New Financial Inclusion Programme Beneficial For Sector

BMI View: India's penetration of the formal banking sector is well below the regional average. We believe that the new programme for financial inclusion introduced by Prime Minister Narendra Modi will be a long-term positive for the sector.

We believe that the recent announcement by Indian Prime Minister Narendra Modi to introduce a new programme for financial inclusion called the Pradhan Mantri Jan Dhan Yojana during the country's Independence day on August 15 will be a long-term positive for the Indian banking sector, in particular consumer banking. The scheme aims at creating 150mn new bank accounts (two per family for 75mn households) by 2018. Each bank account will have a government guarantee overdraft facility of INR5,000 (USD83), micro insurance of INR100,000 (USD1,658) and a free debit card. This scheme will significantly deepen banking penetration in the country, improve the stability of the Indian banking sector and in turn lead to an expansion in credit growth over the coming years.

Opportunities For Banking Sector

Well Below Regional Average
Asia - Account At A Formal Financial Institution, % Age 15+ (LHS) & Banking Sector Total Assets, % Of GDP

BMI View: India's penetration of the formal banking sector is well below the regional average. We believe that the new programme for financial inclusion introduced by Prime Minister Narendra Modi will be a long-term positive for the sector.

We believe that the recent announcement by Indian Prime Minister Narendra Modi to introduce a new programme for financial inclusion called the Pradhan Mantri Jan Dhan Yojana during the country's Independence day on August 15 will be a long-term positive for the Indian banking sector, in particular consumer banking. The scheme aims at creating 150mn new bank accounts (two per family for 75mn households) by 2018. Each bank account will have a government guarantee overdraft facility of INR5,000 (USD83), micro insurance of INR100,000 (USD1,658) and a free debit card. This scheme will significantly deepen banking penetration in the country, improve the stability of the Indian banking sector and in turn lead to an expansion in credit growth over the coming years.

Well Below Regional Average
Asia - Account At A Formal Financial Institution, % Age 15+ (LHS) & Banking Sector Total Assets, % Of GDP

Opportunities For Banking Sector

We believe that the new programme for financial inclusion will deepen the penetration of the formal banking system, offering great potential for the growth of the sector as India is one of the least penetrated countries in the region. Firstly, the percentage of those aged 15 and above that have an account at a formal financial institution stands at 35.2%, which is significantly below the regional average of 60.5%. Secondly, India's total assets in the banking sector as a percentage of GDP stands at 81.1%, much lower than the regional average of 149.1% (excluding Hong Kong). Additionally, the country is the second most populous nation, with a growing workforce and rising personal wealth. We are forecasting GDP per capita to more than double to USD3,580 over the next decade from the current level of USD1,536. The favourable long-term outlook of India's demographics therefore presents an attractive opportunity for existing banks and for those that will be granted licenses in the future.

Majority of State-Owned Banks Below Average
India - Banks' Tier 1 Ratios, %

Larger Capital Base To Boost Stability And Credit Growth

We expect greater financial inclusion to increase deposits and enhance stability in the banking sector. A larger pool of capital will improve the banks' capital adequacy ratios, especially for state-owned banks which have their Tier 1 ratios below the nation's average.

Credit Growth Upturn To Support Growth
India - Credit & Real GDP Growth, % chg y-o-y

Moreover, we believe that improved stability will allow Indian banks to provide a greater number of loans to the private sector and in turn boost credit growth in the country, which has been on a long-term downtrend since January 2008. Indeed, credit to the economy grew at a slow pace of 13.0% year-on-year (y-o-y) in June as compared to 24.0% y-o-y in January 2008. We believe that an upturn in the credit cycle will be supportive of a reacceleration of real GDP growth to 6.3% in FY2015/16 (April-March) from 4.7% in FY2013/14.

Risks To Outlook

We see two potential downside risks to the implementation of the scheme. Firstly, the financial inclusion programme is a large scale scheme, and its success is dependent on the implementation by banks and the willingness of the population to use banking services. India's population, especially in the rural areas, could still be reluctant to use banking services if financial knowledge is not properly communicated during the process of providing accounts. Secondly, the sector's higher non-performing loans (NPL) ratio of 3.6% (as compared to 2.5% three years ago) could see credit growth remain tepid in the country as banks restrain from increasing loans to the private sector.

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Geography: India
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