Banking assets in India account for 63 percent of the nation's financial assets and play a crucial role in economic development.
The central bank of India, which tightly regulates banking assets, is expanding the industry through financial inclusion and priority sector lending. This is increasing the rural and urban population's access to banking services, reflected in the decline in the average population per branch from 15,600 to 12,500 in 2012 as penetration increases.
New analysis from Frost and Sullivan, Competitive Landscape and Trends in the Indian Banking Industry, finds that public sector banks accounted for 67.2 percent of the total banking assets and 51.1 percent of commercial banking assets, which stood at INR 95.73 trillion in fiscal year 2013.
"The Indian banking system is on an upward growth trajectory and is expected to be the third largest banking industry worldwide by 2020," said a Frost and Sullivan analyst.
"However, this goal can only be achieved by implementing liberalization norms proposed by the Reserve Bank of India (RBI), which focus on issuing on-tap banking licenses and specialized banking licenses, encouraging consolidation, improving operational performance of small and nationalized banks, complying with global regulations, and increasing overseas presence", added the analyst.
Currently, the country follows a universal banking model, where bankers are present across all segments and serve all customers. Nevertheless, a shift in business model is required to keep up with the changing needs, demand and demographics.
A four-tier international, national, regional and local structure has already been proposed and is expected to lead to the emergence of different business models such as specialist, advisory, and priority sector banks.
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The use of alternate and cost-effective distribution channels will also be important to counter some of the other challenges facing the banking industry in India.
This includes the large unbanked population as well as unattractiveness and accessibility issues related to priority sector lending despite the continuous efforts of the central bank and Government to develop the technology and infrastructure needed to reach out to remote areas.
Further, industry players should pay heed to the rise in their non-performing asset ratios even though they have robust capital adequacy ratios which might comply fully with the globally-scheduled Basel III capital regulation which aims to improve the transparency and quality of banking assets and will be implemented in India in 2018.
"Overall, the Indian banking landscape is all set to become more competitive as the RBI issues new banking licenses," stated the analyst. "As a result, banks are expected to offer better, customized products, cater to niche segments, focus on customer service, and look for inorganic growth opportunities through mergers so that they can enhance or sustain market share, revenue growth, and profitability.