July , 2017
Banking: A comparative global analysis
14:14 pm

Varsha Singh and Ankita Chakraborty

According to data from the World Bank, 400 million people remain unbanked in India despite impressive gains in recent years. Most unbanked are poor and female; only 27% of individuals in the bottom quintiles and 37% of women have access to a bank account.

India has the highest number of bank branches in the world. According to the IMF data for 2015, there are over 1.2 lakh bank branches in India, followed by China and Colombia with over 95,680 and 94,074 bank branches respectively. The RBI data for the June 2016 quarter show India now has over 1.3 lakh bank branches. But if you compare it with its population size, the country has fewer banks. There only 13.54 bank branches per 1 lakh adults. Colombia, with 257.69 bank branches per 1 lakh adults, tops this list. Among its neighbouring countries, Sri Lanka has better reach with nearly 18.58 bank branches per 1 lakh people. China, Pakistan, and Nepal have around 8 bank branches per 1 lakh people, and Myanmar has the least with just 3.3. India has 42.54 bank branches per 1,000 sq km. China, given its vast geographical size, has just over 9.5 bank branches per 1,000 sq km. According to a December 2015 RBI report, while there are 18.7 bank branches per 1 lakh adults in urban areas, there’s just 7.8 branches per 1 lakh adults in rural and semi-urban areas.

According to the World Economic Outlook, April 2017 of IMF, global economic growth for 2016
was reported to be 3.1%, lower than growth recorded in 2015. The growth in gross domestic product
(GDP) for Advanced Economies (AEs) and Emerging market and developing economies (EMDEs)
was 1.7% and 4.1%, respectively. Although the rate of unemployment in AEs posted a decline in 2016, inflation has been picking up in these economies due to higher commodity prices. In EMDEs, however,
these pressures eased slightly. Debt in the general government balance sheets remained high. High
loan delinquencies took a toll on credit growth in India and Russia. Brazil recorded negative credit growth in recent months. However, credit growth in China continued to be excessive at more than 10% given the already highly leveraged condition  of Chinese  corporates.

Monetary Policy

The US: The Federal Reserve’s most critical and visible function is to conduct monetary policy. It does this to manage inflation and maintain stable prices. To do that, the Fed sets a 2.0% inflation target for the core inflation rate. It also pursues maximum employment. The goal is the natural rate of unemployment of 4.7%-5.8%. The Fed moderates long-term interest rates through open market operations and the fed funds rate. The goal of monetary policy is healthy economic growth. That target is a 2-3% gross domestic product growth rate. Manufacturing output declined 0.4 % in May; the index is little changed, on net, since February.

The European Union: The European Central Bank (ECB) ensures that the EU’s prices are stable, that is below 2% but also close to 2% to avoid the danger of deflation. Unlike the Bank of England’s inflation target, which is symmetrical, the ECB target is asymmetrical. This means that while inflation cannot rise above 2%, there is no figure which it must not fall below. Critics argue that this creates an in-built recessionary bias, with no specific policy intervention required if deflation occurs. In the UK, the target is 2% +/- 1, so that an inflation rate of less than 1% triggers a monetary stimulus.

China: The monetary policy of China aims to keep the value of the Renminbi (RMB) stable and contribute to economic growth. Zhou Xiaochuan, Chinese economist said, “The Law on the People’s Bank of China (the PBOC) stipulates that the objective of monetary policy is to keep the value of RMB stable to contribute to economic growth.”

The People’s Bank of China does not follow monetarism insofar as it achieves its policy goals not only with reference to inflation control and employment expansion, but also with interventions to set differential interest rates in rural versus urban regions, forbidding lending in certain sectors, and demanding stranded asset write-offs in response to policy changes by the central government of China. The People’s Bank of China increased the costs of seven-, 14- and 28-day reverse repurchase agreements by 10 basis points each to 2.35%, 2.5% and 2.65%, respectively.

India: Monetary operations involve monetary techniques which operate on monetary magnitudes such as money
supply, interest rates and availability of credit aimed to maintain price stability, stable exchange rate, healthy balance of payment, financial stability, and economic growth. RBI, the apex institute of India which monitors and regulates the monetary policy of the country stabilizes the price by controlling inflation. The Government of India, in consultation with the RBI, notified the ‘Inflation Target’ in the Gazette of India Extraordinary dated August 5, 2016 for the period beginning from the date of publication of this notification
and ending on the March 31, 2021 as 4%. At the same time, lower and upper tolerance levels were notified to be 2% and 6%, respectively.

Lending rules

The US:  The central banking system of the United States is the Federal Reserve System or the FED, which is an independent government institution. The American central bank is owned by a number of large banks and not by the state. A significant responsibility of the Federal Reserve is to safeguard the stability of the US financial system and manage the national money supply by means of monetary policy by preventing or limiting inflation and deflation.

US interest rates refer to the Federal fund rates. The Federal funds rate is the interest rate which banks charge one another for 1 day or overnight lending. This American base rate is set by the market and is not explicitly laid down by the FED. By withdrawing or adding funds to the money supply, the FED tries to bring the effective federal funds rate in line with the interest rate for which it is striving. If the FED’s monetary policy alters the base rate, it usually affects the interest rate on various products such as mortgages, loans and savings.

The latest lending rate of the American Central Bank as of June 14, 2017 is 1.250%

As the Bank of America has a large lending business, many analysts expect it to benefit if interest rates continue to rise. According to Paul Donofrio, Chief Financial Officer, Bank of America, in the last quarter, Bank of America’s net interest income, the difference between revenue the bank generates from assets and the expenses associated with paying its liabilities, increased 6% to $10.3 billion. In the company’s Q4 earnings press release, Paul Donofrio also said that while the recent rise in interest rates came too late in to impact fourth-quarter results, a significant increase is expected in net interest income in the first quarter of 2017.

According to consensus third-party analyst estimates, Bank of America is expected to report earnings-per-share, or EPS, of $0.35 on revenue of $21.54 billion. Higher net interest income, loan book growth, and expansion in its wealth management business are expected contributors to the expected 25% year-over-year increase in Q1 earnings. The bank has beaten earnings expectations in the last three quarters.

The European Union: The European Central Bank (ECB) is the central bank for the Eurozone or the euro areas. An
important portion of ECB’s task is to implement the European monetary policy, which includes the interest rate too. ECB takes care of the price stability or an inflation of maximum 2% for the Eurozone. For EU, the ECB offers all its banks the facilities to borrow money from it and then lend money when short of fund. However, these banks pay interest on the loan, which is called the refi rate or refinancing rate. EU follows a 0% lending rate.

China: The central bank of the People’s Republic of China is the People’s Bank of China (PBC or PBOC). The PCB has the highest number of financial assets and resources in the world. The PBC, under the guidance of the State Council deals with drafting and implementing monetary policy and maintaining financial stability and the value of the currency to stimulate economic growth.

The Chinese interest rate is often referred to as the base interest rate, i.e. the central bank base interest rate or base rate is PBC’s basic interest rate. The bank also sets the interest rates for commercial banks and has a lot of influence over the rates which need to be paid in the market for loans and mortgages and the interest paid on savings.

Bank lending rate in China remained unchanged at 4.35% in May from 4.35% in April of 2017. Bank lending rate in China averaged 6.93% from 1991 until 2017, reaching an all-time high of 12.06% in July of 1995 and a record low of 4.35% in October of 2015.

India: The central bank of India is the Reserve Bank of India (RBI). The Indian interest rate is also known as the repo rate. If banks are short of funds, they can borrow rupees from the RBI at the repo rate, the interest rate with a 1-day maturity. If the central bank of India wishes to put more money into circulation, the RBI will lower the repo rate. The reverse repo rate is the interest rate that banks receive if they deposit money with the central bank. This reverse repo rate is always lower than the repo rate. Increases or decreases in the repo and reverse repo rate have an effect on the interest rate on banking products such as loans, mortgages, and savings.The latest lending rate of RBI as on October 4, 2016 is 6.250%.

Interest rates

The interest rate of India’s reserve bank is 6.25% whereas the interest rate of Central Bank of China is 4.35 % and federal bank of US is 1.25%.

Loan rates

The loan rate of the RBI is 9.60 % and the loan rates of Central bank of China is 4.35 %whereas the loan rate of the US is 4.00 %.

Add new comment

Filtered HTML

  • Web page addresses and e-mail addresses turn into links automatically.
  • Allowed HTML tags: <a> <em> <strong> <cite> <blockquote> <code> <ul> <ol> <li> <dl> <dt> <dd>
  • Lines and paragraphs break automatically.

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.