India Commercial Banking Report Q3 2008

Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit. In a number of emerging markets, macro-economic imbalances are evident.

The figures on the tables above provide a snapshot of the banking sector in India and the changes that have taken place within it during the last year. To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets, and GDP mean little: however, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

From Q308, we have included a new section that examines the risks associated with each country's banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008.

Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets.

Two general themes pervade the banking sectors of the Asia-Pacific region. The first is that the excess savings within Greater China and Japan remain enormous and are likely to grow. One expression of this will be the continuing growth in bank deposits that is, in absolute terms, considerably greater than the growth in lending. The second is that central banks have, in much of the region, been moving to tighten monetary policy. This has already had an impact on the behaviour of the banks.

As in previous reports, we include a SWOT analysis for India. The story remains one of a potentially enormous banking system that is held back by the slow pace of structural reform - and a large number of people who are too poor to require the services that can be offered. In the short-tern, an air of caution prevails. The Reserve Bank of India has moved to tighten policy - as a pre-emptive strike against inflation - and the banks have been less-than-aggressive in their lending. The loan/deposit and loan/asset ratios have been falling in India.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMI's assessments of overall country risk, together with the regulatory and competitive environment.

India's overall CBBER, at 58.6, is towards the middle of the countries in the Asia Pacific region that are surveyed by BMI. However, this is largely due to the comparatively high 76.3 score on the heavily weighted banking market elements of the limits to potential returns element. This is probably more reflective of the sheer scale and entrenched position of the Indian banking system rather than of a high level of development.