India is likely to emerge as the third largest domestic banking market in the world by 2040 and could grow faster than China in the long run.
According to a report, the banking world in 2050 will look radically different from what it is today, with the E7 economies becoming at least as important as the G7. This is mainly because of both the faster projected GDP growth in E7 and the systematic tendency of banking sectors to grow faster than GDP as economies develop.
The total domestic credit in seven emerging economies (E7), which includes China, India, Brazil, Mexico, Russia, Turkey and Indonesia, is likely to overtake that in the G7 economies, which includes US, Japan, Germany, UK, France, Italy and Canada.
Total domestic credit in China is likely to overtake the UK and Germany by 2010, Japan by around 2020 and the US by 2045. Interestingly, the analysis suggested that India is likely to be the fastest growing of all the E7 economies in the long run.
China will continue to grow somewhat faster than India over the next 5-10 years but after that Chinese growth will be held back by its rapidly ageing population and diminishing return to its investment-led strategy.
In contrast, India and other emerging economies like Brazil, Mexico, Indonesia and Turkey have much younger population with faster growing labor forces.
As the economic development continues, it is expected the banking and other service sectors in E7 to grow more than proportionately with GDP. The report argued that all of the G7 economies have been in the third stage of post-industrial development for at least the last 20-30 years, during which time there has been an underlying upward trend in their ratio of banking assets to GDP.
The E7 economies have also seen a clear upward trend in this ratio. On the earning profit front also, the banking sector of E7 economies would emerge bigger than the traditional rich countries. According to the report, total profits from domestic banking in the E7 could be around half of those in the G7 by 2025 and larger than in the G7 before 2050.
Notwithstanding the high growth, the E7 will continue to be relatively high risk markets. To mitigate the high risk, there will be cross border mergers and acquisitions in the banking sectors.
Mergers & Acquisitions will encompass consolidation activity in market as local banks acquire one another and foreign banks enter the E7 markets.