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The Indian banking and financial system have come a long way since its early days. As of 2022, the total assets across all banking sectors (public and private banking) crossed $2.67 trillion.
India has one of the world's largest retail banking and financial services institutions - with 12 public sector banks, 22 private banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks, and 96000+ rural cooperative banks, along with other credit institutions.
This is a long jump from its pre-independence or post-independence phases. Before we got independence, India had just 600 banks, with the Bank of Hindustan founded in 1770 in Calcutta being the very first established bank in the country.
Prominent among these is the Imperial Bank of India, which was formed by merging three existing banks in 1921. The Imperial Bank of India was nationalized in 1955 and became the State Bank of India, which is today the largest public sector bank in India.
Similarly, if we look at the post-independence scenario, the banking system in India focused majorly on providing financial services to the poor and rural populations, which largely depended on local money lenders for financial assistance.
With this aim, the Government of India nationalized the banks under the Banking Regulation Act of 1949, and a total of 14 nationalized banks were present, including the Reserve Bank of India (RBI).
However, the most significant push to India's financial system came in 1991, when the government invited private players to invest in India. This led to the liberalization of the banking system in India and led to the formation of the top private banking institutions like HDFC Bank, Axis Bank, ICICI Bank, DCB, and IndusInd Bank.
Going by this trend, the future of financial services in India is on a solid growth trajectory, with India now surpassing the UK to become the 5th largest economy globally.
Here's a look at the current trends shaping the global financial services industry and the opportunities it presents for the banking system in India.
Banking Since 2020: The Global Outlook and How it is Shaping the Indian Banking Sector
The global economic outlook looks gloomy, as several factors hinting towards a recession-like scenario.
First, the geopolitical events, especially post-COVID-19 and the Russia-Ukraine war, have had a lasting impact, and as per the International Monetary Fund, the global growth projects were downgraded to 3.2% for 2022.
These include the issues due to global oil prices remaining volatile, sanctions imposed on Russia by Western countries, and continuing energy shortages that could lead to high costs.
However, despite the global challenges, India's overall financial system seems to be going steady and doing relatively well.
As a result, the IMF projection for India's economic growth in 2022 is at 6.1%, ahead of China (4.4%), Saudi Arabia (3.7%), and Nigeria (3%). In contrast, the US is projected at 1% growth, while Russia, Italy, and Germany could suffer degrowth.
Challenges Faced by the Indian Financial System
Although India's financial system has seen great heights and has a relatable stable approach given the current global economic outlook, this is not to say that the banking system in India hasn't faced issues.
Some of the most recent challenges that continue to have a heavy influence on India's financial system include the following:
India's Banking System Opportunities
In a statement by Kristalina Georgieva, Managing Director, IMF, to the press, she mentions how "India deserves to be called a bright spot on this otherwise dark horizon because it has been a fast-growing economy, even during these difficult times, but most importantly, this growth is underpinned by structural reforms."
According to IBM's Report titled 'Banking on India,' India's banking systems are experiencing significant disruption and change and have invested majorly to bank on technology transformations.
Some of the important initiatives undertaken by the central government for financial enablement and digitization are proving to have fruitful results. As per the report, the opportunities that India can unlock thanks to these initiatives include:
The Future of Indian Banking
In the future, India's financial system will witness a greater emphasis on providing improved and personalized services to clients.
This will be coupled with being able to match competitive rates through the introduction of Neo-banks and other digital lending options that are now available to customers.
The future will see robust growth driven by innovation and investment in infrastructure, digital enablement, and a focus on mobile and internet banking.
As per IBEF, India's fintech market is expected to reach ₹6.2 trillion in 2025. It will witness greater regulatory support, such as the advent of RBI's regulatory sandbox, which will allow fintechs to test out their concepts and innovations before going live.
Further, it will work with 4200+ fintech startups to create a more disruptive, accessible, and innovative future. This can catalyze major initiatives to enable India's financial services offerings to be more robust and fast-paced, including:
Conclusion
To recap all that was discussed in the blog, increasing privatization and digitization are the central themes that will continue to evolve India's financial system in 2022 and beyond.
As we move to a more inclusive, non-traditional, and affordable banking system, focusing on internal controls, credit risk management, managing NPAs, and the adoption of technology will play a vital role in carving the future of growth in our overall financial system.
With positive steps being taken, including the rise of fintech and microfinancing options, the inclusion of the unbanked population, and initiatives for digitizing finance, the banking system in India will be the third-largest in the world by 2025, with the chances of becoming a $5 trillion economy by FY 2029.
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