IBPS Exam Preparation – Competitive Landscape of Banks in India

IBPS Exams and IBPS Interviews are on the way. This post is specially important for IBPS interviews and provide the understanding of the competition faced by Indian banks from other financial institutions. Go through the post to improve your understanding about the Indian Financial Institutions.

Competitive Landscape of Banks in India

Banks face competition from a wide range of financial intermediaries in the public and private sectors in the areas of financial inter-mediation and financial services (although the payments system is exclusively for banks). Such intermediaries form a diverse group in terms of size and nature of their activities, and play an important role in the financial system by not only competing with banks, but also complementing them in providing a wide range of financial services.

Some of these intermediaries include Term-lending institutions, Non-banking financial companies, Insurance companies and Mutual funds

Term-Lending Institutions

Term lending institutions exist at both state and all-India levels.  They provide term loans (i.e., loans with medium to long-term maturities) to various industries, service and infrastructure sectors for setting up new projects and for the expansion of existing facilities and thereby competes with banks.  At the all-India level, these institutions are typically specialized, catering to the needs of specific sectors, which make them competitors to banks in those areas. These include

• Export Import Bank of India (EXIM Bank)
• Small Industries Development Bank of India (SIDBI)
• Tourism Finance Corporation of India Limited (TFCI)
• Power Finance Corporation Limited (PFCL)
• A notable exception is the IFCI Ltd, which lends into a variety of sectors.

At the state level, various State Financial Corporations (SFCs) have been set up to finance and promote small and medium-sized enterprises. There are also State Industrial Development Corporations (SIDCs), which provide finance primarily to medium-sized and large-sized enterprises. In addition to SFCs and SIDCs, the North Eastern Development Financial Institution Ltd. (NEDFI) has been set up to cater specifically to the needs of the north-eastern states.

Non-Banking Finance Companies (NBFCs)

• India has many thousands of non-banking financial companies, predominantly from the private sector.
• NBFCs are required to register with RBI in terms of the Reserve Bank of India (Amendment) Act, 1997.
• The principal activities of NBFCs include equipment-leasing, hire purchase, loan and investment and asset finance.
• NBFCs have been competing with and complementing the services of commercial banks for a long time.
• All NBFCs together currently account for around nine percent of assets of the total financial system.
• Housing-finance companies form a distinct sub-group of the NBFCs. As a result of some recent government incentives for investing in the housing sector, these companies’ business has grown substantially.
• Housing Development Finance Corporation Limited (HDFC), which is in the private sector and the Government-controlled Housing and Urban Development Corporation Limited (HUDCO) are the two premier housing-finance companies.
• HDFC & HUDCO are major players in the mortgage business, and provide stiff competition to commercial banks in the disbursal of housing loans.

Insurance Companies

Insurance/reinsurance companies such as Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GICI), and others provide substantial long-term financial assistance to the industrial and housing sectors and to that extent, are competitors of banks.

LIC is the biggest player in this area.

Mutual Funds

• Mutual funds offer competition to banks in the area of fund mobilization, in that they offer alternate routes of investment to households.
• Most mutual funds are standalone asset management companies.
• In addition, a number of banks, both in the private and public sectors have sponsored asset management companies to undertake mutual fund business.
• Banks have thus entered the asset management business, sometimes on their own and other times in joint venture with others.