Extending the reach of banking services

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: The Indian banking industry, on the back of robust economic growth, has undergone a sea change. From the days of the common man’s excessive reliance on money lenders and loan sharks, the banking system in India has come a long way. Besides a huge network of more than 70,000 branches across the country, banks are using a number of alternative channels (such as telebanking, internet banking, doorstep banking, etc) to reach out to the people. Banks are investing more into risky and complex financial assets rather than the practice of ‘lazy banking’ followed earlier. Banks are fast transforming themselves into a one-stop shop for a range of financial offerings, such as insurance, mutual funds, securities brokerage services, wealth management, etc, compared to plain vanilla deposits and loan products in the past. Liberalisation of the banking sector has infused the much-needed dose of competition among various players.

Despite this progress made by the banking sector, it needs to catch up on a number of fronts, especially on the penetration of banking offerings. Only 59% of the nearly 90 million farm households in India have bank accounts. Only 51% have access to formal credit. The credit-GDP ratio (from 44.5% in 1980s to 56.8% in early 2000 and to around 67% in 2006-07), is still substantially lower than many developed and emerging countries. (The ratio stands at more than 100% for Hong Kong, Singapore, Taiwan, and China). Retail loans-GDP ratio stands at around 17% in 2006-07, which is one of the lowest among Asian countries. The home loan market is highly under-penetrated, with a home loan-GDP ratio of around 8% in 2006-07, as compared to 50% for some developed economies.

Studies conducted by international consulting firms indicate that the supply of micro-credit in India is only Rs 6,000 crore, as against an estimated demand several times that amount. The banking sector is still not able to meet the growing requirements in areas such as financing small and medium enterprise (SME), infrastructure financing, and financing big M&As.