Analysis of Banking Industry in India in FY21


According to the Reserve Bank of India (RBI), India’s banking sector is adequately capitalized and well-regulated. The Indian Financial System and the economic conditions in the country are far superior to any other country around the globe. Credit, market, and liquidity risk reports claim that Indian banks are usually resilient and have withstood the global economic downturn considerably. Recently the Indian banking industry has witnessed multiple transformations and modifications in its strategic model for operation efficiency.

Retail banking gross revenue in India
Retail banking gross revenue in India

Source: theasianbanker

With India’s Immediate Payment Service (IMPS) being the only system at level five in the Faster Payments Innovation Index (FPII), the digital financial system has evolved immensely this fiscal year. The Indian banking system comprises of 20 public sector banks, 22 private sector banks, 44 foreign banks, 44 regional rural banks, 1,542 urban cooperative banks, and 94,384 rural cooperative banks in addition to cooperative credit institutions. During the fiscal year FY16-FY20, credit off-take grew at a CAGR of 13.93%. Whereas in FY20, total credit extended surged to US$ 1,936.29 billion.

Will the Indian Banking Industry be able to increase its profit margin amidst the COVID-19 pandemic?

  • Due to the COVID-19 outbreak in FY20, the profitability and credit management of the banking industry are reducing along with the low-interest-rate situation in the market. Hence, financial institutions are going towards a commission-based income due to the introduction of tech businesses in the developing market over time. The contraction of the Indian economy has adversely impacted the creditworthiness of the banking industry in India as banks are increasing loan loss provisions.

rebound of the banking sector in 2020
Covid-19 impact on the indian banking sector in 2020

Source: Bloombergquint

  • The coronavirus-induced lockdown has digitally transformed and modified industries one of them being the banking industry. Banks are urged to promote the use of channels that have never been their strategic priority that would be particularly intricate, which banks need to address by demonstrating real proximity with their customers. This transformation has also helped to develop customer relations.

  • The advantage of technological innovation can play a vital role in guaranteeing the business continuity of the banks. One of the major is the activation and enhancement of robotics solutions or artificial intelligence (e.g., Advanced BOTs that support the processes of adoption of the technologies displayed on the channels direct) and mobility (e.g., platforms for the management of promoters and systems authorizations), if applied to critical processes, would allow for easier protection in case of absence of staff.

  • COVID-19 has generated instability and high volatility in global capital markets. The financial sector has been one of the most affected, with bank valuations declining in all countries around the globe (P/NAV multiple experienced a severe downfall from 1.00x on 31 December 2019 to 0.69x on 30 April 2020).

projections of grow NPA ratios in various stress scenarios
The looming NPA risk

Source: Indianinforline

  • During this time due to social distancing, banks are using internet banking and communication with the customers online. Banks need to make sure to awareness to consumers who are unfamiliar with the new digital transformation and educate them on how to operate these functions.

  • As customers inquire about help and advice on short-term cash management and re-planning their future, banks would need to prioritize live interactions through video collaboration mechanisms. The banks must also provide cybersecurity and prevent fraud. The financial crisis has made it extremely challenging for businesses to raise funds from lending institutions as they suffer losses due to the pandemic and economic downturn. The banks across the country must help them to restructure their loan programs by modifying them according to the fundamental requirements of the business.

  • This would reduce the cash flow burden in the future and provide financial relief. On the other hand, revenue from retail and commercial banking is falling distinctly, as underlying consumption and transactions have seen an exponential fall. Though central banks around the world slash interest rates, banks are lessening yields to generate business, therefore significantly reducing net interest margins. Income from payments and other fee-based services are hooked by the decline in economic activity. Furthermore, banks would need to evaluate and prioritize current projects to ensure the allocation of assets to the most urgent needs. Banks should also concentrate on investing in areas that will endure the coronavirus pandemic, including projects and initiatives that maintain or improve the customer experience.

Will Digital Banking be the future of the Banking Industry post-COVID-19?

  • According to the Governor of Reserve Bank of India, Shaktikanta Das, banks of the future would be extremely different from now, and regulating the distinct segments of these banks would be a challenging task. Hence there must be a resilient financial system for these operations to function efficiently in the future ahead.

Digital buyers in India 2020 and impacts on banking industry
Digital buyers in India 2020

Source: theworldeconomicforum

  • The digitalization of the banking sector is one of the biggest transformations that has taken place and will continue to follow over the years. As per PwC, “the cybersecurity market in India is set to grow from $1.97 billion in 2019 to $3.05 billion by 2022, at a compound annual growth rate (CAGR) of 15.6 percent. The growth rate is nearly 1.5 times the global growth rate of cybersecurity expenditure.” Amongst them, artificial intelligence will be an integral part of smart banking. Cognitive technology with AI can offer features like cognitive engagement, cognitive automation, cognitive perceptions, and cognitive strategy formation have helped to develop better customer relations understanding each exclusive requirement of every customer.

  • Artificial Intelligence is a system that aims to decrease human intervention by the way of catching data patterns and tracking them to separate the requirements of each customer. On the other hand, robotic process automation will see huge progress in the coming years in comparison to traditional automation technologies.

Why is RBI lender of last resort?

  • When commercial banks decline to meet their financial demands from other sources, they approach the central bank, which gives loans and advances as lender of the last resort. If commercial banks have inadequate reserves to satisfy any financial responsibility, then in order to evade financial dread, there must be a guarantee that banks can get cash if they really need it and the Reserve Bank of India is the only institution that performs the role of lender of last resort.

Profitability distribution of CPI inflation forecast
Profitability distribution of CPI inflation forecast

Source: RBI

  • Every country has its own central bank acting as the lender of last resort to prevent a country’s financial system from collapsing. The purpose of the central bank as lender of last resort makes the creation of credit more accessible by raising confidence in the banking system and reducing the risk of a bank run. A bank run is when consumers panic and crowds start withdrawing their money. The presence of RBI reassures customers, specifically depositors, that their money is safe and secure.

How is the banking industry impacting the exchange rate and inflation?

  • As per IMF data, CPI inflation rate in Inda during FY08 and FY13 were 9.1%, 12.3%, 10.5%, 9.5% 10% and 9.4%, respectively. In developing countries they are striving for success to keep inflation rates at or below target comes with unacceptable financial costs, just as their striving to keep it at or imperceptibly high target comes with unacceptably high costs for developed countries.

  • In this situation, if the central banks restructure their mandate as control of overheating rather than targeting a rate of inflation over which they have limited control, they can revive the market adequately. This also ensures the financial stability of the economy. Hence the RBI should determine overheating more broadly than only through inflation. This in turn shows the exchange currency rate of a country relative to another country’s demand. For example, if the US dollar is more robust than the rupee, then it proves that the demand for dollars (by those holding rupees) is more than the demand for rupees (by those holding dollars).

a graphical representation of the exchange foreign rate in India
Exchange currency rate

Source: FRED

  • Developing economies have a stronger currency rate. The US economy is comparatively stronger than India’s and this is reflected in one US dollar being equal to around 76 rupees. The rupee has been depreciating against the dollar over the past few months.

  • The Reserve Bank of India records the rupee’s Nominal Effective Exchange Rate (NEER) in relation to the currencies of 36 trading partner countries. In REER terms, the rupee has depreciated in March and fallen to its lowest level since September 2019.


The increasing income is expected to enhance the need for banking services in rural areas, and therefore, drive the growth of the banking sector. The digital payments change will influence the credit distribution in India. Payments on Unified Payments Interface (UPI) scored a high of 1.49 billion in terms of volume with transactions worth approximately Rs 2.90 lakh crore (US$ 41.22 billion) in July 2020 and is estimated to touch US$ 1 trillion by FY23 driven by the five-fold rise in the digital payments.

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