- Overview
The Indian Banking industry has been a key pillar of growth with an active GDP contribution of up to around 12%, but it has promoted financial inclusion through various initiatives targeted to bring the country’s underbanked population under the banking gamut. Counted among the most stable banking systems, the industry has witnessed severe transformation from the dominance of public sector banks to more private banks entering the market.
Now, technological advancement and innovation have given rise to fintech companies which have transformed centuries-old mannerisms of the traditional banking system bringing more ease for the customers. With the rise of Fintech services and enabling of digital banking solutions across the nation, the banking stocks are anticipated to reach newer heights in the coming years.
- Banking Industry and Market Size
A study made by Statista has projected the Indian Banking industry to reach a significant upsurge in the Net Interest income for the industry to reach $338B this year along with the continuation of the dominance of the traditional banks in the sector expected to reach a market value of $331.80B within this year. The banking sector in India comprises around 21 commercial banks, 44 foreign banks, 12 small finance institutions, and around 12 government banks which dominate the industry enjoying customer trust.
Last year, the combined assets of the public as well as private banks were reported to be $ 1016.3B and $1686.70B under which around 58% of the banking assets resulted from the assets of public sector banks (along with private sector and international banks). Likewise, the Indian digital lending market is growing at a CAGR rate of around 38% to reach $ 720, or nearly half of the $ 1.3T by the year 2030, opening vast opportunities for the lending segment in the nation. All this potential will positively impact the banking stocks too.
- Industry Outlook and Major Developments
Since the past decade, the Indian Banking industry has seen tremendous growth reinforced through several factors including robust demand for banking services, rising per capita income, rising consumerism, and easier credit access, etc. have caused the industry to upsurge dramatically which could be evidenced from the fact that till Jan this year, the total number of digital transactions fulfilled stood at 15B worth aggregate value of $25B made through 560 banks through the Unified Payment Interface (UPI) users in the country. A study made on digital payment solutions by BCG has projected that till 2026 as high as 65% of the total payments will be done digitally. As reputable public banks hold a certain level of consumer trust, fintechs are considering and even have entered partnerships with leading banks to obtain permits and fulfill further regulatory obligations offering services such as lending, deposits, and investments.
Recent technical advancements have significantly increased the financial services industry’s competitiveness, quality, productivity, inclusivity, and efficiency in the field of digital lending, and the RBI has taken initiatives to digitalize agro-finance to facilitate easier processing of Kisan Credit Card (KCC) loans.
Developments
With the intent to outspread the revolutionary impact of UPI-based payments globally, Google India Digital Services (P) Limited has entered into an MOU agreement with NPCI International Payments Ltd (NIPL), India.
In July last year, the State Bank of India committed an investment of around $85M to acquire a 100% stake in the SBI Capital in SBICAP Ventures.
In Dec last year, AU Small Finance Bank Limited (AU) and Fincare Small Finance Bank Limited (Fincare) merged into each other leading to AU becoming the surviving entity. Likewise, in the same month, ICICI Prudential Life Insurance and Ujjivan Small Finance Bank entered into a Bancassurance Partnership post-merger bringing together their synergies.
All these industry developments and government initiative will drive investments in Banking Stocks.
- SWOT Analysis of banking stocks
Strengths that influence investment in banking stocks
Pioneer in economic growth
The Indian banking industry is among the most stable industries which has embraced socio-economic circumstances and technological advancements presenting its adaptability and offering solutions such as ease of banking, digital loans and payments, and wealth management for its customers easily accessible through the tip of the phone.
Foundation for Financial Stability
Since the financial health and economic development of a country are closely interlinked with each other they play a crucial role in encouraging economic growth, offering assistance in wealth management, and enabling them to partake in both the domestic and global economies.
Robust Demand for Banking Services
The digital revolution in the banking sector has made it possible for customers to do a variety of financial operations from a distance, such as payments, payment of bills, and cash deposits, including credit card applications. The emergence of branchless banks such as PayPal and Payoneer, methods of social distancing, and the Internet have made digital banking an indispensable part of contemporary financial services.
Weaknesses affecting banking stocks
Vulnerability to Global Conditions
Since more than 50% of the global banking market is fixated on regions like Europe and the USA, the Indian banking industry is susceptible to the economic conditions around the world. So much so that any minor change in consumer preference or currency rate fluctuations could have a huge bearing on the global financial industry leading to volatility.
Lack of reach in rural areas
Despite decades of existence in the country, the banking sector in India has insufficient presence in rural areas leading to poor or deficient services for the rural customers which blocks their access to the essential banking services.
Prone to Cyber Attacks
With rising cases of data negligence and breaches, banks need to rapidly adopt swift measures to enhance their data security measures for instance limitation on the complexity of passwords could lead to higher instances of cyber-attacks leading to comprise data security.
Threats looming in the banking stocks
Severe Competition
Along with the dominance of public banks, the Indian banking industry is witnessing the rise of private banks, fintech companies, and alternative finance entities, including mutual funds and insurance companies affording better customer services capturing the focus of the younger generation representing a persistent need for traditional banks to revolutionize to recall specifically this segment of population.
Increasing Non-Performing Assets (NPAs)
Non-performing assets are those loans that have been bad for a longer period causing major losses for the banks. Not only do they cause losses but also pose a major risk to the country’s economic stability.
Shift in Customer Preferences
Due to the availability of several banking options other than public banks such as private banks, and fintechs offering convenience and better customer services, lately, there has been a shift in consumer preferences which poses a threat to traditional banking systems.
Opportunities stimulating banking stocks
Technological Developments
In the age of technological advancements and innovation, banks have the opportunity to employ pioneering technologies and unswervingly offer better goods and services to lure a more tech-savvy younger population and retain them for a longer period beyond existing digital offers.
Wealth Management and Advisory Services
With increasing disposable income, there is robust demand for individual wealth management and consulting services which might be beneficial for banks and financial institutions to offer personalized services such as detailed investment assistance and financial planning services, meeting the demands of high-net-worth individuals.
Advent of Blockchain technology and Digital Currency
Careful consideration of innovative technologies like blockchain could help to bring more efficiency through streamlining of banking operations and enhance security features of the system. Besides, digital currencies related services could make the banks more appealing to digital currency enthusiasts and investors.
Usage of Artificial Intelligence and Data Analytics
Novel technologies like Artificial intelligence and Data Analytics have revolutionized the banking industry through services such as better customer care services, credit assessment, and fraud detection, etc. among others opening huge opportunities to lower risks, and improve their operational efficiency, ultimately offering more personalized banking experience by utilizing these technologies.
- Government initiative impacting the investments in Banking Stocks
Through its flagship program the Pradhan Mantri Jan Dhan Yojana or PMJDY scheme the Government of India significantly reinforced the banking sector which extended banking facilities to more than 50 crore people in the country expanding bank deposits to reach around $25B.
With the purpose of enhancing the safety and security of card transactions under its risk mitigation measures, the Reserve Bank of India announced new auto debit rules with a mandatory added factor of authentication (AFA), operative from 01.10.2021.
The Union Government also introduced digital payment solutions such as e-RUPI, a QR and SMS-based payment solution allowing users to redeem vouchers without the need for any card or internet service.
In a bid for better efficiency, cost savings, and TAT reduction, the RBI also launched the digital Kisan Credit Card loan facilities which is expected to transform credit flow within the economy.
- Resaons to invest in Banking stocks?
Higher Growth Potential for Investors- Higher interest rates allow banks to charge higher sums for loans given enhanced net interest income and pay less on deposits accepted. Since rising rates indicate a robust economy allowing banks to gain net interest margins leading to higher profit margins for the banking stock investors.
Healthy Economy- Since the performance of the banking industry is closely interlinked with economic stability hence during periods of economic surge, it is likely for consumers and businesses to increase spending and borrow more. Equally, there is growing demand for bank products like credit cards driven by a robust job market and anticipated positive GDP growth causing profit for investors for banking stocks in India.
Growth Opportunities- With the rise in demand for various amenities such as fee-based banking services along such as wealth management and investment banking, products such as digital wallets to gain more consumers and produce non-interest revenue streams, etc. are expected to grow their business manifold and hence more profits for banking stock investors.
Relaxed Regulations from the Government – In the past few years, the Union Government has relaxed certain stringent regulations adopting a more favourable approach towards banks which allowed more flexibility in the lending practices generating higher revenues.
Dividends on regular intervals-Major players in the banking industry offer dividends regularly offering a consistent source of passive income.
- Who should invest in Banking stocks in India?
Investors who are interested to make long-term investment in a volatile industry with certain level of risk tolerance and generate a passive source of income through dividends should make investments in the banking stocks. But before reaching any final decision it is advisable to measure factors such financial status, risk management procedures, compliance management, etc. for the concerned banking stock as per their risk appetite and return prospects to mitigate potential risks.
- Factors to consider before investing in Banking Stocks
Volatile in Nature- The Banking industry is a volatile industry with its performance and growth proportional to the economic conditions which means rapid economic growth might indicate improved performance of the banking stocks in India leading to better profit margins for investors.
Credit Risk and Loan Quality- Since revenues from lending money to individuals and businesses form a major chunk of their business, thus the quality of lending by banks may have a major bearing on their profitability. Thus, banks following due processes to evaluate credit risks might have to face lesser losses offering better banking stock returns for investors.
Regulatory Risks and Compliance Issues- Banks focusing on fulfilling due procedures for risk mitigation and security purposes implemented by the RBI and other regulatory bodies may impact profitability, capital requirements, and compliance costs for banks impacting banking stock value.
Financial Health – Financial performance indicators net interest margin (NIM), return on assets (ROA), return on equity (ROE), and efficiency ratio of the particular bank may affect the value of the Bank stock indicating higher or lower profit.
Brutal Competition-As the Indian banking sector in India is witnessing a power play among the private and public banks, thus individual attributes such as bank offerings, customer service, brand goodwill, distribution network and innovation, etc. among others might make one more appealing than the other.
- Future Prospects for banking stocks
Therefore, the Indian banking sector has been the foundation for supporting as well as encouraging growth of the economy. In the years to come, the industry is expected to witness further growth owing to factors such as improved spending, rapid implementation of development projects, implementation of banking reforms, and employing novel technologies like AI, automation, and Blockchain to offer better customer service, protect customer data and enhance security. Thus, the banking stocks in India is a mixture of thrilling prospects and certain risks which should be prudently evaluated by stakeholders before making any investment decision.