Factors that will help boost growth prospects of India's banking sector:
Favourable demographics and rising income levels
Rising literacy rate, especially in rural India, has increased the need for banking. Between 2006 and 2026, the working population (25-60 years) is expected to increase from 675.8 million to 795.5 million, giving rise to a favourable market for banks.
The projected per capita GDP is expected to increase from US$380.80 (Dh1,398.67) in 2000-2001 to US$ 2,097.50 in 2026, reflecting higher disposable income. There is a significant latent demand for retail banking services, given a low penetration level of about 59 per cent.
Conducive banking environment
India has a well-balanced mix of public and private-sector banks. While public-sector banks provide stability to the banking system with their stringent regulatory framework, private-sector banks add the necessary dynamism to it.
A large number of micro, small and medium enterprises (MSMEs) with significant growth opportunities in their respective sectors provides a significant opportunity to the banking sector. The total credit provided by public sector banks to the MSME sector last year was $39.8 billion, which formed 11.3 per cent of the net banking credit. The banking system envisages doubling of credit flow to the MSME sector in the next five years ending in 2011-2012, with an annual growth of 20 per cent.
Large amount of money is remitted by non-resident Indians, one of the largest diasporas in the world
In 2008, Indians remitted $45bn back home. Debit or credit card transfers and instant money transfers through a special arrangement with overseas correspondent banks are gaining importance in addition to the traditional modes of drafts and checks.
Increasing economic prosperity in rural areas has provided banks with the opportunity to cater to the rural market. With a network of about 70,000 branches, of which about 46,000 are in rural and semi-urban areas, microfinance has emerged as one of the most promising areas for commercial banks. From $12 million in 2003, the market for lending tiny amounts of money to India's poor has grown to $7bn.
The microfinance market is expected to grow to $50bn in the next few years. But in recent months, microfinance companies have come under heavy criticism and are accused of turning into loan sharks. Hundreds of debtors in the Indian countryside have committed suicide allegedly because of harassment from microfinance companies. The government is considering regulating the sector.
* India Brand Equity Foundation