit
2022. The Cash Reserve Ratio (CRR) was raised growth
by 50 bps to 4.5% in May 2022, further raising
interest rates. The Standing Deposit Facility (SDF) Exhibit 13: Credit growth rate (%)
rate stands at 6.25% while the Marginal Standing
20 18.2
facility (MSF) and Bank Rate are at 6.75%.

15
Exhibit 12: Repo Rate (%) 13
10.4
7% 10
6.5 6.5 6.5 7.5
6.25 6.2
5.9
6% 5 3.2
5.4 5.3

5% 4.9 0
4.4 FY17 FY18 FY19 FY20 FY21 FY22 FY23
4 4.4
4% Source: RBI, BCG Sectoral Report

Impact on stock market

3%
Jul-22
Jun-22

Jan-23

Jun-23
Aug-22
Sep-22
Feb-22
Mar-22
Apr-22

Oct-22
Nov-22
Dec-22

Feb-23
Mar-23
Apr-23
May-23
May-22

The increase in repo rate will result in increased

interest payments and will adversely affect the
financial condition of companies with high levels of
Source: RBI
debt consequently impacting their stock prices.
Impact on existing borrowers The banking sector on the other hand, benefits
from rising interest rates in the form of expanding
Fixed rate loans will have no impact due to the rate margins, increasing profitability however may face
hike however, floating rate loans (~70% of industry problems of rising NPA’s.
loans) will be adversely affected. As per RBI‘s
mandate, floating rate loans taken post October 1, The increase in repo rates also reduces liquidity in
2019 are linked to an external benchmark. Most the market which negatively impacts the stock
banks have repo rate as their external benchmark market. The Indian stock market however, has
and a hike in repo rate will result in an increase in been able to achieve new highs amid rising
EMI payments. This increase in EMI payments will interest rates on the back on increased FII
significantly impact loans with big ticket size such as investments, relatively low levels on inflation and
home loans. strong GDP growth projections.

8
 Banking Sector

GOVERNMENT REGULATIONS IN THE BANKING SECTOR

The financial sector of India undergoes regulation at instruments that lack redemption options solely at
several levels and has independent bodies pertaining the holder's discretion. On the other hand,
to different sections such as insurance, pension funds, Supplementary bank capital, classified as Tier 2
commodity market etc. In order to ensure proper work capital, encompasses revaluation reserves,
is being done, government plays a major in influencing undisclosed reserves, hybrid instruments, and
the regulatory framework and policies of various such subordinated term debt. The components of Tier 2
institutions. Capital can be categorized into two tiers: upper and
lower. Upper Tier 2 capital is characterized by
The banking system in India is regulated by the perpetuity, seniority to preferred capital and equity,
Reserve Bank of India (RBI). Major statues that affect deferrable and cumulative coupons, and notability of
the banking industry are: interest and principal payments. Conversely, Lower
• Reserve Bank of India Act, 1934 - Established to Tier 2 capital proves relatively more economical for
set out functions of RBI. It empowers RBI to issue banks to issue, featuring coupons that cannot be
rules, regulations, guidelines, directions on issues deferred without triggering a default, and
relating to banking and financial sector. incorporating subordinated debt with a minimum
maturity of ten years.
• The Banking Regulation Act, 1949 - Provides
framework for the supervision and regulation of all Basel I
banks. It gives RBI power to grant licenses to banks The initial iteration of the Basel Accord, known as
and regulate their operations Basel I, was introduced in 1988 with its primary
• Foreign Exchange Management Act, 1999 - FEMA focus on credit risk. Banks were mandated to
act predominantly regulates cross border transaction in maintain a Capital Adequacy Ratio (CAR) of 8%,
India and related activities FEMA and rules made with at least 50% of it in the form of Tier 1 capital.
under it are administered by RBI The riskiness of assets was determined through risk
weights, ranging from 0% to 100%, assigned based
In 2020, Finance Minister Nirmala Sitaraman with an on their perceived level of risk. However, only credit
aim to broaden the scope of regulations, introduced a risk was considered in the calculation of these risk
bill to amend The Banking Regulation Act, 1949. The weights, and asset classes such as equities and
bill attempts to cover cooperative banks under the commodities were not encompassed in the
regulation by RBI. It extends to 1,482 urban and 58 framework. Furthermore, Basel I solely applied to
multi-state cooperative banks. The amendment allows internationally active banks, excluding domestic
the RBI to reconstruct or merge banks without banks from its scope. Off-balance sheet items were
moratoriums. not accounted for, and the creditworthiness of
borrowers was not taken into consideration under
Basel Regulations
this accord. As a result, Basel I had certain
The Basel Norms, commonly referred to as the Basel limitations and scope constraints that led to the
Accords, constitute a comprehensive framework of development of subsequent Basel Accords to
international banking regulations aimed at establishing address these shortcomings and provide a more
a robust system for the oversight, control, and risk comprehensive and refined regulatory framework for
management of banking institutions. These norms global banking supervision.
were formulated and adopted by the Basel Committee
Basel II
on Banking Supervision, a consortium of central
bankers and bank supervisors representing diverse Basel II, introduced in 2004, introduced sophisticated
regions worldwide. The inception of these accords can risk assessment methods as well as broadening the
be traced back to the global financial upheavals scope of regulation to include operational risk. It
experienced during the 1980s and 1990s. Primarily gave autonomy to banks to use internal risk models
focused on mitigating credit risk, the committee to assess their capital requirements.
prescribed minimum capital requirements for financial
entities. Within the context of Tier I capital, core capital Capital Adequacy Requirements:
assumes significance, encompassing equity capital Basel II mandated banks to maintain 8% of their risk
and disclosed reserves. Equity capital comprises assets as minimum capital adequacy requirement.

9
 Banking Sector

Basel III
• Any surplus Additional Tier 1 (AT1) and Tier 2 (T2)
1. Tier 1 Capital (going-concern capital) capital will be considered in proportion to the
minimum capital requirements. This implies that to
a. Common Equity Tier 1 consider excess AT1 and T2 capital, the bank must
b. Additional Tier 1 have surplus CET1 beyond 8% (5.5% + 2.5%).

2. Tier 2 Capital (gone-concern capital) • In case of non-compliance of minimum

requirements of CET 1 and CCB, surplus CET 1
Limits and Minima and/or Tier 2 cannot be used for computation and
reporting of Tier 1 or total capital.
• As a prudent measure, it was determined that
scheduled commercial banks operating in India must • In determining exposure limits to capital funds, the
maintain a minimum total capital (MTC) equivalent to term capital funds should exclude CCB but can
11.5% of total risk-weighted assets (RWAs), in contrast include Additional Tier 1 and Tier 2 capital
to the MTC requirement of 10.5% of RWAs set forth in corresponding to the CET 1
Basel III which is the global standard
• In June 2023, the RBI issued a directive replacing
• Surplus Additional Tier 1 capital can be used to meet all existing methods such as Basic Indicator
minimum CRAR criteria of 9% of RWAs provided that Approach, The Standardized Approach etc. for
the bank adheres to the minimum CET 1 and Tier 1 calculating minimum operational risk capital
capital ratios requirements with the new standardized approach,
namely, Basel III.
Exhibit 14: Basel III Norms

Basel III Norms in

Description
India

Tier 1 Capital: 7% of RWA

Common Equity Tier 1 5.5% of RWA (4.5% Globally)
Additional Tier 1 1.5% of RWA

Minimum Capital Tier 2 Capital 2% of RWA

Requirements

Countercyclical Buffer 2.5% of RWA

Total Minimum Capital Requirement 11.5% of RWA (10.5% Globally)

RBI introduced a countercyclical buffer (CCB) for Indian banks, which ranges
from 0% to 2.5% of risk-weighted assets depending on the macroeconomic
Countercyclical Buffer conditions. The CCB is designed to build up during good times and be used
during bad times to ensure that banks can continue to lend and support economic
growth
In order for banks to meet their short term liquidity needs, RBI introduced LCR
Liquidity Coverage which require the banks to hold a minimum amount of high-quality liquid assets
Ratio (LCR) (HQLA). The RBI introduced in a phased manner. The minimum requirement was
60% in 2015 and later increased to 100% by January 2019
RBI introduced a leverage ratio requirement for Indian banks, which measures a
Leverage Ratio bank’s Tier 1 capital against its total exposures. The minimum requirement was
set at 4.5%, with a buffer of 2.5%
RBI introduced a number of disclosure requirements for Indian banks, including
Disclosure regular reporting of their capital adequacy, liquidity position, and risk
Requirements management practices. This information is made available to the public to
promote transparency and market discipline

10
 Banking Sector

Minimum Capital Requirements for Operational 2% of the loan amount for standard assets, based on
Risk the category of assets, such as loans to Small and
Medium-sized Enterprises (SMEs), real estate, and
The Reserve Bank of India, having determined that housing loans. The upper layer of NBFCs will consist
such action is essential and beneficial for the public of the top ten eligible NBFCs, as identified by the
welfare, mandates Commercial Banks to maintain an RBI, which necessitate augmented regulatory
appropriate level of regulatory capital to cover potential requirements. This measure is widely perceived as
losses from operational risk. In June 2023, the RBI an endeavor to subject finance companies to
issued a directive replacing all existing methods (Basic regulatory norms akin to those applicable to banks. A
Indicator Approach, The Standardized standard asset is defined as one that exhibits no
Approach/Alternative Standardized Approach, and discernible problems and carries no more than the
Advanced Measurement Approach) for calculating normal level of risk associated with the business. In
minimum operational risk capital requirements with the line with the RBI's provisioning rules, banks are
new standardized approach, namely, Basel III. obligated to reserve a minimum percentage of funds
Digital Lending Norms to cover projected losses arising from lending
activities. For individual housing loans and loans
In order to curb the imposition of exorbitant interest extended to small and micro enterprises, NBFCs
rates and safeguard the interests of customers from must set aside 0.25% of the funded amount as
unethical loan recovery practices, the Reserve Bank of provisions. In the case of teaser rate home loans,
India (RBI) has implemented more stringent NBFCs are required to reserve 2% of the initial
regulations pertaining to digital lending. According to amount and 0.4% annually after the rate is reset.
the new guidelines, all loan disbursements and Moreover, provisions of 0.75% and 1% must be
repayments must be conducted exclusively between made for commercial real estate in residential
the borrower's bank account and regulated entities, housing projects and other commercial real estate
such as banks and Non-Banking Financial Companies loans, respectively. The category of other standard
(NBFCs), without involving any pass-through or pool loans, including those for medium enterprises,
accounts of the lending service providers (LSPs). necessitates a provision of 0.4%.
Furthermore, any fees or charges associated with the
credit intermediation process must be directly paid to Exposure Limits
the LSPs by the regulated entities, and not by the According to the prescribed guidelines, the upper
borrower. By introducing these measures, the RBI has limit on lending to a single borrower is limited to 15%
established a well-thought-out framework that fosters of the bank's total capital funds, which includes tier 1
responsible and sustainable growth within the digital and tier 2 capital. However, this limit can be
lending ecosystem. The digital lending industry, increased to 20% for projects related to
spearheaded by app-based credit providers, has infrastructure. For group borrowers, the maximum
warmly received these new regulations from the RBI, lending limit is set at 30% of the bank's capital funds,
as they are expected to facilitate the sector's which can be extended to 40% for infrastructure
expansion and foster a heightened sense of projects. Moreover, upon obtaining approval from the
responsibility among its participants. bank's board of directors, these lending limits can be
Bank-like regulation for NBFCs further augmented by an additional 5%. It is essential
to recognize that lending encompasses both fund-
The central bank is pursuing a more stringent based and non-fund-based exposures.
regulatory approach towards Non-Banking Financial
Companies (NBFCs), particularly in the wake of the Cash Reserve Ratio (CSR)
systemic risks exposed by the Infrastructure Leasing & In India, banks are obligated to maintain a minimum
Financial Services and Dewan Housing Finance of 4% of their net demand and time liabilities (NDTL)
Corporation crises. Given the increasing significance of in the form of cash reserves with the Reserve Bank
NBFCs in India's financial system, the Reserve Bank of of India (RBI). This reserve requirement is known as
India (RBI) has opted to exercise greater oversight the Cash Reserve Ratio (CRR) and currently does
over these shadow lenders. To this end, the RBI has not yield any interest. The CRR must be upheld on a
stipulated that large or upper layer NBFCs will be fortnightly basis, with daily maintenance reaching at
required to allocate provisions ranging from 0.25% to least 95% of the required reserves. Failure to meet
the
11
 Banking Sector

daily maintenance requirement results in a penalty of to determine net NPAs. Additionally, beyond the
3% above the bank rate, calculated based on the standard requirements, banks are obligated to carry
number of default days multiplied by the shortfall out additional provisioning for loans extended to
amount. companies exposed to unhedged foreign exchange
risks, necessitating a 100% provisioning coverage.
Statutory Liquidity Ratio (SLR)
Special Mention Accounts
In addition to the Cash Reserve Ratio (CRR), banks
are required to maintain a portion of their Net Demand Special mention accounts (SMAs) are those assets
and Time Liabilities (NDTL), ranging from 22% to 40%, that are indicating signs of stress and have a
as Statutory Liquidity Ratio (SLR) in the form of gold, possibility of becoming NPAs. Early recognition of
cash, or specific approved securities. The surplus SLR SMAs can help banks to take precautionary
holdings can be utilized for overnight borrowing measures thereby avoiding big losses. As per the
through the Marginal Standing Facility (MSF) from the stressed asset framework, commercial banks shall
RBI. The MSF interest rate is set 100 basis points report credit information, including classification of an
higher than the repo rate, and the borrowing limit is account as SMA to Central Repository of Information
restricted to 2% of NDTL. on Large Credits (CRILC), on all borrowers having
aggregate exposure of Rs 5 crore or more is
Provisioning recorded with. No provisioning is done for such
Provisioning, within the domain of banking, involves accounts. RBI classifies SMAs based on outstanding
the allocation of a specific amount of funds as a interest payments for less than 90 days.
precautionary measure to mitigate potential future Licensing Norms
uncertainties. This practice is of paramount importance
for banks to safeguard themselves against the potential The new guidelines prescribe that entities seeking a
impacts of Non-Performing Assets (NPAs). Non- banking license must demonstrate a proven track
performing assets are categorized into three distinct record spanning at least 10 years. Moreover, the
types: substandard, doubtful, and loss. An asset is bank's operations should be carried out through a
classified as non-performing if there have been no wholly-owned Non-Operative Financial Holding
interest or principal payments for a period exceeding Company (NOFHC) entirely owned by the
90 days in the case of a term loan. Substandard assets promoters. This measure is aimed at enhancing
are those that have been identified as NPAs for less governance and creating a ring-fenced structure for
than a year, while assets designated as NPAs for more the financial services business, necessitating new
than a year are termed as doubtful assets. Notably, banks to be established solely through a wholly-
provisioning is also mandated for standard assets. For owned NOFHC. The minimum capital requirement
agriculture and small and medium enterprises, the for these banks is set at INR 500 crores, with the
prescribed provisioning rate stands at 0.25%, while for promoter NOFHC obligated to hold no less than 40%
commercial real estate, it is set at 1% (0.75% for of the capital, subject to a 5-year lock-in period.
housing), and for other sectors, it is established at Gradually, there is a planned reduction in the
0.4%. It is crucial to emphasize that provisioning for shareholding of the promoter NOFHC to limit it to
standard assets cannot be deducted from gross NPAs 40% during the initial 5-year period, eventually
scaling down to 15% within 12 years. Foreign
Exhibit 15: Provisioning norms for NPAs
shareholding in the new banks is capped at 49%
Substandard NPAs during the first 5 years, and to strengthen corporate
governance, the Board of these banks must
Secured 15% comprise a minimum of 50% independent directors.
Unsecured 25% Additionally, the new guidelines allow existing Non-
Banking Financial Companies (NBFCs) the option to
Doubtful NPAs either promote a new bank or convert themselves
Secured : into a bank, providing flexibility for entry into the
Outstanding <1 year 25% banking sector. These measures aim to ensure a
Outstanding 1-3 years 40% well-regulated and transparent approach to
Outstanding > 3 years 100% establishing new banks while promoting stability,
independence, and effective governance within the
Unsecured 100% sector.
12
 Banking Sector

Willful Defaulter

A willful default occurs when a borrower intentionally are backed by political parties, the reliability of boards
fails to repay a loan despite possessing adequate to decide on this is questionable.
resources, or misuses the borrowed funds for Priority Sector Lending
unauthorized purposes, or sells a property secured
for a loan without the bank's consent. In situations Proposed by the former Finance Minister Morarji
where a company within a group defaults and the Desai in 1966, the Reserve Bank of India (RBI)
other group entities providing guarantees fail to fulfill implemented priority sector lending (PSL) norms for
their obligations, the entire group can be classified as banks in 1972 with the primary objective of enhancing
a willful defaulter. Recently, the RBI revised the credit access and fostering development among
regulations to encompass non-group companies economically weaker segments of society. In addition
under the willful defaulter category as well if they fail to ensuring credit provision, these norms prescribe
to honor a guarantee provided to another company that banks must verify that loans extended under PSL
outside the group. are utilized for approved purposes, and continuous
monitoring of the end use is maintained. If a bank
RBI initially stated that borrowers who have fails to meet the prescribed PSL targets, it is
committed frauds/malfeasance/willful default will obligated to deposit the allocated amount to the Rural
remain ineligible for restructuring. However, in June Infrastructure Development Fund (RIDF)
2023, RBI was accused of helping defaulter based on administered by the National Bank for Agriculture and
their notification which stated that proposals for Rural Development, as per the directives of RBI. The
compromise settlements in respect of debtors government is considering restructuring the priority
classified as fraud or willful defaulter shall require sector lending (PSL) scheme to allow deposits made
approval of the Board in all cases. This can have a by banks in the Rural Infrastructure Development
serious impact on the banking system. It is the Fund (RIDF) and such other funds to qualify as
depositors from the middle class whose deposits will exposure under PSL. The proposed changes are
be used for writing off loans with a small recovery. expected to provide banks additional flexibility in
Since 2014, the government has not appointed officer meeting sector-specific PSL targets and free up
directors and employee directors to the boards of capital for extending credit to industrially vibrant
public banks coupled with the allegation that boards sectors, fostering economic growth.
Exhibit 16: Priority Sector Lending norms

Domestic
Commercial and Foreign Banks with Regional Rural
Categories Small Finance Banks
Foreign Banks with <20 branches Banks
>20 branches
75% of ANBC or
18% of ANBC or
40% of Adjusted Net CEOBE, whichever is
CEOBE, whichever is
Bank Credit (ANBC) or higher out of which
higher out of which 75% of ANBC or
Total Priority Credit Exposure of off- max 15% can be to
max 32% can be to CEOBE, whichever is
Sector Balance Sheet medium enterprises,
exports and min 8% to higher
Exposure (CEOBE), social infrastructure
any other priority
whichever is higher and renewable energy
sector
18% of ANBC or 18% of ANBC or 18% of ANBC or
CEOBE, whichever is CEOBE, whichever is CEOBE, whichever is
Agriculture higher out of which NA higher out of which higher out of which
10% is for small and 10% is for small and 10% is for small and
marginal farmers marginal farmers marginal farmers
7.5% of ANBC or 7.5% of ANBC or 7.5% of ANBC or
Micro
CEOBE, whichever is NA CEOBE, whichever is CEOBE, whichever is
Enterprises
higher higher higher
12% of ANBC or 15% of ANBC or 12% of ANBC or
Weaker
CEOBE, whichever is NA CEOBE, whichever is CEOBE, whichever is
Sections
higher higher higher

13
 Banking Sector

VALUATION IN THE BANKING SECTOR

Companies are valued using 3 basic models. The Multiples are classified into 2 broad categories,
discounted cash flow model, dividend discount equity multiples and enterprise value multiples.
model and the relative valuation model. The
problem with banking sector is that DCF and DDM Equity Multiples are commonly used to assess small
can not be applied easily. Here is why. stakes in companies. The most popular multiples
are
DISCOUNTED CASH FLOW 1) P/E ratio: P/E or price to earnings ratio is
DCF model involves forecasting the firms expected calculated by dividing the price of the share by
“free cash flows” and then discounting them to the the EPS. This gives an investor insights into the
present value. This when added to the discounted stock being overvalued or undervalued. To
terminal value will be the value of the firm. This come up with the intrinsic price of a share, an
method is not applicable to banks as their free cash investor can multiply the industry P/E ratio with
flows are difficult to estimate due to different the company’s EPS.
regulations that banks have to follow and that their
adjustments to working capital often exceeds their 2) P/B ratio: P/B or price to book ratio is calculated
net profits. Therefore free cash flows for the years by dividing the market price of a share to it’s book
can vary massively leading to inaccurate valuations. value. It is used like P/E ratio but the difference is
The mechanism for capitalizing expenses also that how much additional premium investors pay
varies from other industries. over the book value of company’s assets to hold a
share. This can help gain insights into share being
DIVIDEND DISCOUNT MODEL overvalued or undervalued.
DDM on paper sounds fairly easy. Estimate the
growth rate in dividends. Use this to forecast next Enterprise multiples use the ratio of enterprise value
years dividend and divide this by the difference in to several figures to estimate share value. For these
cost of equity and growth rate. Cost of equity can be purposes, enterprise value is calculated as Market
determined using the Capital Asset Pricing Model capitalization + total debt – cash and cash
and this is the minimum return shareholders expect equivalents.
to remain profitable. Growth rate is subtracted
because cash is needed for growth and that EV/EBITDA estimates how many timed EBITDA has
particular amount has to be set aside and can not to be paid to buy out the business. It is easy to
be distributed to shareholders. A simple example for calculate and can be used like P/E ratio. Just
DDM is multiply the EBITDA by the industry EV/EBITDA to
estimate the enterprise value. Other multiples that
If, Dividend paid = ₹10, Growth = 5%, Cost of equity can be used in the same manner are EV/Revenue,
= 7% EV/capital, EV/EBIT etc. every multiple will generate
a different valuation and a simple of weighted
Value of share = 10(1.05)/(7%-5%) = ₹ 525 average of all valuation can be used to estimate the
overall valuation of a bank.
Now, this would fail for banks as

1) The bank does not issue dividends.

2) Constant growth is very difficult to maintain.
3) Growth can sometimes exceed cost of equity.

Therefore, Banks opt the last option i.e. relative

valuation. Relative valuation involves using industry
benchmark ratios to estimate valuation for individual
banks. For this, several multiples are used which
assess different aspects of a bank to derive it’s true
value.

14
 Banking Sector

CREDIT RISK MANAGEMENT FOR BANKS

Since the inception of banking as a service in India, thus effective and efficient management of credit risk
the banking sector has faced various obstacles in the is crucial for banks. In order to help the banks to
form of scams, regulatory risks, currency risk, manage credit risk, the Basel Committee has
operational risk, etc. But by large, the one obstacle described, key operational boundaries which are to
that banks haven’t been able to administer efficiently be considered by banks, when they devise their credit
and which has rendered the operating capacity of risk management policies. The key operational areas
various banks as null and void is credit risk. Credit are: - (i) Internal Processes which cover the efficiency
risk is the probability of loss that arises due to the and effectiveness of credit management operations,
non-fulfillment of obligations by a counterparty. Credit including collateral management, monitoring
risk can stem from counterparty as well as procedures and contractual requirements; (ii)
concentration risk. Some examples of counterparty Systems which cover the aspects of timeliness and
risks include risk arising from non – payment of loans accuracy of credit risk information to management;
availed from the bank by a customer, risk arising from (iii) People which covers the aspect of efficient
a company which is a business partner with a bank, segregation of duties so as to prevent overlap and
declares bankruptcy and fails to make payment for wastage of resources and efforts.
the services availed from the bank. Credit
concentration risk arises when a bank offers majority The Basel Committee on Banking Supervision has
of its loan to companies and people belonging to a also made it compulsory for the banks to implement
particular industry, region, etc. Say, if that particular credit risk management policies and procedures listed
industry experiences shockwaves due to macro and under Basel Norms II. The Basel Committee has also
micro factors, then the risk of default from that issued a document to facilitate the banks in their
industry increases, thereby increasing the credit risk credit risk management procedures. The principles
of the bank. and procedures included in the document, address
these specific areas: - (i) Establishment of an
For majority of the banks, credit risk arises from the appropriate credit risk environment; (ii) Operating
loans given to its customers. But there are certain under sound credit granting process; (iii) Maintenance
other sources of credit risk as well. Systematic risk of appropriate credit administration, measurement
which is the risk of a breakdown of an entire financial and monitoring process; (iv) Ensuring adequate
system and has a bearing on the operations of the control over credit risk; (v) The role of supervisors. As
entire economy can also lead to credit risk for banks. per Basel, these policies should be implemented
An example of it being the 2008 crisis wherein the along with polices relating to other banking
housing market collapsed and the number of NPAs functionality and operations, in order to smoothen the
skyrocketed and the banks were unable to recollect process of credit risk malmanagement.
the money on the loans given out to people. The risk
of timely settlement of contracts can also lead to After discussing how important credit risk
credit risk for banks. The settlement of transactions is management is and what can happen if credit risk is
a vital element of counterparty risk. This is the point, not administered efficiently, the next question that
where the parties of the contract exchange instrument arises is how to administer credit risk. Banks globally
and pay a certain amount for it. Credit risk arises, as well as in India have implemented certain credit
even if one party fails to deliver on time. Some risk management techniques which are: - (i) Credit
financial instruments also carry with them pre- Exposure which covers determining the exposure of a
settlement risk. This is the risk that arises due to an particular bank to credit activities and portfolio. It
institution defaulting well before the settlement of the consists of current exposure and probable future
contract, where the traded instrument has positive exposure; (ii) Credit risk premium which is used to
economic value to the other party. This type of credit administer credit risk of a barrower. It is the difference
risk usually arises in the case if interest rate swaps between the interest rate a firm pays when it borrows
money and the interest rate on securities like
In today’s ever evolving and dynamic business government bonds; (iii) Credit Ratings which covers
landscape, credit risk management plays a vital role the aspect of the reputation and track record of the
in the functioning of banks. Credit risk has a bearing borrower, which is thoroughly investigated by banks
on the overall functioning and operations of a bank, before lending money.

15
 Banking Sector

FINTECH SECTOR | INDIA

Financial technology or Fintech, as it is commonly referred to has revolutionized the banking services. By
leveraging the force of technology, fintech has paved the way for a convenient mode of banking in India, which
is accessible 24 hours, thereby improving customer experience and satisfaction. The days of waiting in long
queues, limited banking hours, etc. are way behind us and now everything can be accessed with a single tap
on a mobile screen.

The advent of Fintech has augmented the digitization process in India and plays a crucial role in the
development of the country. As a testament of its impact on the development of the country, India has emerged
as the global leader in the real time payments globally, contributing to 46% of all real time transaction taking
place around the world. India is the third largest fintech ecosystem globally and the market size of the Indian
fintech ecosystem is expected to touch the $150 billion mark by 2025. When it comes to the volume of dealings
taking place in the fintech sector, India ranks second globally.

Exhibit 17: Fintech Adoptions Rates of Major Exhibit 18: Fundings Received by Indian Startups in
Economies Against the Global Average of 64% 2022

300 270
India 87 250
250 220
200
87 200 176
Global 150 140
China 137 135 130
Average 64 150
100
50
0
46 82

USA Russia

71
UK
Funding in Million US Dollars
Source: EY
Source: Statista

The Indian fintech market is the fastest growing fintech ecosystem in the world with more than 2100 startups
coming up in the last 5 years. Out of the 102 unicorns produced by India, 21 come from the fintech sector which
is only second to the unicorns from the e-commerce sector, which has a tally of 24 unicorns. The fintech
startups were able to raise funds worth $1.18 billion in quarter 1 fiscal year 2023-2024. This tally contributes to
84% of the total funds raised in the first half of fiscal year 2023-2024. The funds that were raised in the first
quarter of the current fiscal year were two times higher than the funds raised in the fourth quarter of fiscal year
2022-2023.
The payments, alternative lending and insurance platforms were segments that were the top performers in the
Indian Fintech ecosystem in the first halo of the current fiscal year. The fundings received by the payments
segment accounted for 55% of the total fundings received in the FinTech sector in the first half of the current
fiscal year. The fundings in the payments segment has seen a three fold rise over the tally of the second half of
fiscal year 2022-2023. The trend has been similar in the global scenario as well, and the payments segment
was the highest performing sector is US FinTech space as well.

16
 Banking Sector

FINTECH SEGMENTS | INDIA

The FinTech sector of India is multidimensional and has given customers the liberty to choose banking
services as per their convenience. The FinTech sector in India encompasses the following segments: -

Payments:

The payments segment has helped in revolutionizing the way banking was done in India prior to the adoption of
FinTech. It has made transacting and dealing with regards to money easy and convenient. Digital payment
platforms like UPI (Unified Payments Interface) have enabled seamless and quick fund transfers and has
eliminated the hassles linked with carrying actual currency. Mobile wallet services offered by companies like
Paytm, PhonPe and Google Pay have allowed the user to make payments for their bills and utilities and keep
track of it. Overall, the payments segment of the FinTech market is ever-evolving due to technological
improvements and as more and more customers adopt FinTech, digital payments will play a pivotal role in the
development of FinTech in India. The major players from this segment are PhonePe, Google Pay and Paytm.

Wealth Technology:

The wealth tech companies provide services like financial planning, risk management, portfolio management,
investment advice, etc. to customers. The companies in this segment make use of technological tools like
machine learning and artificial intelligence to provide personalized investment services to customers. Since
Covid, it has been observed that the number of people investing in stock markets have surged. Although, the
number of domestic or retail investors have increased, as compared to some of the developed economies, the
share of people making investments in India is very less. As the growing middle class is becoming more aware
and educated regarding investments, there is a huge growth potential for wealth technology segment. Some of
the major players of the segment are Zerodha, Groww, Upstox and others.

Lending:

The FinTech lending segment has filled in the gaps left by the conventional methods of lending, with major
focus being on personal, consumer and business loans. It has also helped in expanding the access to credit in
the backward segments of the country. Digital lending platforms have made the process of disbursement of
loans hassle free, convenient and has reduced the paperwork required as well. FinTech driven microfinance
companies have also helped in providing small ticket loans to customers belonging to the low-income groups,
thereby enabling them to set up their entrepreneurial ventures. The collaboration with traditional lender has
also helped in making the process of lending funds easy and convenient. The major companies in this sector
are MobiKwik, LazyPay and others

Insurance Technology:

The Insurance tech segment of the FinTech industry of India has leveraged technology and data analytics to
innovate the traditional insurance business. InsurTech startups and the established giants are collaborating to
provide new products to customers in order to make it more convenient, affordable and accessible for the
customers. InsurTech has brought in automated underwriting, made the application process easy and quick
and is more appealing to younger customers. But the Indian Insurtech segment is underserved with only 1%
premiums sold through this route in fiscal year 2020-2021 as compared to 13.3% in the US and 5.5% in China
in the same reporting period. But with increased digital penetration, the InsurTech segment has a great
potential for growth in the coming years. The major companies in this segment are Acko, Digit Insurance,
Policy Bazaar and others.

Crypto, Decentralized Finance (DeFi):

Crypto and blockchain have given the Indian customers an opportunity to invest into the avenues of
decentralized finance. This is a segment which has although not got much of a nod from the regulatory
authorities but has seen huge support from the customers. The crypto funding stood at $638 Million for the
fiscal year 2021-2022. The major companies in this segment are CoinDCX, Binance, etc.

17
 Banking Sector

FINTECH SEGMENTS | INDIA

Exhibit 19: Key Players in the Indian Fintech Landscape

Segment Major Players

MobileWallets/UPI
Mobile Wallets/UPI Payment Gateways POS

Payments
Segment

Consumer SME P2P Payday

Lending
Segment

Aggregators Digital Insurers Claims

InsurTech

Investment Platform &

Brokerage Robo-advisors Personal Finance

WealthTech

18

18
 Banking Sector

FINTECH GROWTH DRIVERS

1. Demographic Opportunities in India:
Exhibit 20: Average Age Inda from 2000 - 2040
The surge in the adoption of FinTech industry in India
has been enabled by the favorable demographics of the 45
country. India as compared to its developed 40.4
counterparts, has a comparatively young population 40
36.5
with the median age being 28 years. The new 35 32.4
generation is more tilted towards technology and
sophistication, thereby resorting to FinTech instead 30 28.2
conventional methods of banking. The future is bright 24.3
25
for FinTech as India will be having a younger
demographic for a decade or two. The growth of 20
FinTech has also been augmented by the growing
middle class that is constantly analyzing its options in a 15
rational manners and is not afraid to try out
10
unconventional and non-personnel methods of banking.
5

0
2. Increasing Internet and Digital Penetrations: 2000 2010 2020 2030 2040

One of the crucial growth drivers for FinTech in Inda is Median Age
the surge in digital penetration in India. Today, almost Source: Statista, Average Age Of Population
everyone in India owns a smartphone and does digital
banking. UPI QR codes can be found even in small
shops selling tea and coffee, auto rikshawala, etc. The
trends as shown in Exhibit -4 shows that the internet Exhibit 21: Digital Penetration
penetration is rising for every segment of consumer
service, therefore indicating a bright future ahead for
FinTech.

80% 75%
72%
3. Government Initiatives: 70% 63%
57%
60%
The support from the government has also been crucial
50% 45%
not only in the terms of regulation but also from the 39% 38%
40% 36%
aspect of providing assistance. The adoption of
FinTech is in line with the goal of ‘Digital India’ set by 30% 23% 22%
the government. The government has facilitated the 20% 14% 14%
development of FinTech by enhancing the broadband 10%
infrastructure in rural areas, by creating awareness 0%
regarding digital literacy, etc. Regulators like IRDAI, Internet Smartphone Payment Online
Penetration Penetration Wallets Shopping
RBI and SEBI have implemented numerous provisions Penetration Penetration
In order to ensure increased accountability so as to
make the FinTech market safe and trustworthy. Policies 2020 2025 (Expected)
like Jan Dhan Yojana, National Common Mobility Card
2030 (Expected)
and other have augmented the growth of FinTech in the
country.
Source: India Brand Equity Foundation

19
 Banking Sector

FINTECH GROWTH DRIVERS

4. Investment in FinTech: Exhibit 22: Revenue From Fintech 2021 vs 2030

The amount of investments coming into the Indian

FinTech industry shows the significance the sector has
in the growth journey of the country. The fintech Wealth Tech 2.37
0.2
startups were able to raise funds worth $1.18 billion in
quarter 1 fiscal year 2023-2024. This tally contributes to
84% of the total funds raised in the first half of fiscal InsurTech 36
3
year 2023-2024. The funds that were raised in the first
quarter of the current fiscal year were two times higher
than the funds raised in the fourth quarter of fiscal year Payments 54
8
2022-2023. From a global FinTech perspective as well,
India has outshined with the maximum number of
investments coming to its FinTech market. A surge in Lending 105
interest areas like Buy Now Pay Later, digital currency 8

among others have kept the growth path of FinTech in 0 20 40 60 80 100 120
India alive.
2030 2021
Source: Statista

5. Digital Innovation: Exhibit 23: - Digital Transaction in India Cross 200 Bn

Mark in FY 2023
The improvements and advancements made in
technology, has made the adoption of Fintech easier.
250
With better broadband services, Higer speed,
consumer grievance and wide reach of payment 200
interfaces like UPI have led to an improvement in the
200
reach of FinTech which has led to a greater customer
satisfaction. With the onboarding of 5G services in
India, the FinTech landscape is set for a upward growth
150
trajectory. 121

100
6. Partnership with Banks: 67
50
By partnering with banks and NBFCs, the FinTech 36
50
sector has improved its reach and reputation. By 18 23
partnering with conventional banks, the FinTech
companies get access to a large consumer base, 0
improvement in brand reputation, the functionality and 2017 2018 2019 2020 2021 2022 2023
operations improve with a topping of the ease of use
Digital Transactions
factor of FinTech. Talking about collaborations, recently
SBM Bank partnered with OneCard to launch a mobile Source: Web Assets, BCG

based credit card.

20
 Banking Sector

PAYMENTS OVERVIEW
The growth in digital payments has also been facilitated by the boost provided by the government. During the
tenure of last 5 years, a variety of convenient and easy mode of digital payments like National Electronic Toll
Collection (NETC), Immediate Payment Service (IMPS) and Bharat Interface for Money – Unified Payments
Interface (BHIM – UPI) have seen a consistent growth trajectory and have augmented in the transformation of
the digital payment ecosystem by increasing the person-to-merchant (P2M) and person-to-person (P2P)
payment.

Among all the modes of digital payments, BHIM UPI is the most preferred mode of payment and has recorded
digital payments worth 12.98 lakh crore in January 2023.

Exhibit 24: - Digital Transactions Over The Years

10000

9000
9192
8000 8840

7000

6000

5000 5554
4000 4572
3000
3134
2000
2071
1000

0
2017-18 2018-19 2019-20 2020-21 2021-22 2022-23

Total Number of Digital Transactions (In Crore)

Source: Press Information Bureau

The digital payments sphere is constantly gaining prominence. Digital payments have become the go to mode
of transaction in Tier – 1 cities and Tier – 2 and Tier – 3 cities. The value of digital payments currently stands at
US$ 3 trillion today, which is expected to cross the US$ 10 trillion mark by the fiscal year 2026-2027.

A pan India survey was conducted, in which 90,000 participants were taken as a sample. It was found out that
42% respondents have used digital payments. It is expected that digital payments will constitute 65% of the
total payments in India by the fiscal year 2026-2027. This figure currently stands at 42%.

It is expected that there will be a seven fold growth in digital merchant payment systems from US $0.3 Trillion
to US $2.1 Trillion in fiscal year 2026-2027. If the trend continues, by 2026 out of three payments, 2 of them will
be digital payments. The acceptation rate of digital payments has improved by 53%, increasing from 170 Mn
touchpoints to 260 Mn touchpoints.

21
 Banking Sector

UNIFIED PAYMENTS INTERFACE: UPI

A unified payments interface is platform which allows customers to transfer and exchange money between the
bank accounts of people. It has been developed by National Payment Corporation if India (NPCI). It helps in
eliminating the requirement of entering crucial data while carrying out every transaction, thereby improving
convenience.
Exhibit 25: Volume of UPI transactions in India in H1 FY 2023-2024

Jun-23
9335

May-23
9415

Apr-23
8898

Mar-23
8685

Feb-23
7535

Jan-23
8037

0 1000 2000 3000 4000 5000 6000 7000 8000 9000 10000

Volume of Tranactions (In Millions)

Source:- NPCI

Exhibit 26: Total Value of UPI transactions in India in H1 FY 2023-2024

1600000

1400000
1489145
1475464
1200000 1410443
1407007
1298726
1000000 1235846

800000

600000

400000

200000

0
Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23

Total Value (In Crores)

Source:- NPCI

From Exhibit – 25 and Exhibit – 26, it can be inferenced that the volume and value of UPI transaction in the
country, have been on an uptrend primarily, with some small pulldowns as well.

22
 Banking Sector

WEALTHTECH OVERVIEW
Huge Potential For Growth

In India, as per surveys only 2 percent of the entire population is into investing in the stock markets. When this
tally is compared with the number of people investing in developed countries like USA, where out of the total
population, 55% of the people invest in stock markets, it can be seen that there lies a huge difference when it
comes to investing into stock markets. This gap can be bridged by the WealthTech segment of the FinTech
market in India. During Covid – 19, many of the Indian households, started investing in the stock markets and
this trend has continued even after the pandemic. As the income level of people rises, the proportion of people
investing in the stock markets is highly likely to rise.

As per the RBI reports, in comparison to Fiscal year 2021 – 2022 and fiscal year 2022- 2023, the investment
made by Indian retail investors have shown an increase of 2.5 times in mutual funds. During times, when the
FIIs were net sellers in the Indian markets, the retail investors were the ones who helped in stabilizing the
Indian markets. With WealthTech companies also coming up with courses like Zerodha Varsity, Uplearn by
Upstox among others to improve the financial literacy in the country, in order to boost investments into the
Indian stock markets.

Exhibit 27: Client Participation in Indian Equity Markets

120

100
6.4 5 5
10.7
10 7
10.3
10.2 11
80
15.4 15
16.2

60
45
39 39
38.6
40

20 21.5 23 25
18.1

6.2 7.3 8 7
0
FY 18 FY 19 FY 20 FY 21

Others PRO Retail Investors FII DII Corporates

Source:- Thread Reader App

As stated earlier many people have started investing in the Indian stock markets which can be evidently
made out from the rise in the retail investors in the Indian stock market. Out of the entire Indian
population, which invests in stock markets, 70% of them do it through the mode of WealthTech Apps. As
per the records of FY 2020, there are 4 million investors who use WealthTech apps to invest in the stock
markets and this tally is expected to rise to 12 Million by FY 2025.

23
 Banking Sector

NEO BANKS: THE NEXT BANKING REGULATION

Neobanks is a new concept of banking, working on a digital-only platform operated solely online. These banks
do not have a brick and mortar presence. Transactions when done in the conventional ways of going
personally to the bank requires a lot of time and efforts. Neobanks offer banking services digitally making the
activities seamless, accessible and more convenient. The Reserve Bank of India (RBI) as of now, has not
permitted fully operational neobanks, but neobanks can be set up in collaboration with the traditional banks set
up in India.

Neobanking in India currently stands at a valuation of$ 48 Billion as of FY 2022 and has the potential to reach $
183 Billion by 2030. With the increased internet and smartphone penetration in India. Neobanks have taken
advantage of this trend and is on the road of provding technical services to its customers. These are some of
the features that make neobank different from its brick and mortar counterpart: -

• Savings Account: To eliminate the waiting time and procedural efforts put in opening a savings account in
the traditional manner, neobanks provide their customers the option to open saving account digitally, and
even furnish them with their respective debit cards.

• Credit Cards: Neobanks also provide their customers with a good number of offers on credit cards.
Neobanks also provide high-limit, credit cards based on the performance of the business.

• Personal or Business Loans: Neobanks offer a gamut of services including personal and startup loans
and also help in meeting the goal of financial inclusion by reaching out to underbanked communities. In this
manner, neobanks are bridge the gap left by the traditional bankers.

Exhibit 28: NeoBanks Annual Launch

80
72
72
70

60

49
50 46

40

30 27

19
20

10

0
2015 2016 2017 2018 2019 2020

Funding Amount (In Millions)

Source:- Thread Reader App

24
 Banking Sector

KEY RISKS
1. Dependence on Cash: Although digitization in India is at full pace, there are people who are still bound
towards the use of cash. This can be attributed to the low levels of trust in digitization of a crucial services
like banking, low levels of awareness and financial literacy in the backward areas, etc. Even for e-
commerce business, the preference towards cash is more than digital payments, credit cards and debit
cards. As per the records of 2022, 64% of the dealing on e-commerce websites were done through the
mode of cash. This shows that people still don’t trust FinTech and are more tilted towards cash. This tend
stands as an obstacle for the FinTech industry to overcome.

2. Heavy Dependence on Technology: FinTech is all about technology merged with the conventional
methods of making payments, exchanging money, etc. This framework is lucrative from the point of view of
Tier – 1 and Tier – 2 cities. But when it comes to Tier -3 cities and backward areas, the level of technology
is not available to carry activities related to Fintech, and even if the technology is available, it is not
accessible to everyone. Even in developed cities, network outage causes a lot of problems to customer
using digital payments. Wealth Tech companies are no exceptions to this problem. There have been many
instances wherein people using Wealth tech apps like Zerodha and Groww were unable to book their
profits due to a network errors. These cases result in a hit to the reputation of FinTech companies, thereby
reducing trust.

3. Credit Turmoil: Another problem which plagues the Fintech Industry is the increase in the number of
defaulters who had availed loans and were unable to make timely payment or any payments at all. During
the time of Covid, around 40% od auto debit mandates bounced, owing to the economic distress. The
FinTech firms need to constantly monitor their credit portfolios so as to reduce the number of NPAs which
has huge bearing on the operating margins of these firms. Mostly segments of unsecured loans and to
some extent, commercial vehicle loans are the ones that default, when looked from a FinTech perspective.
To alleviate the problem, techniques like counseling on non-payment of loans to borrowers or restructuring
loans so as to reduce the financial burden and distribute equally over a period of time can be used. If not
administered well, this can cause a huge setback to the major idea of FinTech, i.e. filling the gaps of credit
where conventional banking cannot reach.

4. Privacy Issues and Breach of Data: One of the major drawbacks of FinTech is that there are multitude of
data present with the FinTech companies, and if adequate security and privacy measures are not taken, it
can be disastrous for the company and for its customers itself. If crucial information regarding the
customers gets leaked, it can lead to disastrous repercussions for the customers as their personal
information can get tampered and the company loses the trust and reputation. Recently in the fiscal year
2022-2023, CashMama, an Indian lending app experienced a breach in its database, which exposed
crucial data of thousands of customers relating to bank accounts, Aadhar card, Pan Card among others. A
major reason for not adopting FinTech, is that customer want privacy when it comes to crucial banking
details and this is one aspect which FinTech hasn’t been able to overcome till now.

5. Regulatory and Compliance Risks: The FinTech companies work under a s strict and every dynamic
regulatory environment. The ecosystem is highly regulated and constant changes in the compliance
requirements can result in failure of operation thereby giving rise to operational risk. Failure of complying
with the regulatory requirement can result in huge fines and penalties and unnecessary government
intervention.

25
 Banking Sector

GLOSSARY
Term Meaning

Bancassurance Bancassurance is the concept of selling insurance products of insurance companies by banks.
The bank acts as an agent and promotes Banca (bancassurance) products under section
6(1)(o) of the
Banking Regulation Act, 1949.
It was originated in Europe in the 1980s and was successful.
The bancassurance business model is a globally accepted profitable business.

Banking Banking Ombudsman is a senior official appointed by RBI.

Ombudsmen He handles and redresses customer complaints against deficiency in certain banking services.
The Banking Ombudsman Scheme was introduced under Section 35 A of the
Banking Regulation Act, 1949 by RBI with effect from 1995.

Basel Norms The Basel norms is an effort to coordinate banking regulations across the globe, with the goal of
strengthening the international banking system. The Basel Committee on Banking
Supervision (BCBS) consists of representatives from central banks and regulatory
authorities of 27 countries (including India). Read further on Basel III norms, RBI.

Call Money Call/Notice money is the money borrowed on demand for a very short period. When money is lent
for a
day it is known as Call Money.
CASA CASA stands for Current Account Savings Account.
Account The CASA ratio displays the value of deposits maintained in a bank in the form of
current and savings account deposits in the total deposit.
A higher CASA ratio means the better operating efficiency of the bank.
Cash Credit Cash Credit is a proper limit sanctioned by the bank to the borrowing
manufacturing/trading unit
against the value of the raw materials, semi-finished goods and finished goods including stores.

CIBIL Score CIBIL Score is a three-digit numeric summary of your credit history. The score is derived using the credit
history found in the CIBIL Report (also known as CIR i.e Credit Information Report). A CIR is an
individual's credit payment history across loan types and credit institutions over a period of time.

Core Banking Core Banking Solution (CBS) is the networking of branches, which enables customers to
Solutions operate their
accounts, and avail banking services from any branch of the Bank on CBS network,
regardless of where he maintains his account.
The customer is no more the
customer of a Branch. He becomes the
Bank’s Customer.

Credit Rating ‘Credit rating’ is the assessment of the creditworthiness of a borrower or a loan taker;
creditworthiness
refers to the ability of a borrower to ‘service the loan’, i.e., pay back the loan along with
the interest.
CRR Every bank Maintain certain % of their total deposits with RBI in the form of Cash and Net demand &
Time Liabilities.

2
6
 Banking Sector

GLOSSARY
Deposit Insurance The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly-owned
and Credit subsidiary of the
Guarantee Reserve Bank of India provides the insurance coverage to the depositors.
Corporation
The Reserve Bank of India (RBI) said in a statement released on 4th February 2020
said that Insurance cover on bank deposits has been increased to Rs 5 lakh from Rs 1 lakh per
depositor.
The banks will pay a premium of 12 paise against 10 paise per 100 rupees deposited
after the increased
insurance coverage.
ECB The money which is used for the financing of commercial activities in our country through foreign
sources is called External commercial borrowing. They can be any form namely
loans, credits or even security instruments. They are not allowed to trade through any
stock exchanges. The loan availed from foreign sources is of the minimum
average maturity of 3 years.
Not to be confused with European Central Bank

IBC Insolvency & Bankruptcy Code

IMPS is an instant interbank electronic fund transfer service through mobile phones.
This service is available 24x7 for a transaction between interbank.
It doesn’t require any “batches”. Though IMPS offers Instant Transfer.
To be able to transfer fund through IMPS route you must first register for the immediate payment
IMPS services with your bank.
After successful registration, the bank will provide you “Mobile Money
Identifier(MMID) and Mobile Personal Identification number(MPIN).
For transferring of funds the Minimum & Maximum amount is to be Rs.1 and
Rs.2,00,000.

Kisan Vikas Patra It is a small savings scheme – by the Government of India – run by The Directorate of Small Savings –
and the Post Offices sell these saving bonds.

LAF A LAF is a monetary policy tool, primarily used by the RBI, to manage liquidity and provide
economic
stability.
LAF’s include both repos and reverse repo agreements.
Letter of Credit The letter of credit is one of the negotiable instrument.
It is given by the bank, that guarantee’s buyer’spayment to the seller shall be received on time along
with the proposed amount to be paid.
In this instinct, if the buyer is unable to make the agreed payment to the seller, then the bank will cover
the full or remaining amount of
purchase. Read on Nirav Modi &
PNB

Masala Bonds The bonds listed on the London Stock Exchange (LSE) is termed as Masala Bonds.
These bonds are offered and settled in US dollar to hike Indian Rupee in International market . These
bonds help to raise Indian rupees from Internationalinvestors for infrastructural development in India.
International Financial Corporation (IFC) converts bond from dollars into rupees and uses the rupees to
finance private sector investment in India.

2
7
 Banking Sector

GLOSSARY
MCLR Marginalcost of funds-based lending rate (MCLR) is an internal reference rate for banks fixed by
the
Reserve Bank of India (RBI). It is the minimum rate at which the Bank can lend money.

MIBOR The full form of MIBOR is Mumbai Interbank Offered Rate.

It is the interest rate at which funds are borrowed by banks in marketable size, from other
banks in the Mumbai interbank market.
Micro ATM Micro ATMs are not any special type of ATMs
It is the advanced version of Point of Sale (PoS) having an additional feature of
Biometric scanning. It is also known as a mini version of ATMs.
These machines are connected with the GPRS (General Packet Radio Service) mobile internet
and it
uses the Core Banking Solution (CBS) platform to perform the different types of services.

Mortgage A mortgage is a transfer of a right to stable property for the security purpose of a loan
amount.
Sometimes also referred to as Loan Against Property (LAP)
MSF Repo Rate is the rate at which the money is lent by Reserve Bank of India to commercial bank on
the
other hand MSF is a rate at which RBI lends money only to scheduled banks. Under
MSF banks are allowed to use the securities that come under Statutory Liquidity Ratio in
the process of availing loans from RBI
MSME Micro, Small & MediumEnterprises. The government changed the criteria to define MSME
during the
COVID crisis.
NACH NACH - National Automated Clearing House. The full form of NACH is National
Automated Clearing
House. NACH is the centralised web-based payment solution that helps the banks,
corporate sectors, government and other financial institutions to handle bulk
payments.
NEFT It is a nation-wide payment system.
NEFT is a Deferred Net Settlement(DNS) where all the orders are accumulated and
only executed in batches after a particular time interval.

NPA NPA is an asset of a bank which is not producing any income.

Bank Usually classify as nonperforming assets any commercial loans which are more
than 90 days overdue and any consumer loans which are more than 180 days overdue.

Off-Balance sheet Off-Balance sheet exposure refers to activities that are assets or liabilities of an entity
exposure which
doesn't appear on the balance sheet. Example: Letter of the undertaking, Letter of credit etc.

Priority Sector A large portion of the population in India doesn't have access to funds. Therefore RBI has adopted
Lending Priority Sector Lending norms which relaxes the lending norms for poor and small
businesses.

Provision Setting aside of money from Profits to compensate a probable loss caused on lending a loan is
called
Provisioning. Provisioning is done to cover risk. The provision amount is a part of
bank profit and loss account and kept as a liability in the balance sheet and at the time of
loan write off debited.
Provision The provision coverage ratio (PCR) gives an indication of the provision made against bad loans
Coverage from the
Ratio profit generated. Higher the PCR, lower is the unexposed part of the bad debts.

2
8
 Banking Sector

GLOSSARY
Public Credit Public credit registry is a database of credit information for India that is accessible to all
Registry stakeholders. A
PCR is maintained by a public authority like the central bank or the
banking supervisor. PCR helps in credit assessment and pricing by banks.
Transparent Public Credit Registry, it helps in making better credit decisions by banks. It helps in
enhancing the efficiency of the credit market, increase financial inclusion and improve ease
of doing business.
PCR will also improve access of credit to small and medium enterprises.

RAFA Account RAFA stands for Recurring Deposit Account Fixed Deposit Account.
The RAFA ratio shows how much deposit a bank has in the form of Recurring and fixed deposits.

Repo Rate When RBI provides a loan to the bank for short-term between 1 to 90 days, RBI takes some
interest
from the bank which is termed as Repo Rate.
Retail Banking Retail banking is a type of banking in which direct dealing with retail customers is done.
This type of banking is also popularly known as consumer banking or
personal banking. It is the visible face of banking to the general public.
Reverse Repo rate When bank deposit it's excess money in RBI then RBI provides some interest to that bank.
This interest
is known as Reverse Repo Rate.
RTGS The acronym 'RTGS' stands for Real Time Gross Settlement, which can be defined as the
continuous
(real-time) settlement of funds individually on an order by order basis (without netting).
' Considering that the funds settlement takes place in the books of the Reserve Bank of India,
the payments are final and irrevocable.
Scheduled Banks which are included in the 2nd Schedule of RBI Act 1934 are known as a scheduled
commercialbank commercial
bank.
Slippages New NPAs during the year. Also read Slippage Ratio.

Slippage Ratio Slippage ratio of a bank is calculated as under; Fresh accretion of NPAs during the year
/Total standard
assets at the beginning of the year multiplied by 100

SLR Every bank has to maintain a certain % of their total deposits in the form of (Gold + Cash
+ bonds +
Securities) with themselves at the end of every business days.
SMA These are accounts with incipient stress but not yet classified as NPA. These are accounts
are more
than 0 days past due but less than 90 days past due
Small Finance The small banks are to provide a whole suite of basic banking products such as deposits and
Banks supply of
credit, but in a limited area of operation i.e., primarily in rural and semi-urban areas
UPI This interface will integrate the entire payment systems in India.
It uses a single application program interface with a series of Application Program
interface (API’S). The mobile devices are the primary object for all the payments.

Wholesale banking Wholesale banking refers to banking services sold to large clients, such as other banks, other
financial
institutions, government agencies, large corporations, and real estate developers.
Wholesale banking services include currency conversion, working capital financing, large
trade transactions, mergers and acquisitions, consultancy, and underwriting,
among other services.

2
9