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Priya Ganapati | January 07, 2004

Retail loans and lending to small and medium enterprises will emerge as the two biggest areas of growth in the future for the Indian banking sector.

According to K V Kamath, chairman and managing director, ICICI Bank, India's largest private sector bank, the changing demographic profile and a downward trend of the interest rates will propel retail credit in India.

"There is a huge retail credit opportunity that is surfacing. Banks have low penetration in this segment currently. But it is the one area that is providing the momentum in the banking business now," said Kamath.

India has among the lowest penetration of retail loans in Asia. Though the sector has been growing at around 15 per cent, there is still a huge opportunity to tap into.

Middle and -high-income homes in India has increased from 1.16 crore (11.6 million) in 1995 to 2.57 crore (25.7 million) in 2002.

Interest rates on retail loans have been dropping rapidly too. For instance residential mortgages slumped by 7 per cent over the last four years.

"The entry of a number of banks in India in the last few years has helped provide increased coverage and a number of new products in the market," says Kamath.

SectorShare of
Growth of
Q1 FY 2003
Growth in
Q2 FY 2003

Apart from the individual consumer, small and medium enterprises have emerged as another lucrative segment.

Kamath says that at ICICI, the fastest growth is today coming from lending to SMEs.

ICICI Bank started lending to SMEs just a year ago.

"It is our fastest growing segment today. It just shows the huge opportunity that other Indian banks can tap into in lending," he said.

India's banking industry is has been going through a phase of rapid evolution both in terms of size and approach in the last few years. The total assets in the banking sector today is estimated to be at Rs 17 trillion and total deposits are estimated at Rs 13 trillion.

There are over 290 scheduled banks in the country today, of which 190 are regional rural banks. There are just 9 Indian private sector banks. Together the banking industry offers 66,000 branches across India.

In terms of profile the banking sector has undergone a massive change since liberalisation. Pre-reforms, the sector was highly segmented and dominated by public sector units. Today it is a diversified sector with offerings that can be globally benchmarked.

However, banks in India are yet to effectively leverage technology. ICICI Bank has been acknowledged to be among the first to explore new mediums like Internet banking and build robust call centres for its customers.

Three years ago 94 per cent of transactions in ICICI banks were done in its branches. Today only 24 per cent of transactions happen in the branches. Usage of its ATM has grown from 3 per cent in March 2000 to 51 per cent in 2003; Internet banking has grown from 2 per cent to 10 per cent in the same period and usage of call centres has grown from 1 per cent to 11 per cent.

"Convenience is a key driver and technology helps provide it. The industry has rather outdated systems and currently have low levels of technology readiness. We are lucky that we do not have legacy systems so banks can directly upgrade to the latest technology that is available. Technology is important for it helps banks not only increase their efficiency but also offer alternate mediums of banking for the consumer," said Kamath.

The growing buzz around the Indian economy has helped the banking sector too. This year India is expected to post a GDP growth of over 8 per cent, the highest in the last decade.

"The GDP growth lays the foundation for the banking sector. If the GDP and the country grows well then it means that the economic growth will translate into huge opportunities for the Indian industry," says Kamath.

Kamath is confident that India will re-write the rules of economics when it comes to GDP mix.

In the last few years, services have become increasingly dominant in the Indian economy. Today services account for 56.1 per cent of the GDP compared to 21.8 per cent from industry and 22.1 per cent from agriculture.

Non Performing Loans as % of GDP (2002) Non Performing Loans as % of outstanding loans (2002)
Indonesia 2612

"We are seeing a sustained growth in the services sector, an industrial resurgence and strong agricultural performance taking the GDP to over 8 per cent. The key drivers continue to be services and industry. But what will set India apart is the fact that services will continue to grow at a higher pace compared to the industry," said Kamath.

Kamath believes that in the last few years the Indian industry has gone through a restructuring phase to emerge as a competitive sector on a global scale. While the industry continues to grow, he said that the future lies in services.

"Services will sustain India's economic growth. The growth in services is being driven by knowledge and that along with India's demographics where we have the largest segment of young people will ensure that we have a global edge," he said.

The growing might of the Indian economy also means that Indian companies are now going global.

Following the customer could prove to be a successful strategy at this juncture, said Kamath.

For instance, ICICI Bank is aggressively trying to go international. In August, the bank said that it would open subsidiaries in London and Toronto, an offshore banking unit in Singapore and representative offices in Shanghai and Dubai.

"There is a huge NRI opportunity available. NRIs are seeking ethnic familiarity but they also want internationally benchmarked products and services. If Indian banks can offer them these, then they will have access to a huge market outside India. Also, as companies go global Indian banks can travel with them by expanding the scope of the services they offer," said Kamath.

Like other sectors of the economy today, Kamath said banking too is on a roll with non-performing assets, for long a bane for the industry, now under control and a fine regulatory framework in place.

"India today has among the lowest ratios of non performing loans of a percentage of GDP. It shows that the sector is healthy and supported by a strong regulatory framework. The banking industry is growing rapidly in India and with the buzz around the economy so high it is up to the banks to take advantage of the number of opportunities that have come up," he said.

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