July17 Sector Report - BFSI

JUL
2017
BFSI INDUSTRY COVERAGE REPORT
PRESENTED BY -
ALPHA – THE INVESTMENT AND RESEARCH CLUB
FMS DELHI
Kasinath| Maneel Reddy | Senior Analysts| alpha@fms.edu | +918982465293| +918106354037

Contents
OVERVIEW ......................................................................................................................................................... 4
GLOBAL BANKING SECTOR .......................................................................................................................... 4
INDIAN BANKING SECTOR (2015-2016) ....................................................................................................... 5
MARKET SIZE .................................................................................................................................................... 6
STRUCTURE OF INDIAN BANKING SYSTEM ............................................................................................. 7
Scheduled Commercial Banks (SCB’s)............................................................................................................... 7
Public Sector Banks ...................................................................................................................................... 7
Private Sector Banks..................................................................................................................................... 8
Foreign Banks ............................................................................................................................................... 8
Regional Rural Bank (RRB) ......................................................................................................................... 8
Payment Banks ............................................................................................................................................. 8
Small Banks .................................................................................................................................................. 8
Specialized Banks ......................................................................................................................................... 8
Institutional Banks ........................................................................................................................................ 9
NBFCs .......................................................................................................................................................... 9
Co-operative Bank ........................................................................................................................................ 9
Reserve Bank of India ....................................................................................................................................... 9
TRENDS OF THE INDUSTRY (SCB‘s) .......................................................................................................... 11
Deposits .......................................................................................................................................................... 11
Credit .............................................................................................................................................................. 13
Net Profit ........................................................................................................................................................ 15
Total Assets..................................................................................................................................................... 16
Deposits Ratios ............................................................................................................................................... 17
Credit to deposit ratio .................................................................................................................................... 17
Investment to deposit ratio8 .......................................................................................................................... 17
Ratio of deposits to total liabilities8 ............................................................................................................... 17
Return on Assets............................................................................................................................................. 19
Return on Equity ............................................................................................................................................. 19
NPA (Non-Performing Assets) ........................................................................................................................ 20
Gross NPA ....................................................................................................................................................... 20
Net NPA .......................................................................................................................................................... 21
Gross NPA ratio (as % of gross advances) ...................................................................................................... 22
1
Net NPA ratio (as % of net advances) ............................................................................................................. 22
Net Interest Margin ........................................................................................................................................ 24
Net Interest Margin (net interest income/total assets) ................................................................................. 25
Net interest earned (Millions) ........................................................................................................................ 26
Ratio of non-interest income to total assets .................................................................................................. 27
Other income earned ..................................................................................................................................... 28
Total income earned....................................................................................................................................... 29
Provision coverage ratio ................................................................................................................................. 31
Slippage Ratio ................................................................................................................................................. 32
Capital Funds .................................................................................................................................................. 32
Tier I Capital............................................................................................................................................... 33
Tier II Capital ............................................................................................................................................. 33
Capital adequacy ratio .................................................................................................................................... 34
REGIONAL RURAL BANKS........................................................................................................................... 35
FISCAL YEAR (2015-2016).............................................................................................................................. 39
Scheduled Commercial Banks – Performance and Risks ................................................................................ 39
Demand Drivers for Banking Segment .............................................................................................................. 40
Market dynamics ............................................................................................................................................ 40
Technology ..................................................................................................................................................... 40
FINTECH IN INDIA .......................................................................................................................................... 41
CLASSIFICATION OF FINTECH .................................................................................................................... 42
FINTECH INDIA VS FINTECH GLOBAL ...................................................................................................... 44
SWOT ANALYSIS OF FINTECH .................................................................................................................... 46
GOVERNMENT ACTIONS TAKEN TO SUPPORT FINTECH ..................................................................... 46
INNOVATION IN INDIAN FINTECH............................................................................................................. 47
United Payment Interface .............................................................................................................................. 47
AadharPay....................................................................................................................................................... 48
IMPACT OF DEMONETISATION .................................................................................................................. 49
PAYU‘S ACQUISITION OF CITRUSPAY ...................................................................................................... 50
Deal Overview ................................................................................................................................................ 50
BUSINESS MODELS OF PAYMENT BANKS ............................................................................................... 51
BUSINESS MODEL OF PAYTM ..................................................................................................................... 53
FUTURE OF PAYMENT BANKS IN INDIA .................................................................................................. 53
EXPECTED SUCCESSES ................................................................................................................................. 56
OPINION ABOUT PAYMENT BANKS IN BFSI INDUSTRY ...................................................................... 56
2
FINTECH: BOON/BANE FOR BFSI INDUSTRY? ......................................................................................... 57
INTEGRATION OF BFSI AND FINTECH ...................................................................................................... 58
RECOMMENDATIONS TO IMPROVE FINTECH IN INDIA ....................................................................... 59
BUDGET 2017-18.............................................................................................................................................. 60
IMPACT OF GST .................................................................................................................................................. 62
GST and Banks ................................................................................................................................................ 62
GST and Mutual Funds ................................................................................................................................... 62
GST and Insurance sector ............................................................................................................................... 63
Conclusion ......................................................................................................... Error! Bookmark not defined.
DEVELOPMENTS ............................................................................................................................................ 63
GOVERNMENT INITIATIVES ........................................................................................................................ 65
KEY SUCCESS FACTORS............................................................................................................................... 65
KEY RISK FACTORS ....................................................................................................................................... 65
ROAD AHEAD .................................................................................................................................................. 65
REFERENCES ................................................................................................................................................... 66
3
OVERVIEW
GLOBAL BANKING SECTOR
Since October 2015 overall stability risks in the global level have been increasing. The financial
stability has been clouded by disruptions to global asset markets reflecting setbacks to growth,
greater uncertainty, and weaker confidence. This environment has led to tighter financial conditions
in the global banking industry.
Global Financial Stability Map
The proximate causes of global market disruptions in 2016 are
• Higher macroeconomic risks, as a combination of weaker data, deteriorating sentiment, and policy
surprises roiled markets.
• Oil and commodity prices continued to decline. Concerns about slower growth, weaker commodity
prices, and tighter credit conditions are reducing many emerging market economies buffers, keeping
emerging market risks elevated. The oil prices began to rise after the OPEC nations meet in Sep 2016
(decided to reduce the production of crude oil)
• Uncertainty about economic rebalancing in China as it tackles domestic and external imbalances.
Spill overs to global financial markets from exchange rate pressure, drops in commodity prices,
capital outflows, and notable declines in international reserves added to market strains.
4
• Reduced confidence in policy traction, along with less confidence in the ability of policymakers to
offset the impact of rising economic, financial, and geopolitical risks.
• The credit risks have increased for the first time since 2011 for the advanced economies. Banks in
many advanced economies came under renewed pressure from equity price declines and rising credit
spreads. This pressure pushed bank valuations sharply lower in February 2016, particularly for banks
with the weakest business models and capital buffers.
• In emerging markets the excess capacity in commodity-related sectors, is being unwound through
sharp reductions in capital expenditures, while high private debt burdens reinforce risks to sovereign
balance sheets, credit markets, and banks. This mix is further deterring capital inflows, growth and
weakening exchange rates.
CREDIT RISK (2016)
INDIAN BANKING SECTOR (2015-2016)
India‘s banking sector is well capitalised and regulated as per the Reserve Bank of India. The
economic and financial conditions of India are far superior and the growth prospects are good when
compared to any other country in the world. The liquidity risk, credit risk and market risk studies of
the banking sector shows that Indian banks are resilient and have withstood the test of times (global
downturn).
The banking industry of India has witnessed recently the implementation of innovative banking
models like payment banks and small finance banks. The RBI granted an approval to 11 payments
banks and 10 small finance banks in FY 2015-16. The new measures of RBI may go a long way in
helping the restructuring of the Indian banking industry.
 There is an increase in the financial stability concerns for emerging market economies (EMEs)
but such concerns have been eased for the advanced economies. The performance of most of the
emerging markets had been marked by the domestic imbalances that are resulted from the
decrease in credit growth and slowdown of the economy coupled with the rising stress in
corporate and financial sectors making them vulnerable to the continuously changing external
financing conditions.
5
 In the group of emerging market economies, India stood out in terms of higher economic growth
despite two consecutive years of deficient monsoon. The banking sector, however, was under
stress primarily on account of the burden of non-performing assets (NPAs) which increased
sharply during the fiscal year.
 Apart from prudential regulatory measures, to supplement the existing supervisory processes, an
asset quality review (AQR) of banks was conducted during 2015-16 to address concerns over
NPAs. AQR brought to the fore significant discrepancies in the reported levels of impairment and
actual position and hence, led to increase in provisioning requirements for banks. Although aimed
at better recognition of and provisioning for NPAs in the medium- to long-term, AQR resulted in
an adverse impact on the profitability of banks in the short term. Hence, the banking sector‘s
performance as captured through the annual accounts of banks showed a continued deterioration
during the year when compared to the previous year.
 The aggregate balance sheets of scheduled commercial banks (SCBs) showed a single-digit
growth in 2015-16. The slowdown in credit growth was significant. Growth in profits showed a
decline, primarily on account of a sharp increase in provisions made by public sector banks.
Given the falling profit levels, both return on assets (RoA) and return on equity (RoE) showed a
decrease. Notwithstanding these adverse developments, the capital adequacy positions of banks,
including that of public sector banks, showed an improvement during the year mainly due to the
capital infusion by the Government and changes in the treatment of revaluation reserves, foreign
currency translation reserves (FCTR) and deferred tax assets (DTAs). These changes are expected
to align the capital adequacy framework in India more closely with the Basel Committee on
Banking Supervision‘s (BCBS) guidelines.
 The year was also marked by the introduction of several regulatory, supervisory and
developmental measures aimed at addressing short-to medium-term concerns, including mis
selling of financial products/services and cyber security along with a long-term vision of
developing a sound, competitive, inclusive and customer-friendly banking sector.
 As part of the framework for revitalising distressed assets, in June 2016, the Reserve Bank
introduced the Scheme for Sustainable Structuring of Stressed Assets (S4A) for a deep financial
restructuring of large accounts. Also, the process of selling stressed assets by banks was further
streamlined to facilitate better valuation, price discovery and creation of a vibrant stressed assets
market. Further, keeping in view the difficulties often faced by micro, small and medium
enterprises (MSMEs) in resolving and restructuring their stressed bank loans the RBI released a
separate framework for revival of distressed loans in this sector in March 2016.
MARKET SIZE
The Indian banking system consists of 26 public sector banks, 25 private sector banks, 43 foreign
banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in
addition to cooperative credit institutions. Public-sector banks control nearly 80 percent of the
market, thereby leaving comparatively much smaller shares for its private peers. Banks are also
encouraging their customers to manage their finances using mobile phones.
Standard & Poor‘s (S&P) estimated that the credit growth in India‘s banking sector would improve to
11-13 per cent in FY17 from less than 10 per cent in the second half of FY16.
6
STRUCTURE OF INDIAN BANKING SYSTEM
Scheduled Commercial Banks (SCB’s)
A commercial bank may be defined as a financial institution that provides services, such as accepting
deposits, giving business loans and auto loans, mortgage lending, and basic investment products like
savings accounts and certificates of deposit. In addition to giving short-term loans, commercial banks
also give medium-term and long-term loans to business enterprises. Commercial banks are of the
following seven types:
 Nationalized banks
 SBI and associates
 Regional rural banks
 Private sector banks
 Foreign banks
 Payment banks
 Small Banks
Public sector banks (accounted for the largest share of 75.9 per cent in aggregate deposits and 73.9
per cent in gross bank credit followed by private sector banks (19.7 per cent and 20.8 per cent,
respectively) as on March 31, 2015.
Public Sector Banks
Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held by a
government. It includes SBI, its associate banks nineteen (19) nationalised banks, IDBI and
Bharatiya Mahela Bank (which is about to be merged with SBI). Altogether there are 27 public sector
7
banks. The public sector accounts for 90 percent of total banking business in India and State Bank of
India is the largest commercial bank in terms of volume of all commercial banks.
Private Sector Banks
Private sector banks are those whose greater parts of stake or equity are held by the private
shareholders and not by government. Private sector bank plays a major role in the development of
Indian banking industry.
Foreign Banks
Foreign banks are those banks, which have their head offices abroad. They are obligated to follow the
regulations of both the home and host countries. Because the foreign branch bank‘s loan limits are
based on the parent bank‘s capital, foreign banks can provide more loans than subsidiary banks.
Regional Rural Bank (RRB)
Regional Rural Banks which came into existence on Gandhi Jayanti in 1975 with the formation of a
Prathama Grameen Bank are state sponsored regional rural oriented banks. They provide credit for
agricultural and rural development. The main objective of RRB is to develop rural economy. Their
borrowers include small and marginal farmers, agricultural labourers, artisans etc. NABARD holds
the apex position in the agricultural and rural development.
Payment Banks
The Reserve Bank of India (RBI) on 19th August, 2015 gave in-principle approval to 11 entities to
open payments banks that will widen the reach of banking services and push the government‘s goal
of financial inclusion. The new category of banks will provide basic savings, deposit, payment and
remittance services to people without access to the formal banking system. They can issue debit card
as well as ATM cards. They cannot carry out lending activities and thus wouldn‘t be issuing credit
cards. Customers will be able to buy Insurance products and Mutual funds units from these branches.
Small Banks
The Reserve Bank of India (RBI) announced draft guidelines in July 2014 for licensing of small
banks. Small banks are intended to provide savings products and credit to small businesses, and small
and marginal farmers. There will be no geographical restriction on the area of operation of the banks.
The RBI has set up an External Advisory Committee (EAC) to verify and assess the applications. The
Committee has notable persons on board such as Smt. Usha Thorat, former Deputy Governor,
Reserve Bank of India and Shri M.S. Sahoo, Secretary, The Institute of Company Secretaries of India
(ICSI).
Specialized Banks
There are some banks, which cater to the requirements and provide overall support for setting up
business in specific areas of activity. EXIM Bank, SIDBI (Small Industrial Development Bank of
India) and NABARD (National Bank for Agricultural and Rural Development) are examples of such
banks. They engage themselves in some specific area or activity and thus, are called specialized
banks.
8
Institutional Banks
In India, the emergence of development banking is a post-independence phenomenon. Development

bank is essentially a multi-purpose financial institution with a broad development outlook. It is a
financial institution, which provides a long term funds to the industries for development purpose. It
also includes investment institutions like UTI, LIC, and GIC etc.
NBFCs
Non-Banking Financial institutions or NBFCs are those financial institutions which provide financial
services without meeting the general definition of bank. These institutions do not hold a banking
license. Despite this, they provide a wide range of financial services and are regulated by the RBI.
NBFCs offer most of the services offered by the conventional banking system including loans and
credit facilities, education funding, retirement plans, wealth management and trading in money
markets. NBFCs can accept public deposits but they cannot accept demand deposits. NBFCs do not
form a part of the payment and settlement system and hence cannot issue cheques drawn on self.
Co-operative Bank
Co-operative bank was set up by passing a co-operative act in 1904. They are organised and managed
on the principal of co-operation and mutual help. The main objective of co-operative bank is to
provide rural credit.
The cooperative banks in India play an important role even today in rural co-operative financing. The
enactment of Co-operative Credit Societies Act, 1904, however, gave the real impetus to the
movement. The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad
basing it to enable organisation of non-credit societies.
Three tier structures exist in the cooperative banking:
 State cooperative bank at the apex level.
 Central cooperative banks at the district level.
 Primary cooperative banks and the base or local level.
Reserve Bank of India

The Reserve Bank of India (RBI), which commenced operations on April 1, 1935, is at the centre of
India‘s financial system. Hence it is called the Central Bank. It has a fundamental commitment of
maintaining the nation‘s monetary and financial stability. It started as a private shareholders‘ bank
but was nationalized in 1949, under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
RBI is banker to the Central Government, State Governments and Banks.
Key functions of RBI include:
 Monetary policy formulation
 Supervision of Banking companies, Non-banking Finance companies and Financial Sector,
Primary Dealers and Credit Information Bureaus
 Regulation of money market, government securities market, foreign exchange market and
derivatives linked to these markets
 Management of foreign currency reserves of the country and its current and capital account
9
 Issue and management of currency
 Oversight of payment and settlement systems
 Development of banking sector
 Research and statistics
While RBI performs these functions, the actual banking needs of individuals, companies and other
establishments are majorly met by banking institutions (called commercial banks) and nonbanking
finance companies that are regulated by RBI. RBI exercises its supervisory powers over banks under
the Banking Companies Act, 1949, which later became Banking Regulation Act, 1949.
10
TRENDS OF THE INDUSTRY (SCB’s)
Deposits
Deposits (Billion Rs) % Growth in deposits

110000 16
15.1% 14.9%
100000 14
90000 12
80000 10 10.6%
100927
70000 94338 8
85332 7%
60000 74297 6
50000 4
2012-2013 2013-2014 2014-2015 2015-2016 1
2012-13 2013-14 2014-15 2015-16
The deposits in the banks had been increasing from the past few years but the growth of increase
in the deposits have been declining from 2012-2016. The growth was only 7% in 2015-16 as
compared to 10.6% in 2014-15. During financial year 2012-2016, the deposits grew at a CAGR of
10.75%. The fall in the deposit growth this year (compared to the last year) to the single digit was
last recorded in the financial year 1962-63. But all the developments that had taken place in this
fiscal are contrary to the results that we observe.
 The banks have offered 7.25%-7.5% interest on one year fixed deposits, which is way above
the CPI (Consumer Price Inflation) of 4.8%. This was not the case till 2014, where one year
interest rates were about 9%, which were lower than the inflation of 9.5%.
 Decrease in the deposits would be possible if the people had other alternatives of savings. Way
back in 2012-13, people invested their money in the real estate and gold but according to the
data of Central Statistics Office (CSO), the physical savings of households have registered a
decline in 2013-15, which was corroborated by the slump in the real estate and fall in the gold
imports.
 There was a higher growth in the currency circulation, 14.9% growth or 215150 crore rupees.
People had opted to hold cash instead of depositing in the bank where they would receive an
interest.
1
https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!4
11
Growth in Bank deposits, currency circulation and household savings2
Growth in Bank Growth in currency Growth in household

Deposits (%) circulation (%) physical savings (%)
2006-07 23.84 17.35 18.46
2007-08 22.40 17.20 5.49
2008-09 19.93 16.99 41.20
2009-10 17.18 15.68 12.66
2010-11 15.92 18.77 19.89
2011-12 13.46 12.38 38.61
2012-13 15.1 11.59 5.45
2013-14 14.9 9.24 -0.15
2014-15 10.6 11.32 -5.27
2015-16 7 14.86 NA
 The growth in the money circulation is accounted to the fact the service tax rates are increased
from 12.36% to 15% since 2013-14. This led to the increased payment of service tax by the
people.
 The deposits in the bank are mainly dependent on the money in hand in the rural India. The
incomes have dried up from this part of the country and the main reason for this is the
uncertainty in monsoon. The income in rural areas is under terrible stress. Most of the part of
Maharashtra is under the condition of drought in this fiscal. The crop prices have collapsed for
most of the crops such as cotton, basmati, soya bean, maize, sugarcane, rubber etc.
 According to the labour bureau report, new jobs in eight industries- textiles, leather,
automobiles, transport, handloom, IT, gems & jewellery and metals, have fallen to 1.35 lakh in
2015 from 4.21 lakh in the last fiscal (2014).
 The Indian banking sector has remained stable despite the global upheavals. The deposits under
the Pradhan Mantri Jan Dhan Yojna (PMJDY) have increased. There were about 255 million
accounts which were opened and a total of USD 6971.68 million have been deposited.
 After the major step of demonetization by RBI and Government of India, there were about 14.5
lakh crore of deposits in the denomination of 500 and 1000 rupee notes. This had led to the
decline in the credit deposit ratio and hence there were many steps taken by the government in
the budget of 2017, to revive the banking industry.
2
RBI, CSO
12
Credit
Credit (Billion Rs) % Growth of Credit

70000 16
60000 14 13.6 14
50000 12
10
40000 8.6 9
66500 8
30000 56208 61023
49642 6
20000 4
10000 2
0 0
2012-2013 2013-2014 2014-2015 2015-2016 3
2012-13 2013-14 2014-15 2015-16
 The credit value of the banks increased from 2013-14 to 2015-16 and the percentage growth rate
of the credit has marginally increased year on year basis from the last fiscal.
 Credit to personal loans has been increased by 19.4% from the previous financial year. The
demand for the retail as well as the corporate loans had increased from the previous financial
year. The services, personal loans and agriculture credit growth led to the overall credit growth.
 There has been an increase in the percentage growth of credit from FY15 to FY16, but this value
is less than the percentage growth of credit in FY14.
Sectoral Deployment of Bank Credit4
2012-13 2013-14
5899
6660
13922 13922
Agriculture Agriculture
Manufacturing Manufacturing
Services Services
22303 Personal loans Personal loans
25165
11519 13375
3
4
13
2014-15 2015-16
7659
11663 8829
13922
Agriculture Agriculture
Manufacturing Manufacturing
Services Services
14131 Personal loans Personal loans
26576 15411 27307
Percentage growth in sectoral deployment5
70
60 13.1
50 14.7 Personal Loans
17.1 19.4
40 15.5
12.6 Services
30
13.6 5.7 9.1 Manufacturing
20 15.1 5.6
15 2.7
15.3
13.5 Agriculture
10 7.9
0
2012-13 2013-14 2014-15 2015-16
 There has been a growth of demand for both the corporate and the retail loans and in more
particular, the services, real estate, consumer durables and agriculture allied sectors led to the
growth in the credit in this fiscal year.
 The manufacturing sector has seen a reduced allotment of credit unlike other sectors which had
an increase allotment of credit supply.
 The credit to the NBFCs has been increased and is growing at a pace of 25% year on year basis.
The credit given to the Non-banking Finance Companies is the highest in the last three years and
is stood at 55.27 billion USD.
5
14
Net Profit
Net Profit (Billion Rs)

1000
800
600
400
200
0
2012-2013 2013-2014 2014-2015 2015-2016 6
 The net profits of the banking sector have been declined during the fiscal year 2016 as compared
to the last fiscal. The net profit came down to 341 billion rupees in this fiscal as compared to 891
billion rupees in the last financial year.
 During 2015-16, SCBs interest earnings and non-interest incomes were adversely affected,
which led to a more than 60 per cent drop in net profits for the banking sector. Banks‘ return on
assets (RoA) and return on equity (RoE) showed a substantial decline as compared to the
previous year even as the public sector banks (PSBs) reported negative RoA.
 The main reason in the dip in the profits is due to the drastic increase in the Non-performing
assets from the last year due to the major implementation of Assets Quality Review by the
Reserve Bank of India (RBI).
 The results in the third quarter of this fiscal are also not good and the reason being the impact of
demonetization (Nov 2016) and the accumulation of NPAs. Due to this the deposits have been
increased and the credits are decreased, this has mainly affected the interests which the banks
receive when they give loans to the customers. As these interest incomes are affected, there was
a dip in the profits.
 All together 23 state-owned banks (PSBs) have clocked a lower aggregate net profit for the three
months ended December 2016 than that of Axis Bank. PSBs are slowly limping back to
profitability a year after the launch of the Reserve Bank of India (RBI)‘s asset quality review
which required them to make hefty provisions for impaired assets.
 At Rs 492.53 crore, combined profits of the lenders was lower than Axis Bank‘s Rs 579.57 crore
and less than one-twentieth of Rs 9978.84 crore by the 16 private-sector banks.
 In the year-ago period, the same set of public-sector banks had recorded an aggregate net loss of
Rs 10419.25 crore.
 Eight banks (IDBI Bank, Central Bank of India, Indian Overseas Bank, Oriental Bank of
Commerce, UCO Bank, Bank of Maharashtra, State bank of Travancore and State Bank of
Mysore) posted losses in the third quarter FY17. This was an improvement over the third quarter
of FY16, which had seen 10 of these banks recording losses.
6
15
 IDBI Bank recorded the largest loss of Rs 2254.96 crore, among the above banks, pulled down
by provisions worth Rs 3205.52 crore, which outweighed its net interest income of Rs 850.38
crore.
 Bank of Baroda, which had posted Rs 3342.04 crore loss in the quarter ended December 2015,
saw a net profit of Rs 252.67 crore this year. The improved performance had more to do with a
59.5% year-on-year (y0y) jump in other income, comprising core fee income and treasury gains,
than with better core operations.
 The bank‘s net interest margin (NIM), a key measure of profitability, declined 32 basis points
(bps) to 2.49% at the end of December from the end of September.
 Bank of Baroda‘s net profit for the third quarter stood at Rs 252.67 crore compared with a loss of
Rs 3342.04 crore a year earlier.
 Shares of Bank of Baroda (BoB) fell 10.3%, its steepest fall in two year, after most of the
brokerages downgraded the stock as non-performing assets (NPAs) continued to mount. This
was just the day when the bank‘s quarterly results were released. The reason for the fall is
mainly because of increase in NPAs and the profits did not reach the estimates.
 State Bank of India's profits (third quarter FY17) more than doubled from a year ago in the
October-December period, first such rise in five quarters, helped by lower provisions for bad
loans. The last time the bank posted a year-on-year rise in its quarterly profit was in the three
months ended September 2015. SBI, which accounts for more than a fifth of India's banking
assets, saw its gross bad loans as a percentage of total loans rising slightly to 7.23 percent at the
end of December, from 7.14 percent at end-September. SBI, which accounts for more than a fifth
of India's banking assets, saw its gross bad loans as a percentage of total loans rising slightly to
7.23 percent at the end of December, from 7.14 percent at end-September.
Total Assets
Assets (Billion Rs) Percent Growth in Assets

140000 20
120000
100000 15 15.2 14.5
80000
129589 10 9.7
60000 109759 120370
95900 7.7
40000 5
20000
0 0
2012-2013 2013-2014 2014-2015 2015-2016 7 2012-2013 2013-2014 2014-2015 2015-2016
 FY13-16 saw growth in assets of banks across sectors. The banking sector assets have
increased at a CAGR of 35.12% from 95900 billion rupees (FY13) to 129589 billion rupees
(FY16).
7
16
 Assets of public sector banks, which account for more than 70 per cent of the total banking
assets, grew at a CAGR of 12 per cent.
 Private sector expanded at a CAGR of 13 per cent, while foreign banks posted a growth of 9
percent.
 Corporate demand for bank loans have grown due to continued infrastructure investments, and
due to other policy decisions such as reducing oil subsidies, issuing of telecom spectrum
licenses and the proposed abolition of penalty on loan prepayment.
 Total assets of Public Sector Banks amounted to approx. 90,000 billion in FY16.
 Even though the assets have been increased from 2013 to 2016, the percentage growth of the
assets has been declining since 2012-13. The percent growth came down from 15.2% in 2012-
13 to 7.7% in 2015-16.
Deposits Ratios
Credit to deposit ratio8 Investment to deposit ratio8

100 70
90 60
80
70 50
60 40
50 30 61.3
40 82.54 90.3
71.38 74.72 79.24 78.24
30 20
20 10 27.98 29.09 28.76 34.45 31.45
10 0
0
Cash to deposit ratio8 Ratio of deposits to total liabilities8

8 90
80
7 70
60
6 50
7.14 40 78.27 84.62 82.61 77.88
30 69.66
5 5.59 5.66 5.59 56.32
5.18 20
4.93 10
4
0
8
17
CD Ratio (%)
80
70
60
50
40 79.1 78.9 78.3 78.2
30
20
10
0
2012-2013 2013-2014 2014-2015 2015-2016 9
 The loan-to-deposit ratio (LTD) is a commonly used statistic for assessing a bank's liquidity by
dividing the bank's total loans by its total deposits. This number is expressed as a percentage. If
the ratio is too high, it means that the bank may not have enough liquidity to cover any
unforeseen fund requirements, and conversely, if the ratio is too low, the bank may not be earning
as much as it could be.
 Demonetization dominated a significant part of Third quarter making the whole fiscal eventful.
The large deposit inflow due to the currency exchange and the withdrawal limits by the RBI
ensured that the banks were overflowed with liquidity in the backdrop of muted credit demand
and a likely weak credit demand outlook in near term. Though not of the similar scale but with
different driving factors, the liquidity overflow was reminiscent of third quarter (3rdQ) of 2009,
when SBIN had an inflow of Rs 732 billion in deposits while credit growth was just Rs 109
billion in the same quarter (an incremental CD ratio of just 14.9%). This induced SBIN to
introduce its ‗teaser rate‘ scheme that eventually made it a market leader in home loans and
subsequently in vehicle loans with its retail loan push.
PSBs as a group reported over Rs 434 billion in non-tax provisions (driven mostly by RBI‘s AQR)
and a net loss of Rs 109 billion in the third quarter of 2016. This creates a favourable base effect and
earnings growth therefore is likely to see a quantum leap.
 The deposits for this fiscal year have been decreased as compared to the last year. But during
FY12–16, deposits grew at a CAGR of 10.75 percent and reached 100927 billion Rs in FY16.
 The major factors influencing deposit growth are strong growth in savings amid rising disposable
income levels.
 Access to banking system has also improved over the years due to persistent government efforts
to promote banking technology, and promote expansion in unbanked and nonmetropolitan
regions.
 Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY, have also increased. As in November
2016, USD 6,971.68 million was deposited, while 255.1 million accounts were opened.
9
18
Return on Assets
Return on assets Return on assets (2016 Dec)

1.2 2
1 1.5
1
0.8 1.5 1.45
0.5
0.6 0.42 0.31
1 0 -0.2
0.4 0.8 0.8 -0.49
-0.5
0.2
0.3 -1
0
2012-2013 2013-2014 2014-2015 2015-2016 10
 The return on assets is the least for this financial year when compared to the last 5 years. The
increase in the total amount of non-performing assets, for the banking sector as a whole due to
the asset quality review which has been taken place in the end of 2015, has a prominent role
to play in the downfall of the profits and the hence the returns.
 The ROA for the year 2014-15 is 0.8 while it is 0.3 for 2015-16; there is a 62.5% decrease in
the return on assets for the FY16 as compared to FY15.
 The nationalised banks had a negative return on assets in the FY16 and it is -0.49% and due to
this the Public sector banks as a whole had also a negative return on asset which is -0.2%.
 The foreign and private banks had done well as compared to the public sector banks, with
around ROA of 1.5% (private sector banks) and 1.45% (foreign banks).
Return on Equity
Return on equity (%) Return on equity (%)

16 15
14
12 10
10 13.81
5
8 6.78 8
13.8 3.59
6 10.7 0
10.4
4 -3.47
2 3.6 -5 -8.52
0
2012-2013 2013-2014 2014-2015 2015-2016 11 -10
10
11
19
During 2015-16, SCBs‘ interest earnings and non-interest incomes were adversely affected, which
led to a more than 60 per cent drop in net profits for the banking sector. Banks‘ return on assets
(RoA) and return on equity (RoE) showed a substantial decline as compared to the previous year
even as the public sector banks (PSBs) reported negative RoA.
SCBs’ return on assets and return on equity (bank group-wise)
Sr. Bank group Return on assets (%) Return on equity (%)
2014-15 2015-16 2014-15 2015-16
1 Public Sector Banks
Nationalised Banks* 0.37 -0.49 6.44 -8.52
The State Bank Group 0.66 0.42 10.56 6.78
2 Private Sector Banks 1.68 1.50 15.74 13.81
3 Foreign Banks 1.84 1.45 10.24 8.00
4 All SCBs 0.81 0.31 10.42 3.59
 Return on assets = net profit/average total assets.

 Return on equity = net profit/average total equity
NPA (Non-Performing Assets)
Gross NPA12
Gross NPA (Billion Rs)

8000
6000
4000
6120
2000 3233
1941 2644
0
2012-2013 2013-2014 2014-2015 2015-2016
12
20
Net NPA
Net NPA (Billion Rs)

4000
3000
2000
3495
1000 1754
1426
987
0
2012-2013 2013-2014 2014-2015 2015-2016 13
 An asset, including a leased asset, becomes non-performing when it ceases to generate income for
a particular bank.
 Banks tried to reduce their stressed assets by selling them to asset reconstruction companies
(ARCs). This has been increasing since March 2014 because of the regulatory support extended
to banks under the Framework to Revitalise the Distressed Assets in the Economy.
Number of ARC’s and assets acquired from the banks (in billion rupees) 14
Values December March March March
2013 2014 2015 2016
Company count 5 13 14 16
Total acquired from banks 163.56 351.64 584.79 726.26
13
14
https://rbi.org.in/SCRIPTs/AnnualPublications.aspx?head=Trend%20and%20Progress%20of%20Banking%20in%20India
21
Gross NPA ratio (as % of gross advances)
Gross NPA ratio

10
4 7.8
2 3.8 4.3
3.2
0
2012-2013 2013-2014 2014-2015 2015-2016
 There was a rise in gross NPA from the past 4-5 years. But there was an approximately 100%
increase in the Gross NPA in the FY16 as compared to FY15 and this is mainly after the
Asset Quality Review by the RBI in 2015.
 Nearly all banks showed a rise in the GNPA ratio for December from a year ago period,
which means that bad loans have been piling up at the same pace.
 Smaller banks not just showed shrinkage in their loan book but also a larger part of the book
had gone bad.
 For the 38 listed banks put together, the gross bad loan stock rose 59% to a around Rs 6.82
trillion in December.
 Eighteen of the twenty four listed public sector banks have 10% of their loan book as bad
assets.
Net NPA ratio (as % of net advances)
Net NPA ratio

5
4
3
2 4.4
1 2.1 2.4
1.7
0
2012-2013 2013-2014 2014-2015 2015-2016
The banking sector has been under pressure due to a variety of reasons such as: High NPAs and
higher provisions being made, sluggish growth in credit off take with investment being low and
22
challenges of capital for PSBs in particular. The RBI has been lowering the reference rate in a
guarded manner and banks have followed suit, albeit cautiously. However, business has been low and
emanated more from the retail segment and less from industry and services. This has gotten reflected
in their financial performance. Results of the banks (excluding SBI) show that this fiscal year has
continued to be stressful in terms of growth in net interest income and profits. Gross NPAs are now
around Rs 3.66 lakh crore for these banks.
 December 2015 has been the turning point when the sector was affected on all sides.
 Net interest income growth started slowing down to reach a low of 3.6% in Q2-FY17.
 The change in NPA recognition standards led to a sharp increase in growth of these assets
which continues for the last 4 quarters.
 Banks have also made higher provisions for NPAs, which has led to a decline in net profits in
the last 4 quarters. However, this decline appears to have gotten moderated in the last 2
quarters which could probably signal changing times in the next two quarters.
 Indian Overseas Bank had the highest ratio at 14.32%, only one of the signals that the bank is
in deep trouble. The net NPA stock for the 38 banks showed a rise of 57% in December from
a year ago.
 There has been a sharp jump in NPA ratio with a sharp increase from 5.37% in December
2015 to 7.04% in March 2016, with continuation in next 2 quarters. For the PSBs the NPA
ratio was as high as 14.5% in September 2016. Five of these banks had a ratio of less than
10% - Canara Bank, Indian Bank, Punjab and Sind Bank, Syndicate Bank and Vijaya Bank.
SCB’s NPAs recovered through various channels (in billions)15
2014-15 2015-16
No. of Amount Amount No. of Amount Amount

Channel of cases cases
recovery referred involved recovered referred involved recovered
Lok Adalats 29,58,313 309.79 9.84 44,56,634 720.33 32.24
DRTs 22,004 603.71 42.08 24,537 693.41 63.65
SARFAESI 1,75,355 1,567.78 256.00 1,73,582 801.00 131.79
Total 31,55,672 2,481.28 307.92 46,54,753 2,214.74 227.68
15
23
PSB’s NPAs recovered through various channels (in billions)16
2014-15 2015-16
No. of Amount Amount No. of Amount Amount

Channel of cases cases
recovery referred involved recovered referred involved recovered
Lok Adalats 2596351 270.2 9.31 4244800 690.17 31.34
DRTs 18397 532.03 34.84 19133 574.39 55.90
SARFAESI 166804 1463.06 234.34 159147 650.08 110.33
Total 2781552 2265.29 278.49 4423080 1914.64 197.57
Banks have been making all efforts to reduce their non-performing assets through various legal
channels like resolutions through Lok Adalats, Debt Recovery Tribunals (DRTs) and invocation of
SARFAESI. However, the amount recovered by all SCBs during 2015-16 reduced to 227.68 billion
as against 307.92 billion during the previous year. PSBs, which are burdened with a high proportion
of the banking sector‘s NPAs, could recover only 197.57 billion as against 278.49 billion during the
previous year. The deceleration in recovery was mainly due to a reduction in recovery through the
SARFAESI channel by 52 per cent from 256 billion in 2014-15 to 131.79 billion in 2015-16. On the
other hand, recovery through Lok Adalats and DRTs increased.
Net Interest Margin
NIM (%)
3
2.8
2.6
2.4
2.6 2.6 2.7 2.6
2.2
2
2012-2013 2013-2014 2014-2015 2015-2016
 Net interest margin (NIM) came under pressure during the year due to loss of interest from
standard assets slipping into NPAs, the impact of implementation of the Ujwal DISCOM
Assurance Yojana (UDAY) leading to lower yields and adoption of the marginal cost lending rate
(MCLR) during a decreasing rate scenario. Lower costs of funds could not offset the decline in
NIM.
16
24
 NIMs are bound to weaken given the suddenly expanded base of IEAs (interest earning assets)
while the incremental spreads remain obviously thinner due to deployment in short term
instruments (MSS, Reverse Repo). Nevertheless, these earnings constitute an upside hitherto not
factored in estimates and thus contribute to a better top line growth.
Net Interest Margin (net interest income/total assets)17
NIM's (%)
Net Interest Margin FY16 5
4
4
3
2 3.45 3.6 3
1 2.64 2.06 2.23 2.6
2 4.31 3.97
0 3.49
2.96
1
0
HDFC ICICI AXIS SBI
 The net interest margin of the public sector banks have been adversely affected in this fiscal
due to the increase in the NPAs.
 All the banks have been affected by this, but the Public banks had a big hit. The NIM is low
at 2.23 for the public banks as compared to 3.6 and 3.45 for foreign banks and private banks
respectively.
 The NIM of all the scheduled banks has also been decreased to 2.6 in FY16 from 2.7 in FY15.
This had a great impact on the banking sector and hence the profits of this sector have been
reduced to their half (approx.)
 Indian banking sector have healthy Net Interest Margins as compared to the global peers
 HDFC leads the large banks with a NIM of over 4.31 percent in FY16.
 Prominent Chinese banks have NIM‘s between 2-3 percent, significantly lower than Indian
peers and US banks have similar NIM‘s as compared to India.
17
25
Net interest earned (Millions)18
12000000
10000000
2011-2012
8000000
2012-2013
6000000
2013-2014
4000000 2014-2015
2000000 2015-2016
0
State Bank of India & its Associates Nationalised Banks

(Millions) 5000000 4360555
4740986 4755626
2500000 3911061
4000000 3411767
2000000
3000000
1500000
2000000
1000000 1841722 2020862 2146587
1435552 1637657 1000000
500000
0 0
Public Sector Banks Private Sector Banks

6761848.6902213.
8000000 6202276. 184 3000000
5548717. 905 486 2476891
7000000 4847318. 2500000 2141455
6000000 816
179 1891359
5000000 2000000 1664864
1345555
4000000 1500000
3000000 1000000
2000000
1000000 500000
0 0
18
26
Foreign Banks All SCBs
600000 504454 523175 12000000
457689 94077579902279
500000 422486 10000000 8551325
359966 7636068
400000 8000000 6552839
300000 6000000
200000 4000000
100000 2000000
0 0
 Public sector banks account for over 72 per cent of interest income and the SBI (along with its
associates) accounts for 21% of interest income in the sector in FY16
 They lead the pack in interest income growth with a CAGR of 12.8 per cent over FY12-16
 Overall, the interest income for the sector has grown at 15 per cent CAGR during FY12-16
 The net interest earned has been slightly increased in FY16 from FY15, but this rise is not in
proportion to the rise in the assets of the banks. Because most portion of these assets have been
stated as non-performing and this is not a good sign for the economy.
 The foreign banks and private banks have somewhat been insulated from the provision of NPAs
as compared to the Public sector banks. This could be attributed to the procedures of disbursing
the loans and keeping a check on their assets.
Ratio of non-interest income to total assets
2
1.8
1.6
1.4
1.2
1
0.8 1.75
1.59
0.6 1.23 1.16
0.4 0.8 0.94
0.2
0
State Bank Nationalised Public Private Foreign All SCBs
of India & Banks Sector Sector Banks
its Banks
Associates
 Public sector banks account for about 57.20% of income other than from interest (‗other
income‘) and this has been deceased from 57.65% in the year 2014-15
 Other income for public sector banks has risen at a CAGR of 13.31% during FY11-16
 Overall, other income for the sector has risen at 13.88% CAGR during FY11-16
27
Other income earned
1600000
1400000
1200000
1000000
2011-2012
800000
2012-2013
600000 2013-2014
2014-2015
400000
2015-2016
200000
0
State Bank Nationalised Public Private Foreign All SCBs
of India & Banks Sector Sector Banks
its Banks
Associates

(Millions) 600000
479810 493470
400000 500000 424217
370168
300000 400000 325766
300000
200000
337406 200000
276164
100000 178231 197462 227075 100000
0 0
Public Sector Private Sector Banks

830876.2
1000000 755974.7 600000
651292.2 54 62 496326
800000 503996.7567629.5 46 500000 418417
72 400000 354742
600000 35 297927
300000 250480
400000
200000
200000 100000
0 0
28
160000 149702 1600000 1452352
134893 1324095
140000 125150 1400000
108959 112286 1140927
120000 1200000 977843
100000 1000000 863437
80000 800000
60000 600000
40000 400000
20000 200000
0 0
 The other income has been increasing since 2011-12 and the anomaly being the foreign banks
which had a decline in the other income had earned in 2015-16.
Total income earned
12000000
10000000
8000000
6000000 2011-2012
2012-2013
4000000
2013-2014
2000000 2014-2015
2015-2016
0
29
(Millions) 6000000 5220796 5249096
4784772
3000000 5000000 4281229
2500000 3737533
4000000
2000000
3000000
1500000
1000000 2068797 2297027 2483993 2000000
1613782 1835118 1000000
500000
0 0
Public Sector Private Sector Banks

10000000 7517823.7733089. 3500000 2973217
6853569. 446
6116347. 24 3000000 2559872
8000000 5351314. 151 2246101
388 2500000 1962791
6000000 914
2000000 1596035
4000000 1500000
1000000
2000000 500000
0 0

654156 648325 11354631
10731851
700000 592582 12000000
534773 9692252
600000 10000000 8613911
468926 7416276
500000 8000000
400000
6000000
300000
200000 4000000
100000 2000000
0 0
 The total income is the sum of the interest income and the other incomes as given above.
 The total income of all the banks has been increasing since 2011. The reasons for this would be
the rise in the credits given by the banks to the customers and hence the interest is increased year
on year basis.
 The interest income plays a main role in the total income. As the interest is the revenue that is
obtained from the core activities of the banks and this is the main purpose of the banks. Hence
this plays an important role in determining the profits of the bank.
 Only the foreign banks have a negative trend in this aspect. The total income has been declined
for the foreign banks.
30
 Even though the interest income for the foreign banks has been increased, the other income for
those banks has declined in this fiscal.
 It could be concluded that the foreign banks had a great hit on their other incomes and this has
impacted the total income of the foreign banks.
Provision coverage ratio
The provision coverage ratio (PCR), a measure of the funds set aside by banks to cover bad loans,
has declined steeply in the past three years for almost all public sector banks. A higher provision
coverage ratio means the bank is protecting itself better against its bad loans
Provision coverage ratio (%)

50
48
46
44
47.6
42
44.7 44
40 41.5
38
2012-2013 2013-2014 2014-2015 2015-2016
A decline in the ratio means that provisions have not been made to the extent of the rise in bad loans.
Except for a few banks such as State Bank of India, Central Bank of India and Indian Bank where
PCR has remained more or less stable or increased marginally since March 2013, the ratio has
declined sharply at most public sector banks.
This relation is used to analyse asset quality of the bank, i.e., the cumulative provision balances of the
bank as on a particular date to gross NPAs. It is a measure that indicates the extent to which the bank
has provided against the troubled part of its loan portfolio. A high ratio suggests that additional
provisions that are to be made by the bank in the coming years would be relatively low (if gross non-
performing assets do not rise at a faster clip).
Provision coverage ratio = Cumulative provisions / Gross NPAs
 The overall PCR has also declined in the year 2015-16. This ratio has been declining since 2012-
16.
 The PCR is 41.5% in 2015-16 which was declined from 44% in the previous financial year.
 The main reason for the decline in this value is that the banks have not allocated additional funds
for the NPA‘s that are classified after the asset quality review.
 The decline in this ratio suggests that the banks are not perfectly equipped with their arsenal for
any disturbances for the future.
31
Slippage Ratio
The slippage ratio is calculated by the formula: (Fresh accretion of NPAs during the year/Total
standard assets at the beginning of the year)*100
Slippage Ratio (%)

8
7
6
5
4
6.9
3
2
2.8 3.3 3.2
1
0
2012-2013 2013-2014 2014-2015 2015-2016
 The slippage ratio clears shows the increase in the non-performing assets in this fiscal year.
 The ratio has been increased from 3.2% in 2014-15 to 6.9% in 2015-16. This is a 100%
increase in the ratio as compared to the last financial year.
 The main reason for the increase in this ratio is the increase in the NPA‘s, that are freshly
accrued in this fiscal year and this was due to the Asset quality review by the Reserve bank of
India in the last months of 2015.
 The slippage ratio of the public sector banks has seen a great impact due to the higher
accretion of the non-performing assets.
 This was also the main reason for the dramatic decrease in the profits of the public sector
banks.
Capital Funds
Equity contribution of owners. The basic approach of capital adequacy framework is that a bank
should have sufficient capital to provide a stable resource to absorb any losses arising from the risks
in its business. Capital is divided into different tiers according to the characteristics / qualities of
each qualifying instrument. For supervisory purposes capital is split into two categories: Tier I and
Tier II.
Under the Basel Accord, a bank's capital consists of tier 1 capital and tier 2 capital, and the two types
of capital are different. Tier 1 capital is a bank's core capital, whereas tier 2 capital is a bank's
supplementary capital. A bank's total capital is calculated by adding its tier 1 and tier 2 capital
together. Regulators use the capital ratio to determine and rank a bank's capital adequacy.
32
Tier I Capital19
A term used to refer to one of the components of regulatory capital. It consists mainly of share
capital and disclosed reserves (minus goodwill, if any). Tier I items are deemed to be of the highest
quality because they are fully available to cover losses Hence it is also termed as core capital.
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to
measure a bank's financial health and is used when a bank must absorb losses without ceasing
business operations. Under Basel III, the minimum tier 1 capital ratio is 6%, which is calculated by
dividing the bank's tier 1 capital by its total risk-based assets.
Many lenders saw a dip in the common equity Tier-I capital and total Tier-I capital after the
provisioning done in the wake of the asset quality review (AQR) in 2015. Andhra Bank has fallen
below the mandated 7% ratio, many others are perilously close to slipping too.
Tier II Capital
Refers to one of the components of regulatory capital. Also known as supplementary capital, it
consists of certain reserves and certain types of subordinated debt. Tier II items qualify as regulatory
capital to the extent that they can be used to absorb losses arising from a bank's activities. Tier II's
capital loss absorption capacity is lower than that of Tier I capital.
Tier 2 capital include revaluation reserves, hybrid capital instruments and subordinated term debt,
general loan-loss reserves, and undisclosed reserves. Tier 2 capital is supplementary capital because
it is less reliable than tier 1 capital. In 2015, under Basel III, the minimum total capital ratio is 8%,
which indicates the minimum tier 2 capital ratio is 2%, as opposed to 6% for the tier 1 capital ratio.
19
http://bankingindiaupdate.com/index.php/apr-2016/
33
Capital adequacy ratio
A bank's capital ratio is the ratio of qualifying capital to risk adjusted (or weighted) assets. The RBI
has set the minimum capital adequacy ratio at 9% for all banks. A ratio below the minimum indicates
that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank do
not expand their business without having adequate capital.
CAR = Tier I capital + Tier II capital / Risk weighted assets
CAR
14
13.8
13.6
13.4
13.2 13.9
13
12.8 13.3
13 13
12.6
12.4
2012-13 2013-14 2014-15 2015-16
CAR(TIER I)
11
10.8
10.6
10.4
10.2 10.8
10
10.3 10.3
9.8 10.1
9.6
2012-13 2013-14 2014-15 2015-16
 Capital adequacy ratio as per Basel III was above 10% for 28 of the 29 banks on which
information is available. 11 had ratios of above 12%.
 The Capital adequacy ratio of the banking industry has been increased from 13% to 13.3% from
2014-15 to 2015-16. The minimum CAR as stipulated by RBI is 9% and the current ratio is
already higher than this value.
 The high ratio signifies that the banks have sufficient amount of capital and reserves as a percent
of the assets. As the credit given by the banks is risky, this amount has to be with the bank as per
the Basel III norms.
34
REGIONAL RURAL BANKS
As at end-March 2016, there were 56 regional rural banks (RRBs) in the country with 45 sustainable
RRBs, i.e., earning profits and carrying no accumulated losses. Assets/liabilities of RRBs increased
by 8.4 per cent during the year. On the asset side, loans and advances witnessed a growth of 14.6 per
cent against 22.9 per cent in the previous year, while investments improved by 3.6 per cent against an
increase of 10.0 per cent during the corresponding period. On the liability side, deposits witnessed a
marginal increase in growth to 14.8 per cent as against 14.0 per cent in the previous year, while
borrowings declined by 19.4 per cent vis-a-vis a 28.0 per cent increase in the previous year.
Net Profit (billions)

8
7.5 7.5 7.5
7 7
6.5
6
5.5
5 5
4.5
4
2012-13 2013-14 2014-15 2015-16
ROA and NIM of Regional Rural Banks
4
3.5
2.5 2.45
2.5
3 2.55
2.5
ROA (%)
2
NIM (%)
1.5
1 0.9
0.8 0.7
0.5 0.45
0
2012-13 2013-14 2014-15 2015-16
During 2015-16, both interest income and interest expended witnessed lower growth as compared to
the previous year. Interest expended increased by 14.6 per cent against 11.1 per cent increase in
interest income. This led to a marginal decline in NIM. Further, provisions and contingencies
increased by 71.0 per cent largely on account of deteriorating asset quality. These factors led to a
decline in the overall net profits of RRBs by 26.5 per cent as against a 1.9 per cent increase during
the previous year.
35
Marginal Standing Facility
This facility was constituted by RBI to provide banks with overnight credit over and above the limit
of LAF. Similar to LAF, under this facility as well, banks borrow and lend money by selling and
buying excess SLR assets. The banks can borrow a maximum of 2% of NDTL from this facility
against their SLR holdings. Within this facility banks are allowed to borrow even if they do not meet
the SLR requirement, which means that even if they do not have excess SLR funds, they can borrow
up to 2% of their NDTL. MSF rate is always 50 basis points above the repo rate, which makes the
current rate as 7%.
Shift from Base Rate to Marginal Cost of Lending Rate

The main components of base rate system are:
 Cost of funds
 Operating expenses to run the bank
 Minimum Rate of return i.e. margin or profit
 Cost of maintaining CRR
As it can be observed, the banks do not consider ‗repo rate‘ in their calculations. They primarily
depend on the composition of CASA (Current accounts & Savings Accounts) and deposits to
calculate the lending rate. Most of the banks are currently following average cost of fund calculation.
So, any cut or increase in rates (especially key rate like Repo Rate) by the RBI is not getting
transmitted to the bank customers immediately. As per the RBI‘s new guidelines, it is mandatory for
the banks to consider the repo rate while calculating MCLR with effective from 1st April, 2016.
The new method — Marginal Cost of funds based Lending Rate (MCLR) will replace the present
base rate system. The main components of MCLR calculation are:
 Operating Expenses
 Cost of maintaining CRR
 Marginal Cost of funds
 Return on Net-worth Tenor Premium (an additional slab of interest over the base rate, based
on the loan tenure & commitments)
The main differences between the two calculations are i) marginal cost of funds & ii) tenor premium.
The marginal cost of funds will have high weightage while calculating MCLR. So, any change in key
rates (increase or decrease) like repo rate brings changes in marginal cost of funds and hence the
MCLR should also be changed by the banks immediately.
How MCLR Works?

For instance, for salaried individuals, XYZ Bank has set a floating rate home loan at one-year MCLR
of 9.20% with a spread of 25 bps for loans of up to Rs.5 crore. So, the interest rate will be 9.45%
(9.20% +0.25%). This interest rate is valid till 30th April, 2016 (as given in the bank‘s website).
XYZ Bank has decided to set one-year MCLR as the benchmark rate for their home loans. Though
the MCLR is reviewed monthly, your home loan will be reset every year automatically, depending on
the agreement with the bank. So, for an Rs.50-lakh home loan on 10th April, 2016, the home loan
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interest rate would be 9.45%. EMI instalments at this rate of interest are to be paid for the next 12
months. Let‘s say one-year MCLR gets revised to 9. % in April, 2017 and the spread remains the
same then the home loan interest rate will be reset at 9.25% (MCLR of 9% plus spread of 25 bps).
Asset Quality Review
The Reserve Bank of India (RBI) has conducted an asset quality review with a view to cleaning up
balance sheets of banks. This has resulted in mounting losses for the banking sector.
Typically, Reserve Bank of India (RBI) inspectors check bank books every year as part of its annual
financial inspection (AFI) process. However, a special inspection was conducted in 2015-16 in the
August-November period. This was named as Asset Quality Review (AQR). In a routine AFI, a small
sample of loans is inspected to check if asset classification was in line with the loan repayment and if
banks have made provisions adequately.
However, in the AQR, the sample size was much bigger and in fact, most of the large borrower
accounts were inspected to check if classification was in line with prudential norms. Some reports
suggest that a list of close to 200 accounts was identified, which the banks were asked to treat as non-
performing. Banks were given two quarters, October-December and January-March of 2016 to
complete the asset classification.
The RBI believed that asset classification was not being done properly and that banks were resorting
to ever-greening of accounts. Banks were postponing bad-loan classification and deferring the
inevitable. Investors were also facing uncertainties as guidance by banks on bad loans was erratic. So
finally, Mr.Raghuram Rajan decided to end the uncertainty as he committed to cleaning up bank
balance sheets.
Bad loans in the Indian banking system jumped 80 per cent in FY16, according to RBI data, mainly
on account of the AQR. The AQR created havoc on banks‘ profit & loss accounts as many large
lenders slipped into losses in both the said quarters, which resulted in some of them reporting losses
for the full financial year. Record losses were posted in Q4 of FY16 by many large lenders like Bank
of Baroda (Rs.3,230 crore), Punjab National Bank (Rs.5,367 crore) and IDBI Bank (Rs.1,376 crore).
Almost all public sector banks were impacted, while the impact in the private sector was limited to
biggies such as ICICI Bank and Axis Bank. HDFC Bank emerged unscathed from the crisis as its
exposure to big-ticket infrastructure projects was relatively small. The impact of the AQR is not over.
In the last two quarters of the previous financial year, banks have classified AQR-identified accounts
(which were termed as stressed assets) as NPAs which resulted in an increase in provisioning to 15
percent as compared to 0.4 percent provisioning requirement for standard assets.
In the four quarters of the current financial year, banks have to increase provisioning of accounts that
were restructured (known as standard restructured assets, and which attract 5 per cent provisioning)
earlier but are still weak (that is, repayment is not regular) – to 15 per cent over the four quarters, but
are not mandated to classify them as NPA. Accounts that were classified as sub-standard (first
category of NPA), will slip into doubtful category if it stayed sub-standard for 12 months. Doubtful
assets attract 40 per cent provisioning. Further down the line, if loan is not serviced, banks have to
treat it as a loss account with 100% provisioning.
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NPA Ordinance
The Indian Banking system had a bouquet of adequate laws to deal with the NPA menace particularly
The Insolvency and Bankruptcy Code, 2016 and the strengthened SARFAESI Act and DRT law.
There were also RBI-led initiatives such as CDR, 5/25, SDR, S4A and JLF framework. However, the
key was the adoption and implementation of the new Bankruptcy Code and other associated options
by banks, which has not happened adequately so far. Hence, the Indian Finance Ministry opined that
the RBI needed to be further empowered to implement the Bankruptcy Code and related options as
they feel necessary. It is in this regard that Union Government pressed ahead with the NPA
Ordinance.
Now RBI has been empowered to intervene effectively in the functioning of banks through
modification of Section 35A of The Banking Regulation Act. The NPA Ordinance seeks to modify
Section 35A of The Banking Regulation Act, 1949, which is a section that empowered the RBI to
intervene in the functioning of a bank and provide specific directions, if certain conditions are
satisfied. However, the Finance Ministry felt that language of Section 35A was inadequate as far
empowering the RBI to act effectively is concerned. Hence, in this regard, two incremental sections
viz. 35AA and 35AB have been added to The Banking Regulation Act. Under Section 35AA, the
GOI authorizes the RBI to initiate insolvency proceedings in cases it deems fit. Section 35AB would
empower the RBI to give directions to banks for resolution of specific stressed assets. It would also
deal with matters that deal with specific accounts that may be under the aegis of the Oversight
Committee
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FISCAL YEAR (2015-2016)
During 2015-16, the performance of most emerging market economies (EMEs) was marked by
severe domestic imbalances emanating from economic slowdown and downturn in credit growth
coupled with rising stress in corporate and financial sectors. India stood out in terms of higher
economic growth although the banking sector was under stress primarily on account of asset quality
concerns.
The regulatory and supervisory policy responses during the year inter alia included asset quality
review (AQR) of banks, financial restructuring of large accounts under the Scheme for Sustainable
Structuring of Stressed Assets (S4A), Large Exposures Framework to contain concentration risks,
draft guidelines for the Net Stable Funding Ratio (NSFR) and rationalisation of ownership limits in
private sector banks.
Scheduled Commercial Banks – Performance and Risks
 The banking stability indicator (BSI) shows that the risks to the banking sector remained
elevated due to continuous deterioration in asset quality, low profitability and liquidity. The
business growth of scheduled commercial banks (SCBs) remained subdued with public sector
banks (PSBs) continuing to lag behind their private sector peers. System level profit after tax
(PAT) contracted on y-o-y basis in the first half of 2016-17.
 The asset quality of banks deteriorated further between March and September 2016. PSBs
continued to record the lowest capital to risk-weighted assets ratio (CRAR) among the bank
groups with negative returns on their assets.
 The GNPA (gross non-performing advances) ratio of SCBs increased to 9.1 per cent in
September 2016 from 7.8 per cent in March 2016, pushing the overall stressed advances ratio to
12.3 per cent from 11.5 per cent. The large borrowers registered significant deterioration in their
asset quality.
 The macro stress test shows that GNPA ratio of SCBs may increase further under assumed
baseline macro scenarios. The PSBs may record the highest GNPA ratio and lowest capital to
risk-weighted asset ratio (CRAR) among bank-groups although the CRAR at the system as well
as bank-group levels is expected to remain above the regulatory required minimum.
 Asset quality of scheduled urban co-operative banks (SUCBs) deteriorated. Asset quality of the
non-banking financial companies (NBFCs) also worsened.
 The degree of interconnectedness in the banking system measured by the connectivity ratio
showed a declining trend. SCBs were the dominant players accounting for nearly 59 per cent of
the total bilateral exposures followed by NBFCs. On a net basis, asset management companies
managing mutual funds (AMC-MFs) followed by the insurance companies were the biggest fund
providers in the system while NBFCs followed by SCBs were the biggest receivers of funds.
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Demand Drivers for Banking Segment
Major demand drivers for banking industry
Technology
Market Household
Dynamics Savings
Demand
Drivers
Market dynamics
 There is an increasing reach of banks into rural areas and Tier2/Tier3 cities. Banks aim to achieve
a penetration level of 81.5% in 2018.
 To reach into the rural areas the RBI has come up with the concept of Payment Banks, which
would act like an extended arm of the banks, situated in places where the whole banking system
could be setup. This would also increase the rate of deposits for the banks as the people in the
rural areas don‘t have a routine of depositing their money in the saving account.
 Micro finance would be emerged as a major thrust area.
 The Merger of the SBI and its associates to reap the benefits of consolidation.
 Improving competitiveness in terms of lower interest rates, increased productivity, better working
capital management, deleveraging. All the bank rates have been cut down by 25 basis points
during the third quarter to improve the growth of the banks but in the recent MPC meet in
February 2017, there was no cut in the rates. The status quo was maintained, against the market
sentiment. The reason stated was that the inflation rate was low and there is time in
implementation of the budget, so these factors should be analysed before taking any decision.
Technology
 Technology in banking is drawing more and more customers for banking related products and
services as they become more cost effective and customer friendly. Banks renders various
technology based services such as mobile banking, net banking, tele banking, atm/credit cards, etc.
 The government has come up with the scheme UPI (Unified payment interface), through which all
the bank accounts could be associated and through the BHIM app, which is a payment wallet, the
payments would be made and received.
40
 The main backdrop of this advancement is that the use of debit cards would be decreased. As they
would be replaced by the wallets.
 Banking sector spend about 46% of its technology budget in business continuity, 32% for adding
product functionality/new products/new features and the remaining 22% in new technology which
can change the business process.
 After the demonetization, the industry which has seen a major surge in growth is the fintech
industry and this was augmented by the drive of digitalization by our government.
FINTECH IN INDIA
Fintech refers to companies, who use technology to provide financial services like wealth
management, insurance and payment. There are over 12000 start-ups in the world and over 400 in
India with investment of over 19 billion dollars in 2015. Fintech is expected to grow at an annual rate
of 7.1%. The Indian market has also responded well to fintech mainly due to increasing smartphone
penetration. There has been an emergence of next generation payments, P2P lenders, security and
block chain etc. within the fintech ecosystem.
The fintech industry is valued at around 1.2 billion dollars and is estimated to reach around 2.4
billion dollars. The transaction value is estimated at 33 billion dollars with estimated 5 year CGAR at
22%. As show in the graph below the funding to such fintech companies till August 2016 is also
growing as shown below
41
The top 10 major players in the Fintech industry along with their funding till date are shown as
below:-
Top 10 major Fintech Players

1000 890
800
600
400
200 86.8 80 69.6 65 50.6 42 35 35 Total Funding (in mns)
0
CLASSIFICATION OF FINTECH
The fintech industry is broadly divided into 6 mini categories:-
 Next-generation payments:
o Next generation payments refers to digital technologies which are disrupting the
traditional method of payments even non cashless like credit card, debit card etc.
o At least 46% of the Indian fintech industry is based on next generation payments.
o PayTm and Mobwikik major players in this field
o Regulations have been favorable to mobile payments industry. E.g. UPI
o Sharp growth due to mobile penetration
o Government entering this field with BhimApp
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Blockchain
o Blockchain is a technology which records every single Bitcoin execution that has been
executed. In other words, a blockchain is a full history of banking transactions.
o Usage in optimizing back office operations, speed and efficiency of payment systems
o Despite global popularity, Blockchain is in its nascent stages in India
o Example of Blockchain startup is Zebpay which raised $1mn
Robo Advisory
o Robo advisory is a class of financial advisors which supply financial services in area of
wealth management at minimal human interactions
o Financial advice provided through algorithms with low cost services (0.25%) when compared
to human advisory (1%)
o Examples of roboadvisory: MyUniverse, BigDecision, ScripBox etc.
o Sparingly used both in India and in the world but huge potential across the world with
estimates at 68% 5 year CAGR.
o Estimated management of $5 trillion of assets by 2025
o Challenge mainly in gaining trust of customers
Bank in a Box
o A white-labelled solution spanning across various channels to meet the operational
needs of a bank.
o Relatively new and used by banks to tap the unbanked segments of the market
o Simplifies the IT landscape of the bank and increases its operational efficiencies.
o Widely implemented by RRBs(regional rural banks), IDFC and YesBank
o The SaaS model is widely used
P2P lending
o P2P lending is a method of debt financing that allows one to borrow without the help
of a financial intermediary.
o Lack of proper regulatory framework in India with p2p still in the nascent stages
o A boon for lenders who are unqualified for a loan
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o Most p2p loans are made to small businesses(57.7 million in India)
o Eg. Lendbox, Fairscent, I-lend, Easy Rupiya etc.
Security and Biometrics

o Privacy of banking has become an important issue in lieu of cyber-attacks.
o Usage of biometrics in banking has helped ensure produce
FINTECH INDIA VS FINTECH GLOBAL
The global scenario of fintech is widely different from the Indian scenario. The success of fintech
depends on the number of mobile users as shown in the graph below:-
12
10.7068013
9.860609189
10
8 7.158521303
6.724163134
6.245719764
65.486284289 world
4.728132388 4.834343174
india
4.063205418
4 3.470715835
3.354297694
2.839756592
0
2014 2015 2016 2017 2018 2019
Graph: The rise in mobile phone users (expressed as percentages)
It can be observed that India has a higher mobile user percentage growth rate. Since mobile phones
are integral to the success of the fintech growth story especially post the launch of United Payment
Interface and Bharat Bill Payment Systems.
44
The above graph from KPMG‘s global fintech report compares the financial inclusion of India with
the world. This depicts why India has miles to go to ensure complete financial inclusion and achieve
the dream of a cashless society.
Another observation is that while India has taken only to the payments subsector of fintech. PayTm
funding amounts to 38.5% of total funding to fintech companies in India from 2014-2016. It is yet to
grasp other subsectors of fintech like blockchain technology, robo advisory etc. On the other hand
side the global funding which is highly concentrated to Fintech hubs like UK, USA, Israel. The story
is entirely different. It can be seen in the graph below:-
Here payments consist of only 10% of the total funding. A majority is in the banking/lending and
securities/cap mkts/ wealth management fields. This is because of the lack of financial knowledge
among Indians to invest their money in stocks/mutual funds etc. Less than 1% of Indian households
invest in stocks when compared to USA where the number is 40%.
45
SWOT ANALYSIS OF FINTECH
STRENGTHS
 Low cost of transactions with respect to other traditional methods(payments)

 Low barriers to entry
 Ability to provide better customer experience and ease of transactions
 Ability to help optimize back end operations in banks
THREATS
 Ability to get funding;

 Investors feel it is too risky to invest in fintech
 Heavy regulation attached to it
OPPORTUNITIES
 Huge unbanked sector in India of around 233 million.

 Huge CAGRs associated with investing in fintech companies
 The major participants in financial services are actively seeking new technology solutions to
remain relevant and gain competitive advantages.
WEAKNESSES
 the biggest challenge is to build out the trust factor. Indians have been traditionally
conservative especially when it comes to trusting their money with an entity that does not
have a track record that a traditional bank or NBFC has.
 Lack of proper financial knowledge
GOVERNMENT ACTIONS TAKEN TO SUPPORT FINTECH
o RBI approved licenses of 11 payment banks (Reliance Industries, Aditya Birla Nuvo, Vodafone,
and Airtel etc.) with the following regulations:-
 An individual customer can have maximum of 1 lakh in account
 Credit cards cannot be issued by the payment banks
 Payment Banks will not be allowed to undertake lending services
 NRI will not be allowed to open accounts
o Launch of United Payment Interface(UPI) with USSD platform
 UPI is a digital payment system for mobile-to-mobile transfer
 Enables customers to transact through an app linked with their bank accounts
 UPI app present for Android smartphone users but USSD platform for non-smartphone
users(majorly present in rural areas)
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 USSD supported by 51 banks and integration with UPI for offline transactions
o RBI approved in-principle approval to 33 entities which had applied for Bharat Bill Payment
Operating Unit(BBPOU) under Bharat Bill Payment System(BBPS)
 BBPS is an integrated bill payment system which would offer interoperable bill payment service
to customers online as well as through a network of agents on the ground.
 Existing bill aggregators and banks are envisaged to work as Operating Units to provide an
interoperable bill payment system
 Payment can be done through cash, cheque and electronic modes
o Jan Dhan Yojana; Digital India; Aadhar‘s Unique Identification system; Start-Up India; Jan
Dhan Mudra Yojana
 Pradhan Mantri Jan Dhan Yojana was introduced to improve financial inclusion in India. Its goal
is to ensure every Indian citizen has access to basic financial services ranging from insurance to
savings
 Digital India is a scheme to ensure that government services are made available to citizens
digitally through improved online infrastructure.
 Start-Up India was launched in August 2015 in order to boost the start-up ecosystem in India by
launching tax benefits upto 3 years and 10,000 crores of funds with a single window clearance
with the help of a mobile application
 Jan Dhan Mudra Yojana was launched to boost the non-corporate small business sector by
providing interest friendly loans. In Union Budget 2017, the lending target was doubled to 2.44
lakh crores.
o Launch of RuPay
 High cost of transactions within domestic transactions due to monopoly of foreign
players(Visa/MasterCard)
 Goal is to have a domestic, open loop payment system in India to reduce transmission costs and
compete with foreign players.
INNOVATION IN INDIAN FINTECH
The 2 biggest innovations in the fintech market are the UPI and the AadharPay.
United Payment Interface
 Unified Payments Interface (UPI) is a system that powers multiple bank accounts into a single
mobile application (of any participating bank), merging several banking features, seamless
fund routing & merchant payments into one hood.
 Another benefit of UPI is the low transaction charges involved. As of now, UPI is entirely
free while in the future, UPI is expected to charge less when compared to NEFT/RTGS as
shown in the table below.
 In UPI, one need not remember the bank details of the person for transfer, IFSC code or card
details. It is safe as the customers only share a virtual address and provide no other sensitive
information.
 There is a transaction limit of Rs 1 lakh.
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A comparison between NEFT, IMPS and UPI
Disadvantages Of UPI
 Mobile network connectivity is the biggest impediment. Network problems and reliable and fast
internet connectivity is not available in most of the developing countries.
 Enough support infrastructure is not available. In countries like India there is not enough
financial inclusion and financial literacy. Unless that builds up, there is no use in bringing in
more and more advanced technologies.
 More than connectivity, security issues are at the forefront nowadays. People are always under
the fear of misuse of their money by hackers and frauds. They always feel safer to have cash.
Again there are also issues of identity theft that need to be addressed. Issue of pick-pocketing
will be replaced by these concerns.
AadharPay
14 banks have come abroad with AadharPay with more to come. AadharPay is a form of payment
which is fingerprint enabled. Hence the customers need not to have an android phone or any other
technology to make payments. The only number that the customer needs to know is his Aadhar
number. On the other hand the merchant needs to have a smartphone with a reliable internet
connection with the aadhar payment app installed, a fingerprint scanner and a bank account. Here are
a few additional features about AadharPay:-
 No service tax or any other extra charge on the payments using Aadhaar payments app.
 Bharat Interface for Money (BHIM), the common platform for making quick payments using
the Unified Payments Interface (UPI), has also been integrated with Aadhaar Enabled
Payment System.
 Around 111 crore people in the country have Aadhaar numbers
 There are 49 crore bank accounts linked to Aadhaar. Every month 2 crore accounts are being
seeded with Aadhaar.
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Given below is an example of how IDFC Aadhaar Payment bank works.
IMPACT OF DEMONETISATION
The Fintech industry was one of the few sectors which were positively impacted. Here are a few of
the key figures in the Fintech industry:-
200% increase in average transaction value
1000% growth in the value of money added to
700% increase in overall traffic on platform
300% increase in number of mobile app

downloads
400% increase in number of transactions
7000% increase in bank transfers
40% increase in mobile app. downloads
1000% increase in number of merchants
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1200% increase in wallet load
25times increase in wallet transactions
15 times increase in number of downloads
Several other fintech companies posted extraordinary growth figures with PayTm and Mobikwik
listed above.
 Demonetization took 86% of the Indian currency out of the system

 Hit by the cash crisis, people turned to e-wallets and other modes of cashless transactions.
PAYU’S ACQUISITION OF CITRUSPAY
PayU Global is a digital payments provider owned by South Africa‘s Naspers Group. Citrus provides
consumer payment and mobile banking services. It has partnerships with airlines and online
platforms, including Amazon, BookMyShow, ShopClues, Jet Airways, IndiGo, GoAir, Faasos and
Grofers. Citrus Pay was founded in 2011 by Jitendra Gupta.
Deal Overview
o Largest M&A of Indian Fintech so far.

o PayU acquires CitrusPay for 130 mn dollars
o All cash deal
o PayU India will have more than 30 million customers post the acquisition of Citrus Pay.
o The deal was locked in less than six months
o The acquisition of Citrus Pay will help PayU increase the volume of transactions in India and
bring down the cost incurred to fulfil these transactions.
o The deal will grow PayU India customers to more than 30 million, processing a forecasted
150 million transactions in 2016 worth a combined $4.2 billion, growing at more than 50 per
cent year-on-year basis
o Amrish Rau(MD,PayU) to be CEO of PayU in India
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BUSINESS MODELS OF PAYMENT BANKS
To consider the payment banking system, we need to observe the payment bank ecosystem to see
what factors are important in the functioning of a payment bank. The following graph observes the
following:-
We also need to look at the various products and services and then come to a conclusion about the
revenues and expenses.
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Considering that payment banks are not allowed to give loans, payment banks do not have a net
interest margin. Their business models are different from ordinary banks. However, they pay an
interest on the savings bank account
The business model of payment banks becomes viable only when economies of scale are achieved.
However, unlike traditional mobile money players, it is unlikely that payments bank will be able to
live off transaction revenues alone – and without diversified revenues, the road to profitability will be
difficult. Therefore, payment banks require sustained investment to expand distribution and the
payments ecosystem to reach a high volume of digital transactions across customer segments. In turn,
this will allow the payments banks to grow small balances and treasury income, and allow them to
pursue partnerships that leverage the payments banks‘ assets to offer adjacent financial services.
MNOs bring substantial experience with business models characterized by regular investment and
long payback periods.
To build a comprehensive suite of basic low-cost banking and payment services for a large customer
base, India‘s payments banks will need to collaborate with an ecosystem of partners across
distribution networks, the national payments infrastructure, technology providers, and banking and
payments providers.
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BUSINESS MODEL OF PAYTM
PayTm is India‘s largest fintech company with approximately 890 mn dollars in total funding and is
valued at $4 billion dollars. The revenue model of PayTm is divided into 7 categories i.e.
marketplace, recharge services, bill payments, buy and sell, payTm wallet and PayTm bank.
Payment Marketplace
 Currently has over 120 million buyers and 2 million daily transactions
 Revenue is collected from the sellers in the form of commissions
 Promotions for sellers i.e. revenue generating ads
Recharge services
 Consist of mobile recharge and bill payments

 Commissions are charged from these operators
Bill Payments
 Platform for paying various bills like electricity, datacard, water, mobile etc.
 Commissions are charged from providers
 PayTm partnering with educational institutions and act as a portal to accept education fees and
insurance installments
Buy & Sell
 Act as a platform for buyers and sellers
PayTm Wallet
 a semi closed wallet (approved by RBI) used to store currency in digital form which can be used
to buy goods and services
 Paytm wallet doesn‘t permit cash withdrawal.
PayTm Bank
 Still yet to come; similar to a payment bank

 Digital bank entirely dependent on its mobile app
PayTm integrates its Wallet at most places where other companies integrate their payment gateway
infrastructures. It works in the exact same way as that of payment gateways i.e. by discounting the
value of the transaction by 1-3% and giving the rest to the merchant.
FUTURE OF PAYMENT BANKS IN INDIA
As seen above, payment banks can only be successful with huge economies of scale. In recent
updates, out of 11 payment banks granted permission by RBI, 3 have dropped out namely Tech
Mahindra, Cholamandalam Finance and Dilip Sanghvi-IDFC bank- TELEnor JV have dropped out
53
leaving 8(India Post, Airtel Money, Reliance Industries, Vijay Shekhar Sharma, Aditya Birla Nuvo,
Vodafone MPesa, Fino PayTech and NSDL).
The reasons for dropping out could be:-
1. Long Payback Period: It is extremely tough to achieve economies of scale without sufficient
time involved. According to a report by GSMA, it takes a minimum of 10 years for a payment bank
to reach its maturity stage of growth.
2. Intense Competition: Well established banks like HDFC, ICICI etc. are already offering
financial products on their portfolio. The only USP that payment banks have is their high savings
interest rates. With 8 additional payment banks. The competition is intense. In addition to that, luring
people from their banks to deposit money in payment banks is not easy.
3. Regulations: The most primal problem with banks is that they cannot lend their deposits
bringing in jeopardy the feasibility of their business models. Payment banks have to keep at least
75% of their deposits in government bonds with maturity upto 1 year eroding the profit margins.
4. High Volume and Low margins: The players in this business should have the capacity to
reach the untapped sectors of the banking economy like small farmers, small businesses. The margins
are also low as the banks have revenue generating interest spreads of just 3-4%. There is no
guarantee that they can generate enough money from online transactions despite the entry of UPI
which has reduced the cost of mobile transactions.
Hence to predict the future of the 8 payment banks, the ability of payment banks to achieve
economies of scale and get their existing customer base on hold is a huge factor to achieve success.
Hence, the 8 payment banks and their holding company‘s customer base needs to be taken into
consideration:-
1. India Post: India Post Payment bank is an initiative by the Indian postal services which has
around 154899 postal offices and is the most widely distributed postal services company in the
world. The payment banks were brought to digitalize the Post Office savings Bank account which
also offers high savings interest rate i.e. 7% on an annual basis. Given the distribution of India Post,
this payment bank has already has a huge customer base and is expected to reap profits from it.
2. Airtel Money: Airtel Money is Bharti Airtel‘s initiative. Bharti Airtel is India‘s leading
telecommunication service with 264.4 million customers. Airtel also has a widespread reach in the
rural areas where payment banks have the highest potential. However in recent times, it has been in a
price war with Reliance Jio which has eaten the market share of the telecom. Despite this, Airtel has
a majority share of 22%( a drop from 28.4% in 2014). The future of this payment bank depends on
Airtel‘s fate in the price war with Jio and ability to retain its customer base and not lose it to
customers. On a positive note, Airtel has the customer reach both in rural areas and urban areas to
make Airtel Money a success.
3. Reliance Industries: This is a joint venture between Mukesh Ambani led Reliance Industries
and SBI and is named Jio Payments Bank. Jio was launched in September 2016 and has already
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achieved a customer base of 100 million. Right now, it has a market share of 19%. Given it‘s a joint
venture of SBI and Jio, the expertise and customer base of SBI which has a vast network of 85356
branches. While Jio has only a 4G base, it has captured the urban areas but needs to cover the rural
areas which do not have that technology as of now. Hence, Jio aims to establish a network over 2
lakh villages and 18000 cities. Given its ability to establish a huge network and capture a huge
market share in just 6 months coupled with a partnership with India‘s largest bank by number of
ATMs and branches, this payment bank initiative has huge potential to be successful.
4. Aditya Birla Nuvo: Aditya Birla Idea Payments Bank is a 51:49 joint venture (JV) between
Aditya Birla Nuvo Ltd (ABNL) and telecom major Idea Cellular, respectively. Idea cellular is India‘s
third largest telecom operator with around 192.4 million customers. Over the last 3 years, Idea has
cornered an incremental Revenue Market Share of 33% giving tough competition to market leaders
Airtel and Vodafone by earning 1/3rd of the incremental market - way above its fair share of the
market.Idea is expected to merge with Vodafone in order to strengthen its customer base. If the
merger base goes through, IDEA-Vodafone is expected to be India‘s largest telecom operator and is
expected to achieve economies of scale. This is most necessary considering the price war with Jio
entering the market. It can be predicted that this payment bank venture can be successful if the
merger pulls through.
5. Vodafone: Vodafone only has its own M-Pesa mobile payment service, a mobile wallet
which its users can use for payments. At present, Vodafone's mobile wallet has 8.5 million customer
base and the end of September, they carried out transaction value of Rs 860 crore. It also has 20% of
active mobile money subscribers and has about 1,30,000 business correspondents. As similarly said
above, that this payment bank venture can be successful if the merger with IDEA pulls through.
6. Fino Tech: Fino PayTech is the payment bank initiative of the Fino group which is an NBFC
headquartered in Mumbai. Fino Paytech provides banks a branchless avenue of offering banking
products to customers. Our innovative technology solutions combined with a last mile distribution
network ensures cost-effective delivery of financial services in a safe and convenient manner. Fino
PayTech has a partnership with ICICI and services around 28 million customers with their products.
In ten years, Fino Tech have touched the lives of over 78 million customers through over 28000
transaction points in 499 districts across 28 states in India. However, when compared to its
competitors, FinoTech has not yet achieved the scales of Jio, IDEA, Vodafone etc.
7. National Securities Depository Ltd: This payment bank is in collaboration with IDBI bank
LTD. National Securities Depository Limited (NSDL) is an Indian central securities depository based
in Mumbai.[3] It was established on 8 November 1996 as the first electronic securities depository in
India with national coverage based on a suggestion by a national institution responsible for the
economic development of India. It has indicated that the payments bank will keep the interest rate on
its savings bank deposits within the current market range of 4-5%. Similarly as in the case of
FInoTech, NSDL still needs to achieve economies of scale and a dedicated customer base with
product differentiation in order to reap profits from the payment bank.
8. PayTm: PayTm is the largest fintech company in India with a total funding of $890 mn. The
bank intends to use Paytm‘s existing user base for offering new services, including debit cards,
55
savings accounts, online banking and transfers, to enable a cashless economy. The payments bank
would be a separate entity. Currently payTm has a customer base of nearly 147 mn people using their
wallet. PayTm needs to convert its customers to deposit their money in the paytm bank.
Hence, the expected successes out of these 8 payment banks are shown below. Out of these 8
payment banks, only Airtel has opened its services and has added over 1 million customers.
EXPECTED SUCCESSES
OPINION ABOUT PAYMENT BANKS IN BFSI INDUSTRY
“Small and payments banks have not yet devised a business model which can be termed viable. Neither
the payments banks nor small finance banks seem to have as yet devised a business model that can be
said as viable”
Arundhati Bhattacharya (SBI Chairperson)
“I think wallets have no future. There is not enough margin in the payment business for the wallets to
have a future. Wallets as a valid economic proposition is doubtful. There is no money in the payments
business. The current loss reported by market leader Paytm is Rs1,651 crore. You cannot have a business
that says pay a Rs500 bill and take Rs250 cash-back”
Aditya Puri (HDFC MD)
56
“The Reserve Bank of India is taking a bet on payments banks so that these new entities can push the
existing banking system to be innovative. The central bank is open to new technology and would wait for
regulations to evolve rather than dismiss new systems. We attempt to be an informed and adaptive
regulator...The easiest thing to say is 'no'. When there's uncertainty, it is easy to say no. But saying no
prevents the system from developing.”
Raghuram Rajan (Former RBI Governor during his tenure)
“Payment banks will have a "multiplier impact" by providing doorstep banking to people in remote
areas at lower cost and compete with traditional banks in future. The pattern in which the payments
bank is being formed, the overhead cost is very less because the existing structure is being used. Going
forward, a time will come when for small depositors this payments bank will give competition to normal
banking”
Arun Jaitley (Finance Minister)
FINTECH: BOON/BANE FOR BFSI INDUSTRY?
For banks, the growing competition with FinTechs represents a challenge. Banks could lose29 - 35
percent of their revenues to the new attackers via customer churn and shrinking margins if they do
not act, according to McKinsey calculations.
According to a survey by The Economist Intelligence Survey, 33% of respondents think that a mix of
banking and fintech will be the future. Integration means there are several synergies present between
banks and fintech which are possible. For example in Germany, a fintech startup can only lend if
done in partnership with a bank. To explain further about the synergies, a bank has outdated
technology systems. They provide the back-office operations for thousands of complex products need
to support stringent security requirements and must support exacting regulatory and risk-
management standards. This is where fintech can help by suing the bank in a box solution. Another
problem is that banks are hesitant to meet the challenge of fintech. Fintech presents the challenge of
product cannibalization to banks. A bank considering a peer-to-peer lending business must accept
that it will transfer share directly from its long-established, deeply ingrained consumer lending
operation.
57
However, banks have a few strengths which fintech companies don‘t have. Banks‘ greatest strength
is clearly their customer franchise. One of the hallmarks of the customer relationship is a reputation
for trustworthiness and stability. d, banks bring hard-won expertise in the critical fields of regulatory
compliance and risk management. This is more than just know-how—it is hardwired into the
technology networks that banks have spent billions to create.
Similarly, fintech companies also do have a few strengths which banks don‘t have. Foremost is the
ability to take a ―category killer‖ approach to banking portfolios. Fintech firms are able to maintain a
laser-like focus on a single product, building excellence into both the technology and the customer
experience. Second is their nimbleness in technology—both an attribute of a disruptive firm‘s culture
and of Fintech‘s ―clean slate‖ technology base. But Fintech‘s greatest underlying strength is its
culture, which provides an ability to move fast, to take risks, and to innovate. This strength is
acknowledged by both the Fintech firms and the banks that compete with them.
Fintech too also has a problem with economies of scale. Fintech firms are now less than 2% of the
banking market. They are competing with the banks and 4,000 other disruptors to win customers of
all kinds—and have only a few years to do so. Fintech executives consider building a customer base
to be an important challenge to the industry. Fintech executives are aware that banking customers are
used to having all of their banking needs met under one roof. They lack the ability to cross-sell or
build common platforms for just a single product. Given below are the results
Hence from the analysis, it can be observed that it is best if the integration of fintech and BFSI
companies go hand in hand in order to achieve synergies.
INTEGRATION OF BFSI AND FINTECH
From the above graph, we can observe that the weaknesses of Fintech and the strengths of BFSI are
the same. Fintech needs customers and banks have customers. But their mutual interest goes further.
Banks‘ brands and resources can provide assurance to customers in a sensitive product field. The
Fintech offering can be one of a number of products for customers who want to bank under one roof.
This is possible only if banks acquire/merge with fintech companies and adopt their technologies.
Here are a few steps that banks can follow:-
58
1. Include IT in the due diligence and integration planning: Combining a bank and Fintech is at
its heart combining two technologies. When IT is involved early, it can pre-audit the two
infrastructures.
2. Make regulatory integration an early priority: Once the deal is closed, Fintech employees
should be on-boarded onto the bank‘s compliance. Mandatory training should take place, and
policies, contracts and guidelines should be integrated into the highest standard of the two
entities.
3. Ring-fence the new culture: Banks have risk and process-focused cultures because their
regulators and their business practices demand it. Imposing these practices on a free-wheeling
start-up may suffocate the very agility that is the goal of acquisition.
RECOMMENDATIONS TO IMPROVE FINTECH IN INDIA
The above graph from the report of SwissNexIndia depicts the fintech ecosystem of India with other
countries. It can be observed that India is low on funding , entrepreneurial attitude and technology
preparedness. Here is a few steps to improve on these 3 accounts
Funding:-
 Need to improve innovation in n developing segment-specific vertical products unique to India

 Funding is in abundance but start-ups are not creating solutions that are usable, affordable and
profitable.
Entrepreneurial Attitude:-
 Solutions such as credit schemes focused on woman entrepreneurs, social financing and crowd
financing are areas that are yet to see any large-scale disruptions.
 Government has launched a scheme called Start-Up India where procedures are made easy and
tax benefits in order to encourage entreprenuers espeicially Dalit, SC/ST women entreprenuers.
59
Technology Preparedness:-
 Absence of broad-based financial transaction infrastructure, which has been a major challenge as
several Indians in rural parts of India do not have bank accounts, credit score and home
ownership details
BUDGET 2017-18
Boost to affordable housing, big infrastructure spending push and a fiscal deficit target of 3.2% of
GDP came as a big boost to the banking sector, which were the main highlights of the budget. A tax
concession on provisions for bad loans also came as a relief for Indian banks which are struggling
with gross non-performing assets of around Rs 6.7 trillion. Banking stocks rallied up, with the BSE
Bankex gaining 2.7% on the day of budget.
 There are proposals to create more jobs, boost infrastructure spending and the measures which
will help increase credit off take for the banks. Government spending on this sector would be
around Rs 3.96 trillion in the next fiscal year. As banks have been struggling with a large number
of stressed cases in the infrastructure segment, fresh investments will help a great deal and
hopefully turn around some of those companies that have been defaulting.
 The Union budget proposed to assign infrastructure status to affordable housing projects, in line
with the government‘s aim to provide housing for all by 2022. Granting infrastructure status
would provide cheaper loans and easy access to credit. Lenders will also look at it favourably
and banks will have lower risk weightage while providing loans on affordable housing. A higher
allocation of Rs 23000 crore has been made to the rural Pradhan Mantri Awas Yojana.
o The push to affordable housing is expected to boost credit demand, and banks as well
as housing finance firms would be competing for their slice of the pie.
 Other measures that will boost credit growth include the highest target for farm credit at Rs 10
trillion. After the government‘s move to withdraw Rs 500 and Rs 1000 notes, bank credit growth
has fallen to around 5%, the lowest in a couple of decades.
 The positive announcement for the banking sector was the government‘s comparatively tame net
market borrowing figure of Rs 3.48 trillion in 2017-18, as compared with Rs 4.25 trillion in the
current year. The net borrowing figure takes into account the securities that will be bought back.
Capital expenditure data provided in the budget document reveals that the gross market
borrowing is set at Rs 5.8 trillion for the new financial year, which is approximately the same as
2016-17.
 The government proposes to increase allowable provision for non-performing asset (NPA) from
7.5% to 8.5%. This will reduce the tax liability of banks (Allowable provision is the amount of
bad loan provision that is tax deductible). It also proposed that tax on interest will be levied on
actual receipts and not on accrual basis in respect of Non-Performing Asset (NPA) or bad loan
60
accounts. This will remove hardship of having to pay tax even when interest income is not
realised.
o The relief on allowable provision for NPAs to 8.5% of total income would help
lenders who are under a massive pile of bad loans. However, the benefit is limited as
the demand from the industry was that the entire provisioning towards NPAs be
allowed as deduction for tax purposes.
 Capital infusion of Rs 10000 crore in this fiscal, for recapitalization of PSU Banks will be a
morale booster in scenarios where Banks are in dire need of capital for Credit growth and Basel
III compliance. The view of some of the public sector bankers is that the increase in allowable
provision could have been slightly higher as the banking sector‘s NPA troubles are very big.
o The government‘s allocation of funds to recapitalize banks it owns has fallen short of
what analysts deem adequate. The Rs 10000 crore is unlikely to help public sector
lenders that are hamstrung currently to meet loan demands. Some may even find it
difficult to meet the regulatory minimum.
 Allowing asset reconstruction companies (ARCs) to list the security receipts banks issue against
bad loans on stock exchanges registered with the Securities and Exchanges Board of India. This
will enhance capital flows in to the securitisation industry and will particularly be helpful to deal
with bank NPAs.
o ARCs in India have been struggling to raise funds to cater to the rising pile of bad
assets. Trading of security receipts could be one avenue to raise money for ARCs.
 Foreign Investment Promotion Board (FIPB) is to be abolished. This move has been taken to
ease the path for foreign companies to invest in the country.
 In a digital push, all cash transactions above Rs3 lakh will be rendered invalid. Banning cash
transactions above Rs3 lakh will prompt individuals and firms to use more of digital channels
through banks. Also the cash expenditure allowable (daily basis) has been reduced to Rs 10,000
from the existing Rs 20000. Under the Pradhan Mantri Mudra Yojana, the lending target is set up
at Rs 2.44 trillion.
 Systemically important non-banking finance companies (NBFCs) to be categorized as qualified

institutional buyers (QIBs) by the Securities and Exchange Board of India, to participate in the
initial public share offers. This helps NBFCs looking to diversify their business and also in
building a strong source of other income.
Public sector banks seem to be benefitted, as the relief on allowable provision of NPAs blunted the
lack of capital from the government. Although banks did not get direct benefits, the push to
affordable housing, infrastructure spending and rural schemes is bound to boost credit disbursal. The
budget‘s direct measures are not sufficient to revive the banking sector but the impact of other steps
will eventually help the growth of the banks.
61
IMPACT OF GST
The GST (Goods and Service Tax) is a substantial shift from the previous tax regime. Service sector
will have a major impact of the GST as compared to the manufacturing or trading sector. The major
shift could be observed in the financial services provided by the Banks and the NBFC‘s such as fee
based, fund based and insurance services.
Owing to the volume of operations provided by the NBFC‘s and the banks, GST compliance will be
quite difficult to implement in this sector.
GST and Banks

The BFSI industry would be affected by GST in the following two fronts
 The tax under GST is higher than the current service tax
 Registration of the banks and NBFC‘s in each state they operate in
Before the implementation of GST, the transaction fee for banking services was 15%. The banking
services include applying for a demand draft, ATM withdrawal beyond the number of free services,
locker rentals, issuance of cheque books, drafts, duplicate passbooks, SMS alerts, collection of
outstation cheques, home loan processing fee, fund transfer, loan applications, foreign exchange and
so on. For the insurance companies too, the service tax on the term and health insurances was 15% on
the entire premium amount. ULIPs (Unit-Linked Investment Plans) were also charged with 15% on
their premium minus the invested amount
Now the tax rate under GST has been increased from 15% to 18% (for all the services provided by
the BFSI sector). Hence there is a hike of 3% tax on all the services provided by the banking sector.
Before GST, all Banks and NBFC‘s had centralised registration under the service tax laws for all its
branches. But under GST the branches of the banks in multiple states and union territories have to
register separately in every state they are situated. All the records have to be maintained separately
for each state. In case a bank has various branches in a state, then only one registration is required for
all the branches in that state. This is a cumbersome task for the banks.
GST and Mutual Funds
GST would impact the mutual fund consumers also. The GST is applicable on the TER (Total
Expense Ratio) of the mutual funds and hence this would go up. (Usually TER for the mutual funds
varies between 1.25% to 2.75% and the AMC‘s can levy charges within the prescribed limits of
SEBI). Now the AMC‘s have to adjust their expenses so that the total of TER after the application of
GST is under the prescribed limit of SEBI. Mutual fund distributors earning upto Rs 20 lakh will
remain exempt from GST and those earning more than this had a hike of 3% in their taxes.
62
Impact
If a scheme‘s TER is 2.5%, excluding the service tax, it means, the total TER after the service tax as
per previous tax regime would be 2.875% (15% service tax on TER). But with the GST it would be
2.95 (18% GST). Hence the return to the investor suffers to some extent if the AMC‘s don‘t absorb it.
GST and Insurance sector
The insurance products could be mainly classified into 3 major kinds – Term insurance, Endowments
and ULIPs.
The premium paid on the term insurance has two portions – risk coverage and the savings. The
service tax is only on the risk premium portion and not on the savings portion. Now as per GST, the
value of services on which the GST (18%) would be imposed in the case of term insurance is:
The gross premium minus the amount allocated for investment (on behalf of the policy holder)
In case of single premium annuity policies, on 10% of single premium and in all other cases on 25%
of premium of 1st year and then on 12.5% of premium in the next subsequent years.
If the premium paid is only towards the risk cover, then 18% of GST on the total premium is levied.
The impact on general insurance (car, health and other non-insurance policies) would be a hike of 3%
from 15% to 18% under GST.
Insurance Product Before After Applicability

GST (%) GST (%)
Term insurance premium 15 18 On entire premium
ULIP 15 18 Premium-invested amount
Health insurance premium 15 18 On entire premium
Car insurance 15 18 On entire premium
Annuity: single premium 1.5 1.8 On 10% premium
Endowment: 1st year premium 3.75 4.5 On 25% premium
Endowment: renewal 1.875 2.25 On 12.5% premium
premium
DEVELOPMENTS
 The merger of the five associate banks with State Bank of India (SBI) will be postponed to by a
quarter due to the demonetisation exercise, acknowledged SBI chief Arundhati Bhattacharya
who for weeks had said that the merger is as per the schedule. The bank had announced in May
plans to merge its five associate banks with itself by March 2017 to emerge as a global bank in
order to compete with peers in emerging markets.
 State Bank of India (SBI, has opened its first branch dedicated to serving start-up companies, in
Bengaluru.
63
 The State Bank of India (SBI) has signed an agreement with The World Bank for a Rs 4,200
crore (US$ 625 million) credit facility, aimed at financing grid connected rooftop solar
photovoltaic (GRPV) projects in India.
 An Indian private sector bank, RBL Bank Limited, has raised Rs 330 crore (US$ 49.6 million)
from a UK-based development finance institution CDC Group Plc, which will help RBL to
strengthen the capital base to meet future requirements.
 JP Morgan Chase, the largest bank in United States by assets, in India, is planning to expand its
operations by opening three new branches in Bangalore, Delhi and Chennai in addition to its
existing branch in Mumbai.
 Investment management company, Canada Pension Plan Investment Board (CPPIB), has bought
a large stake in Kotak Mahindra Bank Ltd from Japan-based Sumitomo Mitsui Banking
Corporation.
 Capital Small Finance Bank, India‘s first small finance bank has started its operations by
launching 10 branch offices in Punjab, and aims to increase the number of branches to 29 in the
current FY 2016-17.
 Free Charge, the wallet company, has partnered with Yes Bank and MasterCard to launch Free
Charge Go, a virtual card that allows users to pay for goods and services at online shops and
offline retailers.
 Kotak Mahindra Bank Limited has bought 19.9 per cent stake in Airtel M Commerce Services
Limited (AMSL) for Rs 98.38 crore (US$ 14.43 million) to set up a payments bank. AMSL
provides semi-closed prepaid instrument and offers services under the ‗Airtel Money‘ brand
name.
 A microfinance services company, Ujjivan Financial Services Ltd, raised Rs 312.4 crore in a
private placement (the private placement included 33 domestic investors which included
insurance firms, mutual funds, family offices and High Net worth Individuals (HNIs)).
 Over the next one year, a private equity investor, The Lok Capital, backed by US-based non-
profit based organization (Rockefeller Foundation), plans to invest in two proposed small finance
banks in India (up to US$ 15 million).
 To help expanding access to financial services in rural and semi-urban areas, RBI has granted in-
principle licences to 10 applicants to open small finance banks.
 11 applicants have been given approval to establish payment banks by the RBI. These banks can
accept deposits and remittances, but are not allowed to extend any loans.
 A Japanese financial services group, The Bank of Tokyo-Mitsubishi (BTMU) aims to double its
number of branches in India to 10 over the next three years and also target a 10 % credit growth
during FY16.
 Allowance has been given by RBI for the third-party white label automated teller machines
(ATM) to accept international cards, including international prepaid cards. Now white label
ATMs can tie up with any commercial bank for cash supply.
 To increase the investment opportunities, RBI has allowed Indian alternative investment funds
(AIFs), to invest abroad.
 To convert its microfinance business into a full service bank, Bandhan Financial Services raised
Rs 1,600 crore from two international institutional investors.
64
GOVERNMENT INITIATIVES
 In July 2016, the government allocated Rs 22,915 crore (Indradhanush Project) for the capital
infusion in 13 public sector banks (PSB‘s). They are expected to improve their lending
operations & liquidity.
 The RBI has released the document, Vision 2018 which is aimed at encouraging a larger use of
electronic payments by all the sections of society. This is done by increasing the usage of the
digital channels, bringing down the paper-based transactions, and boosting the customer base for
mobile banking.
KEY SUCCESS FACTORS
 Consolidation of the State Bank of India with its associates to reduce the operating cost of banks
which has been increasing.
 To reduce the transaction time for the customers by using strategies like six sigma strategy.
 Adopting the latest technology for the purpose of banking. For example the DBS bank had come
up with an innovative model to open a savings account in less than minutes in an online process
 To enter into new markets and to venture into new areas such micro finance. The payments banks
are an initiation to improve upon this segment. The payments banks are an extension of the regular
banks which don‘t have an option to lend. They act like an extended arm to the existing banks.
 Offer new customised products for different target population.
 Proper Asset liability management and to decrease the NPA‘s.
KEY RISK FACTORS
 Asset Quality (Non-performing assets)

 The Operating expenses of the PSB‘s (public sector banks) are higher than the foreign and private
banks.
 Increase in interest rates reduces the competitiveness of banks in lending.
 After the demonetization, the banks are over loaded with a huge amount of cash. The deposits had
been increased and to increase the credit, the RBI should come up with necessary rate cut in the
MPC review which would be happening in April 2017.
ROAD AHEAD
The Indian economy is on the brink of a major transformation, with several policy initiatives set to be
implemented shortly. Positive business sentiments, improved consumer confidence and more
controlled inflation are likely to prop-up the country‘s the economic growth. Enhanced spending on
infrastructure, speedy implementation of projects and continuation of reforms are expected to provide
further impetus to growth. All these factors suggest that India‘s banking sector is also poised for
robust growth as the rapidly growing business would turn to banks for their credit needs.
65
After the recent development of demonetization, the banks are full with surplus of cash. The analysts
thought that the MPC would decrease the bank rates during their meet in Feb 2017 (at least by 25
basis points). This was mainly to use the surplus cash with the banks but this didn‘t take place as the
MPC did not turn up to the expectations. During the FY17, there is a greater probability that the bank
rates would come down to augment the growth of the banking sector.
Also, the advancements in technology have brought the mobile and internet banking services to the
fore. The banking sector is laying greater emphasis on providing improved services to their clients
and also upgrading their technology infrastructure, in order to enhance the customer‘s overall
experience as well as give banks a competitive edge.
Many banks, including HDFC, ICICI and AXIS are exploring the option to launch contact-less credit
and debit cards in the market shortly. The cards, which use near field communication (NFC)
mechanism, will allow customers to transact without having to insert or swipe. Innovation in the
sector is likely to drive the banking industry in the future.
REFERENCES
 https://assets.kpmg.com/content/dam/kpmg/pdf/2016/06/FinTech-new.pdf
 https://home.kpmg.com/xx/en/home/insights/2016/03/the-pulse-of-fintech-q1-2016.html
 https://www.capgemini.com/the-world-fintech-report-2017
 http://www.businessinsider.com/the-fintech-report-2016-financial-industry-trends-and-
investment-2016-12?IR=T
66
 http://www.swissnexindia.org/wp-content/uploads/sites/5/2016/10/Fintech-Report-2016.pdf
 http://www.gsma.com/mobilefordevelopment/wp-content/uploads/2016/12/GSMA_The-
business-case-for-payments-banks-in-India_2016-1.pdf
 http://www.bcg.com.cn/en/files/publications/reports_pdf/BCG_Global_Retail_Banking_2016
_ENG_Aug_2016.pdf
 https://www.eiuperspectives.economist.com/sites/default/files/EIU-
The%20disruption%20of%20banking_PDF_0.pdf
67

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JUL

BFSI INDUSTRY COVERAGE REPORT

Kasinath| Maneel Reddy | Senior Analysts| alpha@fms.edu | +918982465293| +918106354037

GLOBAL BANKING SECTOR

Global Financial Stability Map

The proximate causes of global market disruptions in 2016 are

CREDIT RISK (2016)

INDIAN BANKING SECTOR (2015-2016)

Scheduled Commercial Banks (SCB’s)

Public Sector Banks

Private Sector Banks

Regional Rural Bank (RRB)

In India, the emergence of development banking is a post-independence phenomenon. Development

Reserve Bank of India

Deposits (Billion Rs) % Growth in deposits

Growth in Bank Growth in currency Growth in household

Credit (Billion Rs) % Growth of Credit

Sectoral Deployment of Bank Credit4

Percentage growth in sectoral deployment5

Net Profit (Billion Rs)

Assets (Billion Rs) Percent Growth in Assets

Credit to deposit ratio8 Investment to deposit ratio8

Cash to deposit ratio8 Ratio of deposits to total liabilities8

Return on assets Return on assets (2016 Dec)

Return on equity (%) Return on equity (%)

SCBs’ return on assets and return on equity (bank group-wise)

Sr. Bank group Return on assets (%) Return on equity (%)

2014-15 2015-16 2014-15 2015-16

1 Public Sector Banks

Nationalised Banks* 0.37 -0.49 6.44 -8.52

The State Bank Group 0.66 0.42 10.56 6.78

2 Private Sector Banks 1.68 1.50 15.74 13.81

3 Foreign Banks 1.84 1.45 10.24 8.00

4 All SCBs 0.81 0.31 10.42 3.59

 Return on assets = net profit/average total assets.

NPA (Non-Performing Assets)

Gross NPA (Billion Rs)

Net NPA (Billion Rs)

Values December March March March

2013 2014 2015 2016

Total acquired from banks 163.56 351.64 584.79 726.26

Gross NPA ratio

Net NPA ratio (as % of net advances)

Net NPA ratio

SCB’s NPAs recovered through various channels (in billions)15

No. of Amount Amount No. of Amount Amount

Lok Adalats 29,58,313 309.79 9.84 44,56,634 720.33 32.24

DRTs 22,004 603.71 42.08 24,537 693.41 63.65

SARFAESI 1,75,355 1,567.78 256.00 1,73,582 801.00 131.79

Total 31,55,672 2,481.28 307.92 46,54,753 2,214.74 227.68

No. of Amount Amount No. of Amount Amount

Lok Adalats 2596351 270.2 9.31 4244800 690.17 31.34

DRTs 18397 532.03 34.84 19133 574.39 55.90

SARFAESI 166804 1463.06 234.34 159147 650.08 110.33

Total 2781552 2265.29 278.49 4423080 1914.64 197.57

Net Interest Margin

Net Interest Margin (net interest income/total assets)17

State Bank of India & its Associates Nationalised Banks

Public Sector Banks Private Sector Banks