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Banking/Financial Services
Soaring Demand, Mismanaged Supply
India’s banking industry grew by 20% annually over 2002–07, with new private banks seeing
their business grow by 35% annually while SBI and the old private banks have lost substantial
market share. RBI attributes the setbacks to personnel policies, decision-making pace, and delays
in scaling up financial technology. But these and other problems, according to an October 2005
McKinsey study of India’s banking sector, stem in large part from remnants of the old regulatory
system still in place:
• concentration of market share (33%) among India’s top 5 banks, that has accrued
through the absorption of smaller, failing banks;
• regulations limiting redeployment or layoffs of idle staff during downturns;
• branch location rules and directed lending that result in higher rates of non-performing loans;
• ineffective supervision and regulation of the approximately 4,200 RRBs and cooperatives
throughout India that manage the equivalent of $80 billion in deposits;
• low foreign participation in Indian banking due to ownership and branch restrictions;
• absence of professional, independent, nationwide credit-reporting bureaus;
• lack of independence or accountability among PSB boards; and
• at incumbent banks, lack of adequate skills in management or in structuring and marketing
innovative services.
The current system has not helped rural populations to the degree hoped. According to India
B2B marketplace IndiaMART, nearly 60% of rural households and 70% of marginal farmers do
not have bank accounts; 87% of households have no formal credit, and only 21% have access to
formal credit; only 1% of rural households carry any type of loan from a financial intermediary,
with approval taking 24–33 weeks; and consumers commonly bribe lenders to approve loans,
adding a 10–20% premium to their costs. McKinsey estimates that 65% of agricultural credit is
obtained through more costly informal means.
Gradually this situation is changing, as banks have introduced online account access and payments
via mobile phones, remote wireless Internet kiosks and ATMs; voice-guided access in local languages;
biometric and fingerprint identification in place of signatures and passwords to overcome
literacy barriers; and rural banking through post offices, rural NGOs, or trusted village leaders.
Credit Where It’s Due…Or Not
As far back as the 1980s, foreign firms—among them Citigroup, American Express and Visa—
helped launch credit cards in India, partly because, unlike traditional banking, market entry into
the credit card sector has never been regulated. However, Indian consumers have been slow to
embrace credit cards (which incur actual debt) versus debit cards (which access bank funds as a
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