India’s banking sector is built around three pillars – Scheduled Commercial Banks (SCBs), non-banking financial institutions (NBFI) and Co-operative Banks (CBs). Each pillar is sub-divided into a large number of segments making it tough to comprehend the entire architecture. So, what all India’s banking sector comprises of, what is their size and what is their relative positioning. Here is a look at the same based on RBI’s report on Trends & Progress of banking in India.

SCBs, the first pillar of banking, is further categorized into Public Sector banks (PSBs), private sector banks (PVBs), foreign banks (FBs) and recently formed groups, small finance banks (SFBs) and payment banks (PBs). As per the report, there are a total of 95 such commercial banks operating through about 1.3 lakh branches. Total funds managed by them stood at Rs 243 lakh crore at the end of March’23 implying each bank branch handing a little less than Rs 200 crore on an average. Assets have grown at 12%, second successive year of 10%+ growth. This is a significant turnaround after years of lull. Banks’ assets growth had declined to less than 9% during FY14-21 after growing at as much as 18% during FY05-14. In addition to the above-mentioned groups, Regional Rural Banks (RRBs) and Local Area Banks (LABs) are also included in SCBs although their financials are reported separately.

Primary source of funds for banks is ‘deposits’ supplemented by borrowings and the mandatory, equity capital. Of the total, deposits accounted for Rs 191 lakh crore, growth of over 11% during the year. This was the third year of 10%+ growth, from less than 8% during FY16-20. Deposits account for nearly 80% of total liabilities whereas ‘borrowings’ and ‘equity capital’ both contribute about Rs 20 lakh crore each, about 8% of total. (The rest is some other small items). On the other side of balance sheet, the primary item is Loans & Advances accounts for maximum share followed by investments in government and other bonds. Loans stood at Rs 143 lakh crore, sharp increase of over 17% on top of 13% in FY22. Loans & advances growth had fallen sharply from close to 22% CAGR during FY05-14 to less than 7% CAGR during FY15-21. The second consecutive year of credit pick up seem to suggest strong economic momentum.

Investments stood at Rs 64 lakh crore, increase of 11% over previous year. About 80% of this goes towards government bonds. In FY21, when credit growth was only 5%, banks invested more money in bond which grew by 15%. Banks are also required to keep a part of the funds with RBI as CRR (Cash Reserves Ratio) which stood at Rs 10 lakh crore whereas about Rs 4 lakh crore is deployed in inter-bank market where banks borrow and lend to each other. While aggregate funds invested in inter-bank market is just about 5% of total assets, exposure of individual banks vary significantly.  When demand in inter-bank market comes down, banks deposit the surplus with RBI and the reverse. During FY22, inter-bank funds declined by 38% whereas funds with RBI grew by 66%. Situation reversed in FY23 with inter-bank growing by 26% and funds with RBI coming down by 24%.

Within SCBs, PSBs account for the largest share managing 58% of total funds. However, their share has come down from about 70% in FY16. (A part of this is also due to change in ownership of IDBI bank from ‘nationalized’ to ‘private’). PSBs have also seen major consolidation over last few years reducing their numbers from over 25 to 12 now. In comparison, private banks, totaling 21 in numbers, account for 35% of business, up from 24% in FY16. Foreign banks are large in numbers, totaling 46, but have a rather small presence with less than 7% market share. Average assets held by a PSB is Rs 11.7 lakh crore against Rs 4 lakh crore by PVBs and Rs 35,000 crore by FBs. FBs largely operate in metro area with average of just 18 branches per bank against about 2,000 branches for PVBs and 7,000 for PSBs. However, funds handled by each branch of FB is over Rs 2,000 crore against Rs 206 crore by PVBs and Rs 167 crore by PSBs.

FBs are operating with a differentiated strategy where funds mobilization is lower in the order of priority. Deposits account for only 55% of total funds for them against 75% for PVBs and 84% for PSBs. This is compensated by higher equity and borrowings. Equity accounts for 17% of total funds for them against 11% for PVBs and just about 6.4% for PSBs. PSBs have been operating with lower level of equity because of their significant investment in government bonds and loans having lower risk weights which reduce the need for equity capital. Risk adjusted Capital adequacy ratio (CRAR) for PSBs is 15.5%, not much less than 19.8% for FBs. PSBs had also suffered equity erosion as they had to make huge write-off due to sharp increase in NPAs. Central government had infused about Rs 3.1 lakh crore of equity between FY17-21 to help them meet the regulatory requirement. SFBs and PBs are niche segments, introduced over last 3-4 years, with a total of 18 such banks in operation. Total assets with them stood at Rs 2.5 lakh crore and Rs 23,000 crore, 1.1% of total SCBs balance sheet.

In terms of financial performance, SCBs recorded total income of Rs 18.1 lakh crore in FY23, sharp increase of almost 20% against only 2.5% in FY22. Of the total, interest income accounts for Rs 15.5 lakh crore. Although all groups recorded reasonable growth, foreign banks were the top performers with 36% growth. For PSBs, growth rate rose from barely 0.2% to 16%. For PSBs, interest income accounts for 88% of total income against 77% for FBs, who generate significant income from fee-based services. Contingent liability, arising out of exposure through forward exchange contracts etc, is 12 times their balance sheet for FBs against only 36% for PSBs. Whether this creates an unmanageable risk is something that needs to be probed. Staff cost for PSBs is almost 16% of total expenditure against 12-13% for other groups. Interest expenses, at Rs 8.1 lakh crore, is just about half of interest income. The gap in interest earned and expended makes banking quite a high profit business unless banks enter into high-risk lending as seen in the past.

The impact of high-risk lending is reflected in ‘provisions and contingencies’, most of which goes towards NPAs or bad loans write-off. Provisions had reached a peak of Rs 3.2 lakh crore in FY18, 25% of total income, as a result of high NPAs. Of this, PSBs accounted for almost Rs 2.4 lakh crore. This has come down to Rs 2.5 lakh crore now, 14% of total income, giving banks additional margin of 11%. For PSBs, provisions has come down to Rs 1.3 lakh crore helping them make a respectable profit of Rs 1.05 lakh crore against loss of Rs 85,000 crore in FY18. Aided by PSBs turnaround, net profit for SCBs as a whole recorded growth of sharp 44%, to Rs 2.6 lakh crore.

An important ratio monitored in banking sector is incremental Credit-deposit ratio (ICD ratio) which is increase in credit upon increase in deposits during the year. ICD had declined to just 31% in FY21 but picked up sharply to 87% in FY22 and has reached 112% in FY23. A figure of more than 100% means banks would have to mobilize more funds, by increasing the deposits rate, to meet the needs of the economy. It may be noted that SBI raised the same last month. Another aspect related to bank’s lending is money needed by the government from banks to meet its expenses. Since ICD was low in FY21, high government borrowings during the year, arising due to the pandemic, did not disrupt the market. However, government had to reduce its borrowing in FY22 in the face of strong credit offtake. Incremental investment in government bonds by banks came down from Rs 7.3 lakh crore in FY21 to just about Rs 3.3 lakh crore in FY22.This is the scenario when excess government borrowings could have led to “crowding-out”. Lower credit growth in FY21 was, in a way, blessing in disguise for the government; indeed, the entire economy.

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