Banking In India

Banking is nothing new to India. India’s first bank, the Bank of India, opened its doors in 1786. Although the Bank of India is no longer in operation, many banks followed, including “the Bank of Bengal,” which later became known as the State Bank of India.

Established in 1806, this is India’s oldest existing bank. Banking was strongest in Calcutta during the 19th century, the center of commerce and a key British shipping port. It wasn’t until the 1990’s that the government allowed private banks to emerge. These private banks, known as “teach savvy” banks, have made international banking capabilities much easier in India.

The banking presence is growing in India today, as more International banks and financial companies rush to compete for the growing banking needs in the country. Demographically, half of India’s 1.2 billion people are under the age of 25, so over the next several years, a huge generation of people will be entering their earning years and will have diverse banking needs.

Banks are moving toward allowing customers to complete banking transactions using mobile phones and other handheld technology. Banks in the past had used technology such as text messages to advertise promotions for customers, but electronic transactions will probably replace many types of cash transactions in India within the next few years.

The use of technology in banking lowers transaction costs and reduces the need for rapid branch expansion. Currently, 8% of banking transactions in India are completed online. With over 32,000 ATM machines in India as of December 31, 2007, Indian banks are taking advantage of all available financial technology.

Traditionally, Indians have not carried a great deal of debt, with consumer debt making up only 4% of the country’s Gross Domestic Product, compared with over 60% for countries such as South Korea and Taiwan. Banks are eager to participate in the increasing debt loads of Indian consumers.

Like China and South Asia as a whole, India is one of the largest growing areas for credit card, debit card, and cash card services, and studies predict that the credit card market in this region will grow by 15-20% over the next three years. Indian households currently save 28% of their disposable income.

Much like the banking system in the United States, India has a central bank that operates independently from the influence of India’s government. The central bank states that their goal is to manage volatility in exchange rates without pegging that currency to any one standard.

Overall, banks in India are strong today. Balance sheets are transparent and banks there have done a nice job of growing their asset and lending bases at reasonable rates. The challenge for banking in India will continue to be providing full service banking in the more rural areas of the country.

International transfers are relatively easy to send into India’s population centers, but transferring funds to people in rural areas can be difficult. With a population the size of India’s, opportunities for growth are abundant. It will be interesting to observe the future of banking in India.