Banking

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•How did India manage the global financial downturn of 2008-09?
•Classification of Banks
•Advances
•NPAs
•Deposits
•CRR , SLR
•Basel 3 Norms : Background and Impact
•What are Small Banks and what are their prospects?
•What are Payment Banks and what are their prospects?

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 Global Financial Melt-down (2008-09)
and India

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•Firstly, Indian banking system was not greatly affected because our Forex
exposure in Indian banks were low.
•We did not fall into sub-prime crisis.
•High Household savings
•But still we were affected to some extent due to increase in crude oil prices
which increased the inflation.
•Crude oil increased close to $150 per barrel.
•Inflation increased from 7.7% in march 2008 to 12.8% in August 2008, highest in
the previous 4-5 years.
•In summary, during the global financial crisis, Indian banking system was
not affected but Indian economy was affected due to high inflation.
 RBI and Government Measures

 To reduce the inflationary pressures, the CRR was increased to 9% during the
same time almost 8 to 10 times in just 4-5 months.
 These measures reduced the inflation which began to drop from September
2008.
 But this also sucked out the liquidity and the credit availability, investments
and growth were severely affected.
 RBI began to reduce both CRR and Repo beginning from October 2008.
 GOI also announced fiscal stimulus in December 6, 2008 which include:
• Low interest loans
• Higher spending on infrastructure
• Cut in the excise duty
• Made home loans below Rs. 2 mn as priority sector.
 Classification of Banks

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How the players are classified in the banking industry?
For all analysis, banking players are classified into 3 categories
•Public sector banks (SBI& Associates and Nationalized
Banks)
•Private sector banks
•Foreign banks

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 In the last 5 years, Private banks have tripled their share in
loans and more than doubled their share in deposits.

MARKET SHARES
Market Share in Deposits (in
Market Share in Loans (in percentage)
percentage)
Year PSU 2011-12
Private Foreign Year PSU Private Foreign
Banks Sector Banks Banks Sector Banks
Banks Banks
2000 79.41 12.56 8.03 2000 81.29 12.63 5.47
2010 77.24 18.08 4.67 2010 77.68 17.31 5.05
2015 74.28 21.26 4.45 2015 76.26 19.44 4.3
2021 58.68 36.41 4.91 2021 64.7 30.5 4.8

Source:
https://theprint.in/economy/in-just-5-years-private-banks-have-narrowed-public-sectors-huge-lead-in-loans-deposits/550570/
RBI

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 Analysis of Advances

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PRIORITY SECTOR LENDING NORMS

 The priority sectors comprises of agriculture, small-scale

industries (SSI), education, housing etc.
 40% of the advances should be for priority sector lending.
 Banks should also adhere to sectoral targets within the
overall priority sector lending. (like certain % for
agriculture, certain % for small scale industries etc)

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 Credit growth dropped sharply after 2014 compared to the previous
5 years.

BANK CREDIT GROWTH

Source: https://www.ceicdata.com/en/indicator/india/domestic-credit-growth
 Credit growth for Private banks has been much higher than that of
PSU Banks

CREDIT GROWTH (PRIVATE AND PSU BANKS)

Market Share in Loans (in percentage)

Year PSU Private Foreign

Banks Sector Banks
Banks
2000 79.41 12.56 8.03
2010 77.24 18.08 4.67
2015 74.28 21.26 4.45

2021 58.68 36.41 4.91

Source:
RBI, Banks
 Share of credit to the industry has come down from 44% in 2015
to 29% in 2021. While the share of Retail and Services have
increased.
CHANGE IN CREDIT PROFILE

Source: SEBI, RBI, NBFCs, Banks, CRISIL Research

 REASON FOR SLOW-DOWN IN INDUSTRIAL CREDIT GROWTH

• Risk Aversion of both lenders and corporates

• Corporates using alternate funding options - IPOs/FPOs/Rights issues and using past

reserves.

• Twin Balance sheet problem

• Low Capital Adequacy Ratio of PSU banks

• Weak asset quality of the public sector banks

• Banks are focusing on Retail and Services credit as they have much less NPAs

• NPAs in Industrial Credit 7% to 23% between 2014 to 2020

• NPAs in Retail credit < 2% between 2014 to 2020

• NPAs in Service Credit 3% to 5% between 2014 to 2020

 NPA sharply increased in FY 15 and continued to rise till FY 18
before softening since FY 19

NPA Trends

14.00%
12.00% 11.60%

10.00% 9.30% 9.60%

8.60%
8.00% 7.50% 7.50%
6.50%
5.70%
6.00%
4.30%
3.80% GNPA
3.20%
3.10%
4.00% 2.50%
2.00%
0.00%
FY 11 FY 13 FY 15 FY 17 FY 19 FY 21 FY
23P
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Source: Source Company Reports, RBI and Crisil Research
 RBI’S ASSET QUALITY OF REVIEW OF 2015
• RBI suspected underreporting their NPAs by the banks
• Conducted AQR during August to November 2015 and found certain banks
were underreporting NPAs
Bank Reported NPA by the NPA after AQR
bank in 2016
Yes Bank Rs. 748.9 crs Rs. 4925.6 crs
ICICI Bank Rs. 1071 crs Rs. 5105 crs
Axis Bank 1.78% 4.5%
• RBI instructed all the banks to conduct their AQR and report the correct NPAs.

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 How banks under reported NPAs?

Illustration
• Ever-greening
• Disburse working capital loans to the stressed companies
• Disburse fresh loans in addition to the already sanctioned loans
• Disburse loans to the other group companies
• Restructuring of loans

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 PSU Bank’s NPAS has been much higher than Private bank’s NPAs.

NPA TRENDS: PRIVATE VS PUBLIC SECTOR BANKS

PSU Banks Private Banks

Source: Source Company Reports, RBI and Crisil Research

 Bad loans of MFIs are much lower compared to the bank NPAs.

ASSET QUALITY OF MFI (MICRO FINANCE INSTITUTIONS)

Source: RBI
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 IBC is seen as a long-term solution to tackle NPAs

INSOLVENCYAND BANKRUPTCY CODE (IBC )

• IBC bill was passed in May 2016
• According to IBC, banks can initiate the insolvency / bankruptcy procedure
against the defaulter.
• Once approved by NCLT, the Insolvency Resolution Professionals (IRPs) are
appointed.
• The board of directors of the company stands suspended, and the promoters
do not have a say in the management of the company.
• Banks through committee of Creditors can initiate the sale of the company,
find a buyer and recover the NPAs.
 .

BUSHAN STEEL NPA RESOLUTION THROUGH IBC

• The first major case resolved under IBC was the sale of Bushan Steel to Tata
Steel in May 2018.
• Bushan Steel had an outstanding debt of around Rs. 46,000 crores
• The company was sold to Tata Steel and Banks recovered Rs. 35,200 crores.
(76% of the outstanding debt)
• Also got 12% equity stake in the company.
 . Till December 2020, Rs. 4.99 lac crores worth of Cases have been
resolved and the creditors got 43% of the outstanding value.

IBC STATUS TILL DECEMBER 2020

• 480 Bad loans worth than Rs 7 lakh crore to lenders, have gone through
resolution process as on December 2020.
• Banks recovered Rs. 2.22 lakh crores, around 32% of outstanding value
since the inception of IBC.

IBC Regime Pre IBC Regime

Recovery as % of 32% 25%
outstanding loan
Haircut 60% 75%
Average Resolution 340 days 5 years
period
Source:
https://www.bloombergquint.com/law-and-policy/economic-survey-2021-recoveries-
under-ibc-highest-among-all-debt-recovery-methods
https://www.financialexpress.com/industry/universe-of-bidders-shrinks-ibc-recovery-
falls-to-new-low-of-10/2514537/
 PCA PUBLIC SECTOR BANKS

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PROMPT CORRECTIVE ACTION (PCA)
• PCA is process or mechanism to ensure that banks don’t go bust.
• Weak banks below certain performance level are included in PCA.
• According to latest PCA framework, banks to be placed under it are assessed on three
parameters viz. Capital ratios, Asset Quality and Profitability.
 Banks placed under PCA were restricted from expanding number of branches, staff
recruitment and increasing size of their loan book, disbursal only to those companies
whose borrowing is above investment grades.
 It is a temporary measure. After showing improvement in performance, Banks are taken
out of PCA category.

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 11 PSBs were put under PCA list in 2018. Of which 8 banks came
out of PCA list by February 2021.

PCA (2018 to 2021)

• In April 2018, RBI placed the following 11 PSBs under its Prompt Corrective Action

(PCA) framework because of deteriorating performance.

 IDBI Bank, UCO Bank, Bank of India (BoI), Central Bank of India, Indian Overseas

Bank, Dena Bank, Oriental Bank of Commerce (OBC), Bank of Maharashtra (BoM),

United Bank of India, Corporation Bank and Allahabad Bank.

 All banks except Central Bank of India all other banks have come out of PCA list.

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 BANK CONSOLIDATION

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 In 2019 and 2020, 13 PSBs got consolidated into 5 banks.

BANK MERGERS IN 2019 AND 2020

• Bank of Baroda-Dena Bank-Vijaya Bank (effective April 2019)

• W.e.f 1st April 2020 as mentioned below:

• Punjab National Bank with Oriental Bank of Commerce and United

Bank

• Union Bank of India with Corporation Bank and Andhra Bank

• Canara Bank with Syndicate Bank

• Indian Bank with Allahabad Bank

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IMPACT OF BANK MERGERS

• Merging banks account for ~22-23% of the total banking market share and

around 35-40% of the PSU banks’ market share.

• This exercise of consolidating PSU banks will offer improved operating

efficiency with economies of scale and speedier resolution of assets in the

long run.

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 Analysis of Deposits

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 Deposit growth has moderately increased after FY 20.

DEPOSIT GROWTH

Source: Reserve Bank of India (RBI), CRISIL Research

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TYPES OF DEPOSITS

• Term Deposits (Fixed and Recurring Deposits)

• Savings Deposits
CASA deposits
• Current Deposits

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 Market share of private sector banks in CASA deposits have
increased significantly in the last 10 years.

PROPORTION OF CASA DEPOSITS

Pvt Banks
Pvt Banks

PSU Banks
PSU Banks

Source: https://www.zeebiz.com/market-news/news-sbi-hdfc-bank-axis-bank-icici-bank-yes-
bank-in-psb-vs-pvt-lenders-tussle-on-casa-deposits-look-who-is-winning-and-who-is-losing-
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Why Private Sector and Foreign Bank’s CASA is increasing?

• Better Service level, convenience and faster technology adoption.

• Customer’s trust in private sector and Foreign banks is increasing

• Private Sector and Foreign Banks are able to tap in salaried segment market

• Foreign banks have high proportion of corporate customers who maintain

current deposits

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 CRR and SLR

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 SLR
CRR

• Tool to regulate the lending • Tool to regulate lending capacity

and hence liquidity
capacity and hence liquidity
• Percentage of deposits that banks
• Percentage of deposits that banks will have to invest in Gold,

will have to maintain with RBI Government securities and other

government-approved securities
• Banks do not earn any interest rate
• Banks may earn interest rate of
of CRR SLR

• Currently the CRR is 4% • Currently the SLR is 18%

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 CRR and SLR has reduced significantly from its peak of 1990s

Source:
https://www.numberbasket.com/india/finance/rbi-key-rates/cash-reserve-ratio-crr
https://www.numberbasket.com/india/finance/rbi-key-rates/statutory-liquidity-ratio-slr
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 Basel 3 Norms

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 BACKGROUND

•The major problems that led to 2008 crisis were

 High bad debt
 Low quality of capital base
 Insufficient liquidity
•Basel 3 norms have been developed to avoid 2008 like financial breakdown in
the future.
•It is a safeguard/ backup plan for the banking sector
•The objective is even if default rate increases, the bank should remain stable
•Basel 3 proposes many new capital, leverage, and liquidity standards

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Capital Adequacy Ratio (CAR) = (Tier 1 capital + Tier 2 capital)/(Risk weighted
assets)
Problem

State Bank of India has a Tier 1 capital of Rs. 1 crore and Tier 2 capital of Rs. 1
crore. They had given personal loans of Rs. 10 crore whose risk weightage is 100%
and Homes loans of Rs. 10 crore whose risk weightage is 35%. Calculate the
Capital Adequacy Ratio.

Capital Adequacy Ratio (CAR) = (Rs. 2 crs)/(Rs. 10 crs*100%)+ (Rs. 10 crs*35%)

= Rs. 2 crs/Rs. 13.5 crs

= 0.148 or 14.8%

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 Basel 3 norms require banks to bring in more equity capital.

KEY BASEL 3 NORMS

Basel 2 Basel 3
Tier 1 Capital 4% 6%
Tier 2 Capital 4% 2%
Capital Conservation 0% 2.5%
Buffer
Tier 1 Capital + 4% 8.5%
Capital Conservation
Buffer

Source: RBI
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 PSU banks see recapitalisation from government worth Rs 3.4
trillion over last 7 years

CAPITAL INFUSION IN PUBLIC SECTOR BANKS

Source: GoI
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 Small Finance Banks

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SMALL BANKS : SCOPE

•Minimum net worth requirement is Rs. 100 crores

•Priority sector lending norm – 75%

•Focus should be on providing banking services to small farmers, small

businesses, micro and small industries and the unorganised sector.

•At least 50 per cent of the bank's loan portfolio should constitute loans and

advances of up to Rs. 2.5 million in order to extend loans primarily to micro

enterprises.

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 SMALL BANKS : KEY REGULATORY REQUIREMENTS

SMALL FINANCE BANK VS OVERALL BANKING

Deposit Growth Between

Credit Growth Between
2018 and 2020
2018 and 2021
70% 65%
50%
42% 60%
40% 50%
30% 40%
30%
20%
20% 11%
10% 8%
10%
0% 0%
Small Finance Overall Small Finance Overall
Bank Banking Bank Banking
Source: https://www.livemint.com/news/small-finance-banks-to-dominate-small-ticket-lending-in-
india-say-analysts-11625730664827.html
https://economictimes.indiatimes.com/industry/banking/finance/banking/share-of-small-loans-rises-
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thanks-to-small-finance-banks/articleshow/89774444.cms
LIST OF PROMINENT SMALL FINANCE BANKS

•Ujjivan Small Finance Bank.

•Janalakshmi Small Finance Bank.
•Equitas Small Finance Bank.
•A U Small Finance Bank.
•Capital Small Finance Bank.
•ESAF Small Finance Bank.
•Utkarsh Small Finance Bank.
•Suryoday Small Finance Bank.

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 Payment Banks

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PAYMENT BANKS: KEY REGULATIONS
•Acceptance of demand deposits, i.e. current and savings bank deposits.
However, payment banks will initially be restricted to holding a maximum
balance of Rs. 100,000 per customer.
•Payment banks will not be allowed to disburse credit.
•They can also distribute simple financial products like mutual funds and
insurance.
•They can also charge MDR for Debit cards.
• The minimum capital of a payment bank is Rs. 1 billion.

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ACTIVE PAYMENT BANKS

•Paytm Payments Bank

•Aditya Birla Payments Bank

• Airtel Payments Bank

• India Post Payments Bank

• Fino Payments Bank

• Jio Payments Bank

• NSDL Payments Bank

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