Strength of the Indian banking industry lies in its asset quality, growth and profitability over its global peers over the last few years. The banking index has grown at a compounded annual rate of over 51 percent since April 2001 as compared to a 27 percent growth in the market index for the same period. Geographical reach and market penetration have expanded at a very fast pace over the past few years. Customer base is constantly growing. High capital inflows has appreciated a lot over the years. Liquidity position has been quite comfortable in the recent times. The buoyant capital market coupled with an appreciating rupee vis-à-vis US dollar has been attracting large foreign institutional inflows during the last two years. Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Thanks to reforms and stringent regulatory measures taken by RBI Indian banks are considered to have clean, strong and transparent balance sheets thus good quality of assets relative to other banks in comparable economies in its region.
Weakness of the sector pertains to factors like limited market penetration in few geographies, lack of fundamental institutional skill level and less household savings. Public sector banks hold over 70 percent of total assets of the banking industry. However they are Severely lacking in sales and marketing, service operations, risk management and as a result these banks have not been able to match the aggressive growth by the private players. Although the semi urban areas have been successfully penetrated the banking sector hasen’t been able to fully penetrate through the rural areas. And if overall profitability needs to be improved this segment cannot be ignored. According to a McKinsey report, even though Indian households save 28% of their disposable income, they invest only half their savings in financial assets. The rest goes towards buying gold, housing, and buying/maintenance of equipment for the various small Indian enterprises.
Opportunities for the Indian banking industry lies in the untapped rural market Banking sector has not penetrated to the rural sector .About 80% of the rural households in India have no access to formal lending. About 46% of these used informal lending channels, 24% of which resorted to unregulated money lenders. These unregulated money lenders charge astronomical interest rates on their loans which reflect that there is scope for cheaper and more formal lending in the rural credit market. The rural economy accounts for more than two-thirds of India's population and has great untapped potential. The Indian economy is expected to grow at a significant rate in the next couple of years not only in India but also overseas. The Indian banking industry is likely to record significant growth in the short to medium term. By the end of 2010, the asset base of the Indian banking industry is expected to exceed the $1 trillion mark, with profits of about $10 billion.
Over the course of the years the number of market player has significantly increased. This Intense competition could adversely affect the margins of the bank. So the there is threat of the stability of the system and threat from existing players. Other better Savings, investment option available. Failure of some weak banks has often threatened the stability of the system. The global banking industry weathered turbulent times in 2007 and 2008. the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. Though the Indian banking system was de-coupled to a large extent but the threat posed by capital market slow down cannot be overlooked.
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