Competitiveness And Market Structure Of Indian Banking Industry

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Introduction

After 1991 crisis, India’s liberalisation journey was multi-faceted. One of the major areas of liberalization was the banking sector which was highly regulated and controlled by government. Most importantly for banking industry, as per the M. Narasimhan committee recommendations, the liberalization came in the right areas namely interest rate, reduction of reserve requirements, entry deregulation, credit policies and prudential supervision.

Incase of interest rates, they could now be determined by the banks based on their cost of funds rather then government fixing them for banks. The administered regime for interest rate came to an end except for interest rate on savings account. The reduction of reserve requirement for banks made huge capital available for banks which could be deployed in the business. The entry of new players was de-regulated. The government empowered the Reserve Bank of India to issue licenses to the new players, if they met the set criteria jointly set by RBI and Finance Ministry. The credit rationing was completely done away with. Although there is still credit rationing for “priority sector�, the banks are free to deploy their capital on the sectors which they feel profitable. Excessive supervision regime came to an end. The Reserve Bank of India made several changes in prudential supervision and gave autonomy to banks in their day-to-day operation.

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The total asset size of Indian Banking industry is over US$ 270 billion. The total deposit amount is US$ 200 billion. Its branch network is one of the largest in the world with more than 66,000 branches and over 17,000 ATM spread across the country. The bank assets are expected to grow at 13.4% CAGR and it is predicted that India could become the 3rd largest banking hub in the world by 2040.

Currently India has 80 Scheduled commercial banks out of which 28 are public sector banks, 24 private banks and 28 foreign banks (Annual Report, RBI). As Indian economy is growing at an average rate of over 7% since a decade, more and more foreign banks are thinking to foray into the Indian market. As per McKinsey’s report on Indian Banking (2010), total loans-to-percentage of GDP, could grow from its current level of around 30% to ~45% in years to come. Such huge opportunities also

prompts several questions: Who is/ are the dominant players in the market? What is/are their share in the banking industry? What is the market structure of Indian banking industry; is it a monopoly or a perfect competition?

Objectives and Motivation:

The objective of this dissertation is to understand the Indian banking industry, its composition (nationalised banks, private bank and foreign banks) and knowing the players of the industry.

Further the study will find out how much concentrated the Indian banking industry is and provide knowledge regarding top 3 as well as top 5 major banks.

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