Study of the Indian banking industry along with a detailed study on ICICI and HDFC banks

Abstract

The banking system in India is at a crossroads. Indian banking has long been regulated very tightly by the Central Bank, the RBI and for much of its history, it has been dominated by public sector banks. After India’s independence, the banking industry was fragmented and dominated by private players in existence at that time. Between 1960 and 1982, the banking system underwent a big change keeping in line with the socialist philosophy that dominated India till the late 1980s. This period marked a major consolidation of the existing players that affected around 200 banks that were either merged with larger banks or liquidated. In 1969, a major nationalization drive resulted in the creation of 14 major Public Sector Banks (PSBs) that came to dominate the Indian Banking Scene for more than 30 years. In 1991, reforms and liberalization took place in the Indian economy and the Indian Government started to move out of the socialist mold. The banking sector also was shaken up along with the capital markets in India. Private ownership in Public Sector Banks has been allowed within certain limits along with the entry of private players in banking. The banking systems and their regulations have been slowly transforming and the last few years have seen intense competition among the normally laid back PSBs and the private and foreign players. Technology has also had its impact on payment systems and customer service has improved with the advent of internet banking. Amidst all these developments, capital markets are slowly opening up as well. There is a reasonably vibrant Government bond market and the private bond market is taking shape. Derivatives have been introduced in 2003 and this segment is rapidly growing with the addition of newer types of instruments at regular intervals. The pace of change can however be termed as cautious with the RBI and other regulatory agencies keen on avoiding major crises like the Asian Currency Crisis in 1997.

The evolution and future growth of the banking industry can be better understood by a study of some of the salient features of advanced economies like the US and Europe. The growth and development of these advanced systems offer valuable lessons that can be used to guide the nascent Indian system that is at an early stage of development. The following sections of this report attempts to capture trends and the important themes that underlie the development of these advanced systems and compare them to the development in India.