In this column last week, I made a passing mention that the next decade would be one of credit substitution and banks would need to try hard to build their loan books as corporate borrowers will increasingly find new avenues to raise relatively cheap resources. A few senior bankers do not see much merit in my observation. According to them, I have oversimplified the issue to get a smart headline. India will continue to remain a capital-starved country and banks’ loan business will never shrink, they reckon.

One look at the banking industry’s credit growth in the last decade makes one see the value in their argument. At the start of the decade, the industry’s loan book was Rs4 trillion. By mid-December 2009, this had grown more than seven times to Rs29.41 trillion. Bank loans now are around 52% of the country’s gross domestic product, or GDP. At the beginning of the decade, it was not even 19%. In 2000, the credit deposit ratio was 53.3. Now it has gone up to 70.34, reflecting firms’ need for money to expand their businesses in the world’s second fastest growing major economy.

How has the banking infrastructure developed in the past decade? The number of banks has declined from 297 in 2000 to 171 in 2008 (that’s based on the latest data available with the Reserve Bank of India). But one shouldn’t read too much into this as many weak regional rural banks have been either closed down or merged with stronger ones. The number of bank branches has risen from 65,412 in 2000 to 76,050 in 2008, but the population served by each branch continues to be 15,000. Also, the spread of the branch network is not uniform. For instance, the rural branch network has actually shrunk—from 32,734 to 31,076—while branches in metros have grown by at least 50%, from 8,219 to 12,908. In urban centres, too, the banks have spread their network well, from 10,052 to 14,392. This is in sync with the changing profile of Indian banks—they have been selling loans like Coke in urban India.

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How have individual banks fared? Three private banks have posted phenomenal growth. Axis Bank Ltd’s assets have grown from Rs6,669 crore to Rs1.48 trillion, and that of HDFC Bank Ltd from Rs11,656 crore to Rs1.83 trillion. ICICI Bank Ltd’s assets have grown from Rs12,073 crore to Rs3.8 trillion through a series of mergers, including that of the erstwhile financial institution ICICI Ltd with itself. During the decade, Axis Bank’s annual net profit has grown from Rs51 crore to Rs1,815 crore. HDFC Bank’s net profit has grown from Rs120 crore to Rs2,245 crore, and that of ICICI Bank from Rs105 crore to Rs3,758 crore.

The public sector banking industry’s growth has been less spectacular. State Bank of India’s asset base has grown around four times, from Rs2.61 trillion to Rs9.65 trillion. Punjab National Bank’s assets have risen from Rs54,000 crore to Rs2.47 trillion, and that of Bank of Baroda, from Rs58,622 crore to Rs2.27 trillion. State Bank’s net profit has grown a little more than four times—from Rs2,056 crore to Rs9,121 crore. Ditto for Bank of Baroda, from Rs503 crore to Rs2,227 crore. Punjab National Bank’s net profit has grown faster, from Rs408 crore to Rs3,091 crore.

While most public sector banks have been laggards in asset and net profit growth, they have cleaned up their books aggressively, paring non-performing assets, or NPAs. At least four public sector banks had double-digit net NPAs in 2000, and three of them have brought that down to less than 1%. Indian Bank’s net NPAs have come down from 16.18% to 0.18%. The comparable figures for Allahabad Bank are 12.24% and 0.72%, State Bank of Bikaner and Jaipur 10.14% and 0.85%, and Dena Bank 13.47% and 1.09%. The movement of NPAs of new generation private banks in the last decade is not relevant as they came into existence only in the mid-1990s and were not carrying any baggage.

The past decade has also seen the death of quite a few private banks. Global Trust Bank Ltd was merged with Oriental Bank of Commerce while Centurion Bank Ltd first took over Bank of Punjab Ltd and then merged with HDFC Bank. The pace of mergers will accelerate in the next decade, with the government taking the initiative. It has been on the drawing board for quite some time, but no headway has been made because of political opposition as the Left parties, until recently allies of the coalition government at the Centre, believe mergers lead to job losses. The second largest public sector bank is about one-fourth the size of State Bank, the country’s largest lender. We may see the emergence of three-four banks of one-third or half the size of State Bank, depending on how fast the government can push the plan.

Another dominant theme of the next decade will be the spread of banking in rural India through branches, banking correspondents and the mobile phone. RBI has already directed all banks to come out with specific plans for covering rural India that can be rolled out in the next three years. Only 40% of India’s population have bank accounts, 13% debit cards and 2% credit cards. This will change in the next decade. If the first decade of the 21st century in India belonged to mobile telephony, the next will see mass banking.

Banks are being compelled to reach out to rural India but soon, they will appreciate the business opportunity in financial inclusion as urban consumers suffer from loan fatigue and corporations find other avenues to raise money.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a deputy managing editor of Mint in Mumbai. Please email comments to