Indian Banking Sector Analysis 2018

Indian Banking Sector Analysis 2018

Indian Banking Sector Analysis 2018 ; Indian Banking sector is one of the oldest and most popular sector in stock market point of view. It is also one of the largest in terms of market capitalization in Indian stock market. Banking sector is such a sector which is either liked by investors or disliked by investors but there is no middle ground. There are many investors whose portfolio is heavily loaded with banking and finance stocks and at the same time there are some big investors they don’t touch banking stocks. Let’s go ahead with Indian Banking Sector Analysis 2018 and see what is there for 2018.

Visit Housing Finance industry outlook 2018

Indian Banking Sector Analysis 2018

We will do Indian banking sector analysis for both public and private sector banks keeping in view 2018 outlook.

A brief introduction

The Indian banking system consists of 27 public sector banks, 26 private sector banks, 46 foreign banks, 56 regional rural banks, 1,574 urban cooperative banks and 93,913 rural cooperative banks, in addition to cooperative credit institutions. Public-sector banks control more than 70 per cent of the banking system assets, thereby leaving a comparatively smaller share for its private peers.

As per the Reserve Bank of India (RBI), India’s banking sector has sufficient capital and well-regulated. The financial and economic conditions in the country are far superior to any other country in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient and have withstood the global downturn well.

Indian banking industry has recently witnessed the roll out of innovative banking models like payments and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry.

In August 2017, Global rating agency Moody’s announced that its outlook for the Indian banking system was stable. In November 2017, Global rating agency Moody’s upgraded four Indian banks from Baa3 to Baa2.


Key investments and developments in India’s banking industry include:

  • The bank recapitalisation plan by Government of India is expected to push credit growth in the country to 15 per cent and as a result help the GDP grow by 7 per cent in FY19.
  • Public sector banks are lining up to raise funds via qualified institutional placements (QIP), backed by better investor sentiment after the Government of India’s bank recapitalization plan and an upgrade in India’s sovereign rating by Moody’s Investor Service.
  • The RBI amends statutes thereby allowing lenders to invest in real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) not exceeding 10 per cent of the unit capital of such instruments.

Government Initiatives

  • The Government of India is planning to introduce a two percentage point discount in the Goods and Services Tax (GST) on business-to-consumer (B2C) transactions made via digital payments.
  • A new portal named ‘Udyami Mitra’ has been launched by the Small Industries Development Bank of India (SIDBI) with the aim of improving credit availability to Micro, Small and Medium Enterprises’ (MSMEs) in the country.

The government and the regulator have undertaken several measures to strengthen the Indian banking sector.

  • Government of India has unveiled a two-year plan to strengthen the public sector banks through reforms and capital infusion of Rs 2.11 lakh crore (US$ 32.5 billion). That will enable these banks to play a much larger role in the financial system and give a boost to the MSME sector. In this regard, the Lok Sabha has approved recapitalisation bonds worth Rs 80,000 crore (US$ 12.62 billion) for public sector banks, which will be accompanied by a series of reforms, according to Mr Arun Jaitley, Minister of Finance, Government of India.
  • The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 will strengthen the banking sector.

Ref: ibef

So far we have told so many good things about the banking industry. Now let’s explore about the other side of Indian banking industry.

Baking sector performance in FY17

FY17 (refers to period from April 01 to March 31) was yet another challenging year for Indian banks with decline in credit growth, continued stress on asset quality, high provisioning costs resulting in declining profits and high requirement of capital for growth and compliance with stringent regulatory requirements.

The performance of the banks was also impacted by the subdued economic backdrop as well as dynamic regulatory environment. As per the revised estimates of CSO, the GDP growth during FY17 is expected to be 7.1% which was lower than 8.0% during FY16.

Visit Oil and gas industry outlook for 2018 here.

Business Growth

Credit growth was at record low due to decline in demand and asset quality pressures. Credit growth in India has seen a declining trend over the last three years due to decline in economic activity leading to moderation in industrial output, leveraged corporate balance sheets and low capital expenditure (capex) plans resulting in decline in credit demand and asset quality overhang making banks cautious in lending. During FY17, credit growth was at 4.7% which was lowest in growth rate in over a decade.

Asset Quality

Deterioration in asset quality continued but pace of stressed assets addition declined The asset quality of the Indian banks saw a sharp deterioration in the last three years with sharp increase in NPAs in the last two years.

Public Sector Banks (PSBs) have witnessed a higher deterioration in asset quality as compared to the private sector players. However, the private sector banks also witnessed deterioration in asset quality. Gross NPA ratio of private sector banks near doubling from 2.11% as on March 31, 2015 to 4.19% as on March 31, 2017.

As compared to PSBs, the private sector banks continued to have strong net worth coverage to Net NPA with Net NPA to Net worth ratio of 13.03% as on March 31, 2017 as compared to high 77.52% for PSBs.

Earnings and Profitability

Profitability of the banks saw declining trend due to worsening of asset quality Slow credit growth. Deterioration in asset quality impacted the income growth of banks as well as profitability during FY17. The 35 banks studied by CARE Ratings showed moderate growth of 6% due to interest reversals on NPA accounts as well as a low credit growth.

Growth Outlook for Indian banking sector

As per CARE Ratings’ estimate, India’s GDP would see growth in the range of 7.5% to 7.8% during FY18. Considering the improvement in GDP growth, declining pace of NPA addition and capital requirement; CARE Ratings estimates the credit growth to be in the range of 8% – 10% during FY18.

Disclaimer: Most inputs are taken from ibef and care ratings.


Now let’s conclude about Indian banking sector analysis, outlook for 2018.

What would be you first reaction if somebody says this to you? The back bone or the strongest pillar of a sector has posted quarterly loss; nearly after two decades of consecutive quarterly profits.

What would be your impression if you hear this? Second largest pillar of a sector has involved in serious fraud.

These are the story of State Bank of India and Punjab National Bank in public sector banks.

Would you be too much enthusiastic about investing in these sectors?

So as expected we are going with NO in investing in public sector banks until next 1 year. Hopefully situation would turn positive in 2019.

What about private sector banks then? There is no doubt many private sectors banks are much better than public sector banks  on various parameters. Even if we have carefully selected two mid sized private banks for an investment horizon of 2 to 3 years; Overall sentiment remains bearish or stagnant for 2018.

Hope you find above article on Indian banking sector analysis for 2018 useful. Do add a comment below or contact us if you have any queries.

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Also visit Pharma industry in India, Outlook, overview 2018 and Indian IT Industry overview for 2018.

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