The banking sector is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. According to a FICCI survey, the chief strong point of the Indian banking industry is the regulatory system, which has enabled India to carve a place for itself in the global banking scene. The regulatory systems of Indian banks are rated above China and Russia; and at par with Japan and Singapore. The public sector banks (PSBs) maintained its dominance in the banking system. As on March 31, 2008, PSBs accounted for 69.9 per cent of the aggregate assets and 72.7 per cent of the aggregate advances of the Scheduled Commercial Banking (SCB) system. An exceptional feature of the reform of the public sector banks was the course of their financial restructuring. 
Furthermore, a report "Opportunities in Indian Banking Sector", by market research company, RNCOS, forecasts that the Indian banking sector will grow at a healthy compound annual growth rate (CAGR) of around 23.3 per cent till 2011. Banking, financial services and insurance (BFSI), together account for 38 per cent of India's outsourcing industry (worth US$ 47.8 billion in 2007). According to a report by McKinsey and NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US by the year 2010. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30–35 per cent. According to a study by Dun & Bradstreet (an international research body)—"India's Top Banks 2008"—there has been a significant growth in the banking infrastructure. Taking into account all banks in India, there are overall 56,640 branches or offices, 893,356 employees and 27,088 ATMs. Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82 per cent of staff and 60.3 per cent of all ATMs.
On the growth curve
According to the Reserve Bank of India's (RBI), August bulletin, the Indian banking sector's Reserve Money stood at US$ 214.53 billion and credit was estimated at US$ 543.87 billion, till July 4, 2008. Aggregate bank deposits as on November 5, 2008 stand at US$ 716.76 billion. On a financial year basis, aggregate deposits went up by US$ 23.67 billion (3.5 per cent) during 2008-09, till July 4, 2008. The incremental non-food credit-deposit ratio increased to 82.4 per cent till July 2008, from 68.8 per cent a year ago. Earlier, aggregate demand deposits had increased to US$ 112.10 billion from US$ 97.75 billion till July 4, 2007. Commercial banks' investment in statutory liquidity ratio (SLR) eligible securities increased by US$ 9.31 billion up to July 4, 2008 as against an increase of US$ 12.26 billion in the corresponding period of 2007–08.
Aggregate deposits of the scheduled commercial banks (SCBs) reached US$ 132.74 billion till July 2008, as against US$ 120.78 billion in July 2007, and the year-on-year increase in aggregate deposits of SCBs stood at US$ 132.71 billion. Simultaneously, loans and advances of SCBs touched US$ 1.23 billion. Banks had disbursed US$ 3.36 billion of advances between April 1 and May 23 2008, compared to a decline of US$ 10.03 billion in the corresponding period last year. The credit extended by Indian banking sector rose 25.3 per cent at end of May 2008, with the outstanding credit estimated at US$ 499.61 billion.
As on March 2008, while the interest income of the 18 public sector banks and seven private banks rose by 28.4 per cent, the net profit rose at much higher rate of 33.61 per cent. In fact, Indian banks bettered their foreign competitors during the first five months of 2008. According to the league tables for Indian markets compiled by Thomson Reuters, in June 2008, three domestic banks—States Bank of India (SBI), ICICI Bank Ltd and Kotak Mahindra Bank Ltd—were the top three banks in 2008. While the foreign banks' fee decreased by 61 per cent, the three domestic banks saw a 110 per cent growth in average fee income from investment banking operations.
SBI's total investment banking fee income increased by 264.2 per cent to US$ 28.2 million during the first five months of 2008, against US$ 7.7 million during the corresponding period in 2007. ICICI Bank, witnessed a rise of 54.5 per cent at US$ 14.2 million, while Kotak Mahindra Bank, received US$ 11 million from investment banking. Education loan portfolio of banks is expected to grow by 40 per cent in 2008–09, against 30–40 per cent in 2007–08. 
Online cash transactions are increasing rapidly in numbers, with people preferring to send and receive money electronically. With more bank branches getting interconnected through core banking systems, settlements through the electronic systems have nearly grown three times since April 2007. According to latest RBI data, the number of transactions done through electronic funds transfer systems (EFT) and national electronics funds transfer system (NEFT) went up to 1.92 million a month in June 2008 from 675,000 in April 2007. The total amount settled electronically was US$ 2.54 billion in April 2007 and it went up to US$ 4.20 billion by May 2008.
Global players
The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil by 2010, with the second phase of opening expected to commence in April 2009.
Some of the biggest names in global financial services and banks like Credit Suisse, Rabo Group and ANZ are seeking a banking licence in India. The RBI has, in recent months, given fresh banking licences to UBS - Switzerland's largest bank, Dresdner Bank and United Overseas Bank.
ANZ and Rabobank Group, the Dutch Group, is now in the process acquiring a banking licence. The Rabobank Group already holds 18.2 per cent stake in another local private bank YES Bank. Some of the existing players such as StanChart, Citi and HSBC, hold India as one of their top markets.
Overseas expansions
Some of India major banks are planning to increase their foreign operations, with an eye on the rapidly expanding NRI and corporate financing business in foreign markets. The State Bank of India (SBI) is in the concluding stages of introducing its overseas offices and is targeting a three-fold increase in its international business, by the next five years. SBI had been given the consent by the Singapore monetary authority to begin 25 branches in the country.
India's biggest private sector lender ICICI Bank will start four new offices in US - in New Jersey, Texas, California and Illinois. HDFC Bank also plans to increase its foreign operations. Presently, it has representative offices in Dubai and Toronto. ICICI Venture-controlled Ranbaxy Fine Chemicals (RFCL) has acquired the US-based speciality chemicals major Mallinckrodt Baker. The deal was estimated at US$ 340 million.
Private Sector
Ever since the banking operations had been opened to the private sector in 1990s, the new private banks have been increasing its role in the Indian banking industry. Private banks such as HDFC Bank and ICICI Bank are posting a rapid increase in their asset base every year as compared to public sector banks. A comparison between all profit-making 21 public sector banks and 18 private banks operating in the country revealed that private banks' price earning (P/E) ratio was more than public sector banks on June 12, 2008 and in June 12, 2007. The aggregate market capital of 21 public sector banks had increased by 0.66 per cent from US$ 38.57 billion on June 12, 2007 to US$ 38.75 billion on June 12, 2008.
The Dun & Bradstreet study revealed that new private sector banks dominated the banking industry in terms of growth with an average year-on-year growth in assets, with 38.7 per cent for deposits, advances at 39.9 per cent and operating profit at 46.7 per cent. Old private sector banks registered an annual growth rate of 7.1 per cent in assets, 6 per cent in deposits and 12 per cent in advances for FY 07. They fared better in net profit, which increased by 30 per cent. All bank groups recorded a capital adequacy ratio of more than 12 per cent.
Rural banking
Rural India's current credit requirement for 2008-09 is estimated to be US$ 826.73 million, and recognising the huge potential it holds, corporate sectors and banks are now increasingly moving towards rural India. Mobile banking has already taken off in rural areas and thousands of people from rural areas across 12 Indian states are likely to get their social security pension and wages through mobile banking.
As per the suggestions of a working group set up by the RBI, all the regional rural banks (RRBs) should move to the core banking platform (CBS) by September 2011. This can enable them to undertake 90 per cent of their business on the platform. The expected expenditure of this move is estimated at US$ 153 million. All RRBs are likely to get financial help but sponsor banks may have to provide 25 per cent of the cost. By the middle of 2009, the RRBs would be performing 25 per cent of their businesses through CBS, and by September 2010, this would be 50 per cent. All new branches opened after September 2009 need to be CBS-compliant.
Retail banking
Indian retail banking is likely to grow at a CAGR of 28 per cent till 2010 and touch US$ 203.7 billion. It has provided need of the hour services like around-the-clock accessibility through automated teller machines (ATMs), mobile and internet banking. It has also offered services like D-MAT, plastic money (credit and debit cards), and online transfers.
ATMs
Banks have increased their ATM network over the past three years. According to the RBI, by June 2008, the number of ATMs in the country had gone up to 36,314 against 27,088 and 20,267 at end-March 2007 and 2006, respectively.
Loan disbursement
Retail loan disbursements have become simpler and faster. The sector has been growing at around 30 per cent per year over the past 4–5 years. According to the RBI data, the growth of retail portfolio of banks (29.9 per cent) was higher than the overall credit portfolio of the banking sector (28.5 per cent), during 2006–07.
Plastic Money
With the use of credit cards increasing significantly over the last few years, it has played an important role in promoting retail banking. The number of credit cards (outstanding) in June 2008 stood at 27.02 million, against 24.39 million in June 2007, posting a 10.73 per cent growth.
Core Banking Solutions (CBS)
The concept of CBS enables a customer to fulfil numerous banking operations online, has grown since the past four years. The number of bank branches providing CBS increased to 44 per cent in March 2007, against 28.9 per cent in March 2006. Electronic fund transfer facilities and mobile banking is expected to further strengthen the retail banking segment in the future.
Investment Banking
With numerous mergers and acquisition deals by Indian corporates, investment banking revenues have gone up to a record high. According to Dealogic, an international firm that tracks global M &A transactions, investment banking revenues from India crossed the US$ 1 billion-mark for the first time in 2007 to US$ 1.06 billion. This is significantly higher than the US$ 400 million-investment banking revenues recorded in 2006. Also, this surge in revenues has propelled India to become the third largest market for investment banking in Asia-Pacific in 2007.
ICICI Bank, Kotak Mahindra Bank are already into this space and now, HDFC and the Union Bank of India are now also planning to expand into investment banking at a time when aggressive Indian companies are buying foreign rivals.
Road Ahead
The Indian consumer holds the biggest opportunity for the Indian banking system and retail banking has immense opportunities in India. Though there are 334 million bank accounts in India, only 60 million Indian households are actively involved with regular banking activities. If these 30 million additional households are targetted over the next three years, it would expand the revenue pool by around US$ 2.24 billion for banks. Around 91 million households, with incomes of varying between US$ 899– US$ 4,052 per annum, are yet to be tapped by the banking sector. Fiscal year 2008–09 is likely to set off the reform process in the banking sector with most banks complying with Basel II guidelines by 2009. The Indian banking system is expected to undergo an enormous transformation after 2009 with the opening of the financial services sector under the World Trade Organisation (WTO). Under WTO, the Indian banking sector will be open to foreign banks. Bigger capital reserves, cutting edge technology, best practices in audit, accounting and transparency and skilled personnel of foreign banks will pose major challenges to Indian banks.
According to a report by Boston Consultancy Group, the profit pool of the Indian banking industry is estimated to increase from US$ 4.8 billion in 2005 to US$ 20 billion in 2010 and further to US$ 40 billion by 2015. The domestic credit market of India is estimated to grow from US$ 0.4 trillion in 2004 to US$ 23 trillion by 2050. To sustain an average capital adequacy ratio of 12.0 per cent by March 2010, the public sector banks would require an additional capital of approximately US$ 67.50 billion. Under such favourable conditions, India is expected to become the third largest banking hub in the world by 2040, says a Pricewaterhouse Coopers report.
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