With the Indian economy moving on to a high growth trajectory, consumption levels soaring and investment riding high, the Indian banking sector is at a watershed. Further, as Indian companies globalise and people of Indian origin increase their investment in India, several Indian banks are pursuing global strategies,

The industry has been growing faster than the real economy, resulting in the ratio of assets of commercial banks to GDP increasing to 92.5 per cent at end-March 2007. The Indian banks have also been doing exceptionally well in the financial sector with the price-to-book value being second only to china, according to a report by Boston Consultancy Group.

Consequently, the degree of leverage enjoyed by the banking system, as reflected in the equity multiplier (measured as total assets divided by total equity), has increased from 15.2 per cent at end March 2006 to 15.8 per cent at the end of March 2007.

Growth

A burgeoning economy, financial sector reforms, rising foreign investment, favourable regulatory climate and demographic profile has led to India becoming one of the fastest growing banking market in the world. The overall banking industry's business grew at a CAGR of about 20 per cent from US$ 469.4 billion as of March 2002, to US$ 1171.29 billion by March 2007.

Aggregate bank deposits of banks increased by US$ 129.26 billion (22.1 per cent) at the end of March 2007 over the corresponding in 2006. It further increased by 21.2 per cent to US$ 161.47 billion as at end-March 2008 over the corresponding period in 2007. While aggregate demand deposits increased by 19.2 per cent, aggregate time deposits increased by 21.6 per cent in the same period, indicating migration from small savings schemes of the Government.

Similarly, aggregate deposits of the scheduled commercial banks (SCB) grew by 17.8 per cent and 24.6 per cent in 2005-06 and 2006-07. In 2007-08, aggregate deposits of SCBs have increased by 22.2 per cent in absolute terms to US$ 136.55 billion, against US$ 118.30 billion in 2006-07.

Simultaneously, loans and advances of SCBs rose by over 30 per cent (i.e. 33.2 per cent in 2004-05, 31.8 per cent in 2005-06 and 30.6 per cent in 2006-07) in the last three financial years, underpinned by the robust macroeconomic performance. The growth has continued in the current fiscal with non-food credit by SCBs increasing by 22.3 per cent, year-on-year, as on March 31, 2008.

Significantly, the asset quality of the banks has also improved over this period. The gross non-performing assets (NPA) as a per cent of total assets has declined from 4 per cent as of March 2002 to 1.46 per cent as of March 2006. Simultaneously, the capital adequacy ratio of all SCBs has improved from 11.1 per cent as of March 2002 to 12.3 per cent by March 2007.