India
- Population – 1,087m (2004)
- Average lending interest rate – 10.8% (2005)
- % change in consumer prices – 4.2% (2005)
- GDP at constant 1999/2000 prices – Rs26,115bn (2004/2005)
- Agriculture sector as % of total GDP – 21% (2004)
The financial services sector has long been dominated by state-owned institutions. During the second world war the government introduced controls on public issues and used pricing formulas that underpriced share issues. As a result, although India had a large number of stock exchanges, little money was raised through public issues, the floating stock was small, and the markets were speculative and volatile. In the 1950s the government set up long-term financial institutions that supplied the bulk of industry's debt and equity finance, and in 1970 the banks were nationalised.
Government-controlled commercial and development banks, insurance companies and the Unit Trust of India (UTI, a mutual fund) have traditionally been the leading sources of funds for both local and foreign-invested enterprises. The much smaller private financial sector consists of a number of smaller banks, still young insurers and a host of mutual funds. State-owned commercial banks provide both working capital and medium- to long-term finance, but they are predominantly in the business of short-term lending. Public-sector development banks, insurance companies and the UTI specialise in long-term lending and subscribe to corporate shares and debentures. Public-sector insurers, the UTI and other mutual funds are active in the primary and secondary capital markets.
Commercial banking is dominated by the 27 public-sector banks, which control 75.4% of assets in the sector. Private domestic banks hold 18.1% of assets, and foreign banks have the remaining 6.5%, according to the Indian Banks' Association. The public-sector banks have countrywide networks (around 90% of total bank branches), although each bank has its own geographical stronghold. All provide a full range of banking services. Foreign banks play a small but increasingly important and innovative role in India's banking sector. They accounted for 6.5% of commercial bank assets in 2004/05.
Government intervention in the banking system is high, as the authorities try to channel credit to politically important sectors, especially agriculture, which employs about 60% of the workforce. Public-sector banks must devote at least 40% of their loan portfolio to designated priority sectors and 12% to export financing. Since 1993 the Reserve Bank of India (RBI, the central bank) has also given out 12 licences to "new" domestic private banks. These banks—there were eight in December 2005 as a result of mergers and closings—accounted for 12.3% of total commercial banking assets in 2004/05. Foreign institutional and direct investors hold stakes in some of them.
In February 2005 the RBI announced a "road map" for the presence of foreign banks in India, which allows foreign banks unprecedented room to operate, but stops short of introducing the degree of competition required to break the dominance of state-owned banks. A more competitive banking sector environment is expected only in 2009, when the second phase of the road map will allow foreign banks to compete more freely. However, the RBI has taken a number of steps to strengthen the banking sector. It has tightened capital requirement norms for banks, with a capital-adequacy ratio of 9% (compared with the 8% required by Basel II, the capital-adequacy framework for internationally active banks); norms for non-performing loans were tightened in March 2004; since March 2006 banks have to maintain an investment fluctuation reserve of 5%; and banks are required to comply with Basel II norms by March 2007. The overall asset quality has improved since the late 1990s, with the ratio of non-performing loans (NPL) having fallen from 15.7% in March 1997 to 5.2% in March 2005. In spite of many challenges India's banking sector is widely viewed to be much healthier than China's.
Source: The Economist Intelligence Unit
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