Comparision of banking sectors of India and China

India's largest bank, SBI, got a credit rating downgrade this week from Moody's. This comes on top of worries about the quality of bank assets in India in a slowdown. China's banks are not having a great time either. Here's a head-to-head comparison of the banking sectors of the world's fastest growing major economies. India's banks are smaller, more conservative and potentially in much less trouble than China's.

Size Stack

Chinese banks trump Indian counterparts in number and scale. China had 3,769 banking institutions in 2010, with more than 250 commercial banks, 196,000 business outlets and 2.991 million employees. India pales in comparison, with 167 commercial banks, 87,768 business offices and 0.8 million employees.

It's the same story in asset size. At least 11 Chinese banks are perched in the top 100 category based in terms of market size while only three Indian banks make the cut here. To get an idea of the scale difference, consider this: Industrial and Commercial Bank of China, the largest Chinese bank, boasts of a market size of $201 billion while its Indian counterpart SBI's market size is only a fifth at $40 billion.

Not-so Sweeping Coverage

China may have larger and richer banks, but is surprisingly almost at a par with India in terms of coverage, or rather lack of coverage, of population that uses formal or semi-formal financial services. A McKinsey study shows that in India and China, the percentage of adult population that doesn't use formal or semi-formal financial services is 51-75%.

Power Performance

Banks from both sides have recorded high revenue growth, unlike counterparts of developed countries. For instance, McKinsey data show revenues of Indian and Chinese banks grew 19.8% and 13.7% in 2007-10, respectively. The non-performing asset ratio of the countries' banks too is comparable. NPAs of Indian banks stood at 2.5% in 2010 while those of the Chinese were 1.7%. Likewise, the cost to income ratio, another measure of banking efficiency, is only a tad different. Indian banks: 42% and Chinese banks: 39%.

The banking sectors of the two countries are also strikingly similar in the huge public ownership of assets, unlike in developed nations. The government owns 75% of banking assets in India while the private sector holds around 18% and the rest foreign ownership. In China, the public sector owns 51% of assets and the private sector 48%, with negligible foreign ownership.

Measure of Woes

Most experts agree that the woes of China's banking sector are bigger than India's, thanks to the huge fiscal stimulus package the Chinese government handed to banks during the 2008 recession to overcome a slowdown in exports. Up to $2.5 trillion of new loans was disbursed, accounting for 30% of GDP in 2009.

China's banks became a vehicle for the government to provide cheap credit to projects by government enterprises. To make matters worse, there was growing pressure on banks to achieve growth targets through lending in housing and infrastructure. The credit was provided at concessional rates to finance some unviable projects. The upshot was an increase in non-performing loans ( NPL) of Chinese banks. Analysts at Fitch Credit Ratings predict that the ratio of total credit/GDP in China is likely to reach 185% of GDP by the year end from 124% of GDP in 2007. Such high credit/GDP ratios have led to banking crises. Japan in the late 1980s is a notable example.

Source: EconomicTimes