India’s Banking and Financial System: Opportunities for Foreign Businesses

Ankita Tiwari

13 Jun, 2023

India’s Banking and Financial System has come a long way and is undergoing rapid expansion. The total assets across banking sectors earned about USD 2.67 trillion in 2022. India’s Banking and Financial System comprises of commercial banks, insurance companies, non-banking financial companies, pension funds, mutual funds, co-operatives, and other small financial entities. India’s Banking and Financial Systems regulator, the Reserve Bank of India (RBI) has allowed new entities like payment banks to be established which will add to the type of entities already operating in the sector. This sector is predominated by the banking sector with commercial banks accounting for more than 64% of the total assets of the financial system.

The Government of India has framed policies to liberalize, regulate and enhance the industry. The Government along with RBI has taken various measures to enable easy access to finance for Micro, Small, and Medium Enterprises (MSMEs). With the dual push by Government and the private sector, India’s Banking and Financial System has definitely become one of the most vibrant. To know more about India’s Banking and Financial System, continue reading this blog!

India’s Banking and Financial System Achievement

India is successfully sailing through geo-political adversities prevailing in the world. It means that despite the events such as Covid-19, the Russia-Ukraine War, volatile oil prices, and continuing energy shortage, India is doing well. India showed a 7.2% GDP in the financial year 2022-23. This shows that the Indian economy is not prone to external fluctuations. Apart from this, India’s Banking and Financial System has witnessed the following major achievements:

1. In the month of November 2022, a total of 7.30 billion transactions worth Rs. 12.11 trillion were recorded by Unified Payments Interface (UPI)¹.
2. In October 2022, the number of transactions via immediate payment service (IMPS) touched 482.46 million amounting to Rs. 4.66 trillion.
3. India experienced a 62% rise in PE/VC investments which were at USD 77 billion in 2021.
4. Prosus acquired BillDesk for USD 4.7 billion in the year 2021.
5. For smarter digital payment, on 9^th November 2021 RBI announced its first global hackathon ‘HARBINGER 2021- Innovation for Transformation’.
6. In September 2021, 8 Indian Banks announced the rollout of the “Account Aggregator” System to enable consumers to consolidate their financial data in a place.
7. In September 2021, Piramal Group acquired Dewan Housing Finance Corporation (DHFL) at USD 4.7 billion.
8. After approval from NPCI to go live in UPI in a graded manner, on 6^th November 2020, WhatsApp started its UPI payments service in India.
9. India’s largest lender, State Bank of India raised USD 100 million in green bonds via private placement in March 2020.

Government Initiatives in the Field of India’s Banking and Financial System

Major government initiatives in the field of India’s Banking and Financial System are as follows:

1. The Indian government, in the Union Budget 2022-23, announced plans for a central bank digital currency (CBDC) known as Digital Rupee.
2. The International Branch of the National Payments Corporation of India and the NPCI International Payments (NIPL) teamed up with a cross-border digital payments provider named the ‘Liquid Group’ to provide QR-based UPI payments services in 10 countries in North and Southeast Asia. 
3. The RBI communicated that the average base rate @ 7.95% will be charged by the non-banking financial companies – microfinance institutions (NBFC-MFIs) to the borrowers for the quarter starting from 1^st October 2021. 
4. The IFSC Authority constituted an expert committee on 30^th September 2021 to recommend the approach toward the development of a sustainable finance hub and formulate a road map on it.
5. The Prime Minister launched e-RUPI in August 2021. E-RUPI is a person and purpose-specific digital solution. It is an e-voucher based on a QR code or SMS string that is sent to the beneficiary’s mobile phone. It is a one-time payment mechanism where users can redeem the voucher at the service provider without using a card, digital payments app, or Internet banking access.

Opportunities in India’s Banking and Financial System

1. Robust Growth in India’s Banking and Financial System

India has enhanced its spending on infrastructure. Continued reforms and speedy implementation of projects are expected to further the impetus of growth in the banking sector. Rapid growth in businesses is expected to turn to banks for their credit needs. Technological advancement has brought mobile and interest banking services to the frontline. The banking sector is continuously working towards providing improved services and upgrading its technology infrastructure to enhance customers’ overall experience and also give banks a competitive edge.

• Rise in Fintech and Micro-financing

India saw a five-fold increase in digital disbursements. Digital lending stood at USD 75 billion in financial year 18 and was estimated to be USD 1 trillion in the financial year 2023. Indian Fintech market has earned USD 29 billion over 2084 deals from January 2017 to July 2022 bringing India to the second position in terms of deal volume. Further, it is estimated to reach USD 83.48 billion by 2025.

• Financial Inclusion

Over 300 million people opened a bank account since the government took the initiative called the Pradhan Mantri Jan Dhan Yojana in 2014 to provide accessible and affordable financial services to the masses. The unbanked population has been cut down to half.

• Digital Payments

In 2016, the UPI system and BHIM along with the NPCI were launched by the government. This improved mobile banking and online payment services and facilitated the digital revolution.

• Rise of Neo Banking

Niti Ayog proposed ‘digital banks’ to offer banking and financial services online instead of physical branches. It revolutionalized how banking services are provided to customers and created new opportunities for rural and urban sectors.

• Digital Rupee

The launch of the Digital rupee is one of the biggest steps to transform India’s Banking and Financial System. India is among the 10 countries to have successfully launched digital currency. Few banks have already started providing e-rupee while others are making their clients aware of the e-rupee and the process of connecting the bank accounts to CBDC wallets. E-rupee is expected to ease doing business in India and improve the resilience and security of the payment system.

Conclusion

In summation, it can be said that rapid privatization and digitization will continue to evolve India’s Banking and Financial System. An affordable banking system along with internal controls, credit risk management, and adoption of technology will carve the future in the banking and financial system. Further, the reduction in the barrier to foreign investment has received a positive response from many companies and insurance sector.

1. http://cashlessindia.gov.in/upi.html