Indian Banks’ asset ownership lags east Asian peers leaving room for more players

Mumbai: Does India have too many banks? Proponents of the consolidation drive seem to believe so, but the collective asset ownership of our lenders suggest we need several more of them — even more so if the Centre were to quickly reach its stated objective of building a $5-trillion economy.

At 68.35%, the country’s total bank assets in proportion to the GDP trails its Asian peers: Hong Kong, China, Japan, Thailand, South Korea, Malaysia and Singapore — the wealthier east Asian rim that has much deeper bond markets — lead India’s bank-dominated financial system in asset ownership by their lenders.

“The promise of a rising middle class will reap maximum benefits for the financial sector, including banks, as income growth picks up,” said Rahul Bajoria, chief economist at Barclays India. “Banks would play a prominent role in expanding the economy in coming years as the bond market is yet to expand beyond top-rated categories.”

In India, domestic bank credit to the private sector is about 50% of the country’s GDP, markedly lower than 160-200% in case of countries such as China, Japan. This ratio increased significantly to about 50% by 2010 from about 30% in 2000, but largely stagnated thereafter.

So, new bank licence holders are likely to have a major role in helping the Centre achieve its objective of reaching a $5-trillion economy.

“The ratio is low for a country which is growing rapidly and has a primarily bank-based financial system,” said Siddhartha Sanyal, chief economist at Bandhan Bank. “For several emerging market Asian peers like China, Thailand and Malaysia, the same ratio is more than double, on an average, strongly underscoring the room and need for driving further formalisation and banking sector penetration in India.”

The banking sector has grown significantly over the years but the total balance sheet of banks in India still constitutes less than 70% of the GDP, which is much less compared to global peers, RBI’s internal working committee said in a report on private bank ownerships and governance last Friday.

The matrix was in the range 131.9-141.5% for Malaysia, Thailand and South Korea show the World Bank data available until 2017. In three successive years, the dynamics have not changed much, experts said.

An important indicator of bank-based financial deepening, that is, private sector credit, has expanded rapidly in the past five decades thereby supporting the growth momentum, according to the central bank.

India’s bank credit rose marginally to ₹107.38 lakh crore on November 6 this year compared with ₹106.72 lakh crore a year, show latest data from the RBI.

“The domestic credit provided by Indian banks remains low compared with major emerging market and developing economies (EDEs), and advanced economies,” RBI said.

Only State Bank of India is among the top-100 global banks by size.