Indian Banking Sector Final

8/17/2019 Indian Banking Sector Final

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Contemporary Issue Project

A conceptual Study on IndianBanking Sector: Evolution,

Current Challenges and FutureProspects

Submitted o:

Faculty of Management Studies

The Maharaja Sayajirao University Of Baroda

Submitted By:

Parth Patel !"#$

MB% &egular Program$' S(M "

Batch) *+,"-,.

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S%(IES

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!"S" PAE# I$SI%E &F !A$A'E!E$ S%(IES

(eclaration

I ensure a/out the authentication of the material and give

guarantee that there 0ill not /e any misuse of the data1 2ata

used 0ill only /e ta3en for the academic purpose and 0ill not

/e used for commercial or any other purpose1 4ie0s mentioned

in the report are of my o0n' 0hich are /ased on my o/servation

and it may or may not /e accepted /y any individual and5or

any entity1

Parth Patel

Faculty of Management StudiesMSU Baroda

2ate)

Place)

*


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Ackno.ledgement

It gives me great pleasure and satisfaction in presentingthis study as a part of the ful6lment for the 2egree of MB%1 I

0ould li3e to ta3e this opportunity to e7press my sincere

gratitude to several people' 0ithout 0hose help and

encouragement' it 0ould have /een impossi/le for me to carry

out desired 0or31

I 0ould li3e to e7tend my deferential than3s to respected

Pro/" 0(r"1 ayra2sinh ade2a 2ean' Faculty of Management

Studies' The M1S1 University of Baroda$ for his encouragement

and /lessings on my 0ay of progress1

I 0ould also li3e to e7press my heartfelt than3s to my

institute guide' (r" Bhargav Pandya, %ssistant Professor'

Faculty of Management Studies' The M1S1 University of Baroda$

for e7tending his help throughout the project1

I am also inde/ted to many individuals 0hose research

0or3s' articles and data helped me in accomplishing this study1

Parth Patel

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able o/ Contentsopic Page

$o"

%c3no0ledgement 8

%/stract #

9iterature &evie0 .

Introduction :

O/jectives ;

&esearch Methodology ;

%/out Ban3ing Sector <

Challenges and Opportunities ,8

Ban3ing Sector Performance in F=,# *8

Facts and Figures *.

Conclusion *;

&eferences *<

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Abstract

Ban3s are /ac3/one of any economy1 The /an3ing sector' /eing

the /arometer of the economy' is the re>ective of the macro-

economic varia/les1 The Indian /an3ing industry has itsfoundations in the ,;th century and has had a varied

evolutionary e7perience since then1 The initial /an3s in India

0ere primarily traders? /an3s engaged only in 6nancing

activities1 Ban3ing industry in the pre-independence era

developed 0ith the Presidency Ban3s' 0hich 0ere transformed

into the Imperial Ban3 of India1 The initial days of the industry

sa0 a majority private o0nership and a highly volatile 0or3

environment1 Major strides to0ards pu/lic o0nership and

accounta/ility 0ere made 0ith nationali@ation in ,


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#iterature +evie.:

,1 Dair discussed the future challenges of technology in

/an3ing1 The author also point out ho0 IT possesses a

/right future in rural /an3ing' /ut is neglected as it is

traditionally considered unvia/le in the rural segment1 %

successful /an3 has to /e nim/le and agile enough to

respond to the ne0 mar3et paradigm and ineectivelycontrolling ris31 Innovation 0ill /e the 3ey e7tending the

/an3ing services to the untapped vast potential at the

/ottom of the pyramid*1 EComparative study of promotional studies adopted /y

pu/lic and private sector /an3s in India pu/lished in %sia-

paci6c /usiness revie0' Guly Septem/er *++;$ /y S9

Hupta' %run Mittal1 The study concluded that pu/lic sector

is more relia/le that /ut not so good in uality andinnovativeness' a private sector /an3 is not so relia/le /ut

they are /etter in services uality and innovation181 Singla *++;$ e7amines that ho0 6nancial management

plays a crucial role industrialist gro0th of /an3ing1 It is

concerned 0ith e7amined the pro6ta/ility position of

selected si7teen /an3s of /an3er inde7 for a period of si7

years*++,-*++.$ the study reveals that the pro6ta/ility

position 0as reasona/le during the period of study 0hencompared 0ith the previous year1 Strong capital position

and /alance sheet place1 Ban3s in /atter position to deal

0ith and a/sor/ the economic constant over a period of

time14. &amachandra &eddy focused their attention on the

seriousness of DP%s in pu/lic sector /an3s1 They arguedthat 0ith the introduction of international norms of Income&ecognition' %sset Classi6cation and Provisioning in the

/an3ing Sector' managing DP %s has emerged as one of

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the major challenges facing the Pu/lic Sector Ban3s1 Theyfelt that total elimination of DP%s is not possi/le in the/an3ing /usiness o0ing to e7ternalities /ut their incidencecan /e minimi@ed1 To reduce the seriousness of the

pro/lem' they suggest that the /an3s should adopt properpolicy for appraisal' supervision and follo0-up of advances special recovery cells may /e set-up atregionalJ @onal levels &ecovery OKcers should /eappointed at ma3ing necessary provisions andcontingencies$1

Introduction

The /an3ing sector in India is on a gro0ing trend1 It has vastly/ene6tted from the surge in disposa/le income of individuals inthe country1 There has also /een a noticea/le upsurge intransaction through %TMs and internet5mo/ile /an3ing1Conseuently' the dierent /an3s have invested considera/lyto increase their /an3ing net0or3 and their customer reach1

The /an3ing industry in India has the potential to /ecome the6fth largest /an3ing industry in the 0orld /y *+*+ and thirdlargest /y *+*# according to LPMH-CII report' India?s /an3ingand 6nancial sector is e7panding rapidly1 Indian /an3s haveadopted /etter operational strategies and upgraded their s3ills1

They have 0ithstood the initial challenges and have /ecomemore adaptive to the changing environment1 In the comple7and fast changing environment' the only sustaina/lecompetitive advantage for /an3s is to give the customer an

optimum /lend of technology and traditional service1India is one of the top ,+ economies in the 0orld' 0here the/an3ing sector has tremendous potential to gro01 The lastdecade sa0 customers em/racing %TM' internet and mo/ile/an3ing1 Indias /an3ing sector is currently valued at &s1 ;,trillion USN ,18, trillion$1 It has the potential to /ecome the6fth largest /an3ing industry in the 0orld /y *+*+ and the thirdlargest /y *+*#' according to an industry report1 The face of Indian /an3ing has changed over the years1 Ban3s are no0

reaching out to the masses 0ith technology to facilitate greater

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ease of communication' and transactions are carried outthrough the Internet and mo/ile devices1% /an3 is a 6nancial institution that provides /an3ing and other6nancial services to their customers1 % /an3 is generally

understood as an institution 0hich provides fundamental/an3ing services such as accepting deposits and providingloans1 There are also non/an3ing institutions that providecertain /an3ing services 0ithout meeting the legal de6nition of a /an31 Ban3s are a su/set of the 6nancial services industry1 %/an3ing system also referred as a system provided /y the /an30hich oers cash management services for customers'reporting the transactions of their accounts and portfolios'throughout the day1

&b2ective

The main o/jective of this paper is to e7plain the changing

/an3ing scenario and analy@e the impact of /an3ing sector

reforms on /an3ing industry1 The paper studies the challenges

and opportunities of commercial /an3s in changing competitive

scenario1 The paper is an e7tension of 3no0ledge in /an3ing

industry and is useful for /an3ers' strategies' policy ma3ers and

researchers1

+esearch !ethodology

This paper is the outcome of a secondary data on Indian

Ban3ing Sector 0ith special reference to Indian conte7t1 To

complete this' annual reports' various /oo3s' journals and

periodicals have /een consulted' several reports on this

particular area have /een considered' and internet searching

has also /een done1

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Banking System in India

The /an3ing system in India should not only /e hassle free /utit should /e a/le to meet the ne0 challenges posed /y the

technology and any other e7ternal and internal factors1 For the

past three decades' Indias /an3ing system has several

outstanding achievements to its credit1 The Ban3s are the main

participants of the 6nancial system in India1 The Ban3ing sector

oers several facilities and opportunities to their customers1 %ll

the /an3s safeguards the money and valua/les and provide

loans' credit' and payment services' such as chec3ing accounts'money orders' and cashiers cheues1 The /an3s also oer

investment and insurance products1 %s a variety of models for

cooperation and integration among 6nance industries have

emerged' some of the traditional distinctions /et0een /an3s'

insurance companies' and securities 6rms have diminished1 In

spite of these changes' /an3s continue to maintain and perform

their primary roleaccepting deposits and lending funds from

these deposits1


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Before the esta/lishment of /an3s' the 6nancial activities 0ere

handled /y money lenders and individuals1 %t that time the

interest rates 0ere very high1 %gain there 0ere no security of

pu/lic savings and no uniformity regarding loans1 So as to

overcome such pro/lems the organi@ed /an3ing sector 0as

esta/lished' 0hich 0as fully regulated /y the government1 The

organi@ed /an3ing sector 0or3s 0ithin the 6nancial system to

provide loans' accept deposits and provide other services to

their customers1 The follo0ing functions of the /an3 e7plain the

need of the /an3 and its importance)

To provide the security to the savings of customers1

To control the supply of money and credit To encourage pu/lic con6dence in the 0or3ing of the 6nancialsystem' increase savings speedily and eKciently1 To avoid focus of 6nancial po0ers in the hands of a fe0individuals and institutions1 To set eual norms and conditions i1e1 rate of interest' period

of lending etc1$ to all types of Customers1

E-%I&$ &F BA$3I$' I$(%S+)

rigger events4 Beginning of institutional /an3ing 0ith 8 joint stoc3 /an3s

Dationali@ation of Imperial Ban3 and *+ other ScheduledCommercial Ban3s

%cceptance of recommendations of the DarasimhamCommittee

Qi3e in the F2I ceiling for /an3ing sector and declarationof roadmap for li/erali@ation

Phases o/ evolution,1 Pre-Dationalisation phase prior to ,


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*1 (ra of Dationalisation and consolidation ,


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Imperial Ban3 of India 0hich 0as run /y (uropean

Shareholders1 %fter that the &eserve Ban3 of India 0as

esta/lished in %pril ,


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C*A##E$'ES A$( &PP&+%$IIES

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!acroeconomic landscape

Since the onset of the Financial Crisis in *++;' the glo/aleconomy has continued to face rough 0eather and the Indianeconomy and our /an3ing system have not remained immune1&ecovery has /een moderate and sometimes uneven1 2ierent

jurisdictions continue to /e tormented /y 6nancial fragilitiesand macroeconomic im/alances1 Heopolitical ris3s surroundingoil prices and the uneven eects of currency and commodityprice movements also pose signi6cant threat to economicsta/ility1 Sustenance of highly accommodative monetary policyin the %dvanced (conomies has also created monetary policychallenges in emerging mar3ets li3e India1

Challenges /or the banking system

It is against this challenging /ac3drop that the /an3ing systemin India has /een operating for a relatively long period of time0hich has resulted in an adverse impact on the asset uality'capital adeuacy and pro6ta/ility of our /an3s1 But the toughsituation in 0hich the /an3ing system 6nds itself is alsoattri/uta/le in a large measure to the /an3ers ine7perienceand aggression1 9et me delve upon these challenges and the

0ay for0ard in a /it of detail1i) Asset quality

Though on the 0hole' the /an3ing system has remainedresilient' asset uality has seen sustained pressure due tocontinued economic slo0do0n1 The levels of gross non-performing advances HDP%s$ and net DP%s DDP%s$ for thesystem have /een elevated1 %s per preliminary data received at&BI for March ,#' 0hile the HDP%s have increased to "1"#R forthe system as a 0hole' the DDP%s have also clim/ed up to

*18.R1 Ahen seen in isolation' the DP% ratios do not appearvery distressing ho0ever' if 0e add the portfolio of restructured assets to the HDP% num/ers' this rises alarmingly1Stressed %ssets &atio Hross DP% &estructured Standard%dvances to Hross %dvances$ for the system as a 0hole stoodat ,+1


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It is pertinent here to also note the o/servations made in theHlo/al Financial Sta/ility &eport released /y IMF recently1&eferring to the high levels of corporate leverage' the reporthighlights that 8.1< per cent of Indias total de/t is at ris3'

0hich is among the highest in the emerging economies 0hileIndias /an3s have only :1< per cent loss a/sor/ing /uer'0hich is among the lo0est1 Ahile these num/ers might need anindependent validation' regardless of that' it underscores therelative ris3iness of the asset portfolio of the Indian /an3s1

%s you all 3no0' &BI has ta3en various steps to improve thesystems a/ility to deal 0ith corporate and 6nancial institutiondistress1 This includes issuance of guidelines on (arly&ecognition of Financial 2istress' Prompt Steps for &esolutionand Fair &ecovery for 9enders) Frame0or3 for &evitalising2istressed %ssets in the (conomy' detailed guidelines onformation of Goint 9enders Forum G9F$' Corrective %ction PlanC%P$' &e6nancing of Project 9oans' Sale of DP%s /y Ban3sand other regulatory measures' 0hich emphasi@ed the need forearly recognition of 6nancial distress and for ta3ing promptsteps for recti6cation' restructuring or recovery' there/yensuring that interests of lenders and investors are protected1

4arious reports that I get suggest that the implementation of G9F frame0or3 needs further improvement on the ground level1Ae have received representations from /igger lenders a/outnon-cooperation from a fe0 lenders1 On the other hand' smallerlenders have voiced their concerns a/out /eing arm t0isted /y/igger lenders1 Unless' there is proper co-ordination /et0eenthe interested parties' all the revival eorts are li3ely to fall >at1

&BI had given a road map for ending the regulatory

for/earance on asset classi6cation of restructured accountslong /ac3 and accordingly' the for/earance has come to an endon March 8,' *+,#1 There has /een a lot of clamor from alluarters for e7tending this for/earance1 Our stand on this issuehas /een a/solutely clear1 I 0ish to highlight that&estructuring per se is not necessarily a for/idden 0ord1 It is alegitimate 6nancial activity practiced the 0orld over to help the/orro0ers tide over short term pro/lems and to preserveeconomic value in the system1 I dont 3no0 0hy restructuring aloan 0hich is under short term stress should not /e done1 Ahat0e are saying is that' the /an3s must ac3no0ledge the

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pro/lem' admit that the account is facing stress as of no0' /utis e7pected to recover in future1 Qence' ma3e a small provisionand reverse it 0hen the account /ecomes satisfactory andstarts paying1 Staying in denial mode does not help anyone

especially in an interconnected 0orld 0here regulation ma3inghas /ecome glo/al and so has the pu/lic scrutiny1 %nyfor/earance e7tended /y the regulator 0ill /e discounted /ythe investor5 analyst community 0hile assessing the /an3s6nancials1ii) Capital adequacy of banksConcerns have /een raised a/out the a/ility of our /an3s toraise additional capital to support their /usiness and I 0ouldadmit that these concerns are not entirely misplaced' especially

for the pu/lic sector /an3s1 Qigher level of capital adeuacy isneeded due to higher provisioning reuirements resulting fromdeterioration in asset uality' 3ic3ing in of the Basel III Capitalnorms' capital reuired to cover additional ris3 areas under theris3 /ased supervision frame0or3 as also to sustain and meetthe impending gro0th in credit demand' going for0ard1

Though at present' the /an3ing system is adeuatelycapitali@ed' challenges are on the hori@on for some of the/an3s1 For the system as a 0hole' the C&%& has /een steadily

declining and as at the end of March *+,#' it stood at ,*1:+Ras against ,81+,R as at the end of March *+,"1 Our concernsare larger in respect of the PSBs 0here the C&%& has declinedfurther to ,,1*"R from ,,1"+R over the last year1

The poor valuations of /an3 stoc3s' especially the PSBs' are nothelping matters either' as raising euity has /ecome diKcult1Ahen even the /est performing PSBs have /een hesitant to tapthe mar3ets for augmenting their capital levels' it 0ould /e

diKcult for the weaker PSBs to raise resources from the mar3et1 There is a constraint on the o0ners insofar as meeting thecapital needs of the PSBs and hence' the underperforming/an3s are faced 0ith the challenge of loo3ing at ne0er 0ays of meeting their capital needs1 % singular emphasis on pro6ta/ilityratios /ased on &o% and &o($ perhaps fails to capture otheraspects of performance of /an3s and could perhaps encouragea short term pro6ta/ility-oriented vie0 /y /an3 management1Qo0ever' 0ithout getting into the merits of this approach' from

a regulatory stand point' 0e feel that some of these poorlymanaged /an3s could slide /elo0 the minimum regulatory

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threshold of capital if they dont get their acts together soonenough1 Of course' the pressure may lessen some0hat if' goingfor0ard' the asset uality improves on account of highergro0th' resulting in higher retained earnings for /an3s1 The

need of the hour for all /an3s' and more speci6cally' in respectof the PSBs' is that capital must /e conserved and utili@ed aseKciently as possi/le1iii) LCR framework %s you are a0are' the 9iuidity Coverage &atio 9C&$ regimehas 3ic3ed in for the /an3s from Ganuary ,' *+,# 0ith aminimum reuirement of .+R to /e gradually increased to,++R /y Ganuary ,' *+,< in a phased manner1 The 9C& is aratio of Qigh Vuality 9iuid %ssets QV9%$ to the Total Det Cash

Out>o0s prescri/ed to address the short term liuidity ris3 of /an3s and the /an3s 0ould /e reuired to maintain a stoc3 of QV9%s on an ongoing /asis eual to the Total Det CashOut>o0s1

Ban3s have /een as3ing for reduction in S9& citing theimplementation of the 9C& frame0or31 To a certain e7tent theirreuest has merit1 S9& essentially serves the same purpose asthe 9C&1 Qo0ever' S9& does not assume certain out>o0 ratesfor lia/ilities 0hile out>o0 and in>o0 rates under the 9C&

frame0or3 are /ased on certain assumptions of stress1Presently' apart from maintaining 9C& at .+R' the /an3s haveto maintain S9& of *,1#R of the D2T91 Hoing for0ard' as the9C& reuirements gradually increase' it may /e desira/le toreduce the S9& progressively1 Presently' there is a specialdispensation 0herein &BI has permitted /an3s to rec3on up to:R of the S9& to0ards 9C& *R of MSF and #R under F%99C& ,$1Our regulatory department is sei@ed of the issue and 0ouldta3e appropriate measures to address this issue going for0ard1

iv) Unhedged forex exposures The 0ild gyrations in the fore7 mar3et have the potential toin>ict signi6cant stress in the /oo3s of Indian companies 0hohave heavily /orro0ed a/road1 This stress' /esides impactingrepayment of fore7 lia/ilities' eventually hampers their de/trepayment capa/ility to the domestic lenders as 0ell1 It isprecisely 0ith this consideration that &BI has /een advocating acur/ on the increasing tendency of the corporates to dollari@etheir de/ts 0ithout adeuate ris3 mitigation1

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Our supervision of /an3s /oo3s has highlighted the need forthe /an3s to have more ro/ust policies for ris3 mitigation onaccount of unhedged foreign currency e7posure of theircorporate /orro0ers1 Inadeuacies of data further complicate

the impact assessment of such e7posures across the /an3ingsystem1 The /an3s have /een advised to factor in this ris3 intotheir policies5 pricing decision and also devise means forsharing of information on such e7posures amongst themselves1&egulatory guidelines have also since /een issued outlining thecapital and provisioning reuirements for e7posure to entities0ith signi6cant unhedged fore7 e7posures1

v) uman resource issuesI do not need to emphasi@e the Q& issues in /an3s1 This is adecade of retirement for the PSBs and I am sure those 0or3ingthere are already feeling the pinch of the loss of e7periencedhands in their day to day operations1 Ahile the recruitments0ould /e happening at the junior levels' there 0ould /e avirtual vacuum at the middle and senior level for some time tocome1 The a/sence of middle management could lead toadverse impact on /an3s decision ma3ing process as thissegment of oKcers played a critical role in translating the topmanagements strategy into 0or3a/le action plans1 Some of the

major /an3s are also suering on account of prolongedleadership vacuums at the top1 %ll /an3s' including those in theprivate sector' are 0itnessing high attrition rates' giving rise toresource gaps1 The pro/lem is set to get accentuated furtheronce the /an3s that have /een ne0ly licensed5 li3ely to /elicensed' start hiring1 Therefore' /ridging resource gaps andmanaging employee turnover are major challenges that /an3sneed to /e prepared to address1

The /an3s need to continuously enhance the s3ill levels of theiremployees so as to remain via/le and competitive and to ta3eadvantage of ne0 opportunities1 The /an3ing personnel' acrossthe cadres need to /e suita/ly trained to acuire necessary s3illsets to perform their jo/s more eKciently1 The /iggestchallenge is to /uild capacity at a rate 0hich matches the lossof e7isting talent and s3ills to retirement' poaching andresignations1 The training initiatives must ensure that theavaila/le talent pool in the /an3s is a/le to al0ays 3eep pace

0ith the fast changing 0ays in 0hich /an3ing is conducted1 Of course' in these challenges also lie an inherent opportunity for

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/an3s to redra0 their organi@ational pro6le and to create Q&systems and processes /est suited to the needs of the future1

vi) Revision to the priority sector lending guidelines The revised priority sector lending guidelines have /eenreleased last 0ee31 9ending to a fe0 ne0 su/-sectors li3erene0a/le energy' social infrastructure and to the mediumenterprises 0ould no0 /e treated as priority sector lending1Concept of a trada/le Priority Sector 9ending Certi6cate PS9C$has also /een introduced' 0hich 0ould ena/le the de6cit/an3s to /uy these certi6cates from surplus /an3s to meettheir targets1

There is also readjustment in some su/-targets' 0here/y the

/an3s are no0 reuired to progressively achieve ;R of lendingto Small and Marginal Farmers and :1#R to the microenterprises among the MS(s in a phased manner1 This has /een/rought a/out 0ith an underlying o/jective of ma3ing availa/le6nance to the most needy and the most alienated of the/orro0ers1 This may pro/a/ly pose a /it of a challenge initially/ut I /elieve 0ith proper planning' these targets could /eachieved sooner rather than later1

vii) !"#$% and beyond I must compliment the /an3ing sector for 0holeheartedly0or3ing for the success of the PMG2= scheme1 The num/ersspea3 for themselves1 More than ,"1# crore accounts opened1

That leads to the uestion- 0hat ne7tW Flo0 of individualsavings' al/eit ho0soever small com/ined 0ith >o0s fromdirect /ene6t transfer 0ould /e crucial to give an initial push to3eep these accounts active 0hile e7tending productive5need-

/ased credit 0ould /e the second crucial step1 The onus is uponall of us to ensure that the 0indo0 of opportunity that has /eenpresented /y the opening of such a large num/er of accounts'is not put to 0aste /y allo0ing the accounts to turn inactive1

The credit a/sorption capacity of the farmers can /e enhancedthrough consolidation of fragmented landholdings /y usheringin land reforms or through pooling of land holdings in a SQHformat1 Similarly' customers may also /e trained to underta3enon-farm activities1 (orts to enhance the credit a/sorption

capacity must also /e supplemented through 6nancial literacyand vocational training initiatives1 Improved 6nancial literacy

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0ould aid the inculcation of a savings culture and investmentha/it amongst the customers' 0hich can /e leveraged /y the/an3s /y oering suita/le small savings' investment andpension products1

% major challenge for the /an3s 0ould /e to manage their/an3ing correspondent model eectively1 The pro/lems relatingto their via/ility' governance' cash management' lin3age andoversight from a /ase /ranch need to /e uic3ly addressed1

The entire 6nancial inclusion ecosystem must progressivelydevelop' if the momentum gathered under the PMG2= e7ercisehas to /e sustained for all-round /ene6t of all sta3eholders1

viii) &lobali'ation of regulation(making process

%s I alluded to a little earlier' /an3ing regulations are gettingincreasingly glo/ali@ed' su/ject of course to certain nationaldiscretions1 %s mem/ers of the standard setting /odies li3eBCBS and FSB' 0e are committed to implement theseregulations in our jurisdictions1 There is a process for peerrevie0 of regulatory guidelines issued /y various jurisdictions toascertain compliance 0ith the glo/al standards' failure toadhere to 0hich 0ould render the jurisdiction non-compliant tothe standards1 Ahile 0e do participate in the regulation ma3ing

process and suggest modi6cations to protect the rightfulinterests of the domestic economy' very often' 0e have toa/ide /y the larger frame0or31 I 0ill give just one e7ample vi@1the large e7posures regime' for 0hich a consultation paper onne0 SB95HB9 norms has already /een released /y &BI1

ix) echnology and its impact 9et me /rie>y touch upon an issue 0hich is relatively muchmore pertinent for the PSBs' i1e1 use of technology in /an3ing1

%ll PSBs are no0 on CBS platform and have developedcapa/ilities to oer any0here /an3ing1 Fe0 have also startedoering /asic /an3ing transactions on mo/ile for theircustomers1 But this is just scrapping the surface as thetechnology can /e leveraged for a far greater eect1 PSBs must/e a/le to leverage technology for /uilding data 0arehousesand then /e a/le to do data mining and analytics1 The goalshould /e to use data for eective decision ma3ing at variouslevels' including product customi@ation' developing /usinessmodels and delivery channels' etc1

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PSBs must /e a/le to pitch suita/le products for theircustomers through internet and mo/ile /an3ing channels1

Traditional /usinesses are slo0ly moving on-line and e-commerce is the preferred choice of the gen-ne7t customer1

The challenge /efore the PSBs is to upscale their capa/ilities'train their employees on the ne0 technologies to /ene6t fromthe possi/ilities that adoption of technology can open up1

% good thing going for the /an3s is the current recruitment of youngsters in the 0or3 force1 This ne0-generation sta is tech-savvy and can uic3ly connect 0ith technology1 Theenterprising among them must /e accorded freedom toe7periment and suggest 0ays in 0hich the /an3 couldreengineer its processes for its o0n /ene6t and that of itscustomers1 This 0ould reuire a change in mind-set of thesenior 5 Top Management and this must happen if the PSBshave to compete eKciently and eectively 0ith the privatesector counterparts in future1

x) reating customers fairly Protection of /an3 customers has /een one of the thrust areasfor &BI in recent times1 %s you may /e a0are' &BI has issued aCharter of Customer &ights /ased on the glo/al /est practices1

The Charter comprises of follo0ing 6ve rights)

&ight to Fair Treatment &ight to Transparency' Fair and Qonest 2ealing &ight to Suita/ility &ight to Privacy &ight to Hrievances &edress and Compensation

% model customer rights policy jointly prepared /y IB% andBCSBI incorporating these rights has /een circulated to all

/an3s /y IB%1 The /an3s have /een advised to prepare a Board%pproved Policy /ased on the model policy /efore Guly 8,'*+,#1 &BI may revie0 the policies framed /y the /an3s andtheir implementation as part of our supervisory assessmentover the ne7t ,*-,; months1

xi) *%C+A"L compliance9et me no0 turn to another very important issue 0hich iseually challenging for the private sector /an3s as 0ell and

that is' compliance 0ith the L=C5 %M9 norms1 % majority of the

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enforcement action /y the /an3ing sector regulator in therecent past has /een on account of these violations1

The instances of fa3e e-mails soliciting unsuspecting customersto ma3e payments to certain /an3 accounts as a precursor toreceiving pri@e or lottery 0innings from a/road' have /ecomeuite rampant1 It is surprising that even 0ell-educatedindividuals are falling prey to such incredulous oers1 Ahilespreading 6nancial literacy remains a huge challenge' the/an3s cannot /e a/solved of their responsi/ilities in theseuence of events1 Most of this money is /eing transferredthrough /an3ing channels and o/viously' there is a de6ciencyin L=C compliance1 Money muling is another commonoccurrence 0hich highlights de6ciencies in ris3 categori@ationof customers and monitoring of transactions1

I am emphasi@ing on this issue /ecause /an3s need to /esensitive to the possi/ility of regulatory strictures 5 penalties fornon-compliance1 Consistent monitoring of transactions isnecessary to prevent money muling1 % fe0 /an3s in the pasthave already /een 6ned for de6ciencies in adherence toL=C5%M9 norms and 0ith our commitment to comply 0ith theF%TF norms I can only fore0arn you that the freuency and

severity of such penalties 0ould rise in future1

xii) ,alance sheet management Over the past fe0 years 0e have 0itnessed an increasingpropensity to defer or delay provisions in an apparent attemptto post higher net pro6ts1 Pro/a/ly' this short term vision is alsoin part attri/uta/le to short term tenure 0hich the C(Os5 CM2sget1 It must /e appreciated that C(Os5 CM2s 0ould come andgo /ut the institutions are perpetual entities1 The only thing

0hich can perpetuate their e7istence is a stronger and healthier/alance sheet1 It must /e reali@ed that the 6rst step to0ardsresolving a pro/lem is to ac3no0ledge its e7istence1 Thepro/lems 0hich are s0ept under the carpet for a uarter or t0o0ould need to /e encountered thereafter' 0ith the issue gettingfurther complicated in the interim1

Ma3ing higher provisions 0ould not only add strength to the/alance sheet' /ut also lead to /etter control over ta7 out-goand the dividend pay-out' /esides adding credi/ility to the

/an3s 6nancial statements1 Ahile a lo0er net pro6t 0ouldma3e headlines for a day or t0o' /elieve me the savvy long-

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term investors 5 analysts do not read too much into the shortterm /lips1 If they understand that the Management is sincerea/out repairing the /alance sheet' they 0ould drive up thevaluation of your stoc3s' 0hich 0ould help you in the long-term1

Aith most /an3s in dire need of capital' the retained earningsneed to increase progressively1

%s a part of /alance sheet management e7ercise' the Board5TopManagement 0ould have to proactively ta3e a call on the li3elycomponents of their /alance sheets and 0hat shape they 0ouldli3e the /alance sheet to ta3e in future1 The o/jective of optimalutili@ation of capital 0ould have to /e necessarily 3ept in mind0hile evolving /alance sheet management strategies1

xiii) Risk management &is3 is inevita/le in the /an3ing /usiness and hence' a soundris3 management frame0or3 is the touchstone of an eKcient/an31 The ris3 management eectively aims at /alancing the&is3-&eturn Trade-o 0hich is ma7imi@ing return for a givenris3 and minimi@ing ris3 for a given return1 The responsi/ilityof setting a ris3 appetite for the /an3 as a 0hole is that of theBoard and the Top Management1 In practice' ho0ever' 0eseldom see the articulation of an o/jective ris3 appetite

statement /y the PSBs1 If you havent set out a ris3 limit foreach type of ris3 that the /an3 runs and an aggregate ris3appetite for the /an3 as a 0hole' ho0 do you measure andmonitor ris3W Ae must understand that ris3 management isintegral to the success of the /an3 and hence' the TopManagement should strive to put in place an eKcient ris3management frame0or3 3eeping in vie0 the changing mar3etdynamics and the regulatory prescriptions1

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&PP&+%$IIES F&+ S%SAI$AB#E '+&5*

61 +etail banking4 +etail /an3ing is typically mass-mar3et/an3ing 0here individual customers use local /ranches of larger commercial /an3s1 Services oered include savings andchec3ing accounts' mortgages' personal loans' de/it cards'credit cards and so1 It is characteri@ed /y multiple productsmultiple channels and multiple customer groups1

71 'ro.ing middle class- The middle income group andlo0er income groups 0ill /e the largest group of customers1

They 0ill /e pro6ta/ly served only 0ith lo0 cost /usinessmodels having lo0 /rea3 event tic3et si@e of /usiness1 Therising consumerism from the emerging middle India and thehigher purchasing po0er in rural India on account of risingemployment provides opportunities for /an3s to loo3 /eyondthe traditional customer segments1 The ne7t decade 0ould0itness /an3s e7perimenting 0ith dierent lo0 cost /usinessmodels' smaller cost eective /ranches and ne0 use of technology to serve this segment pro6ta/ly181 !obile banking- Aith advent of mo/ile /an3ing' the accessto /an3ing facilities could completely get revolutioni@ed overthe ne7t decade1 (ven if *#-8+ percent of mo/ile users haveHP&S58H activated' there 0ould /e *#+ million to 8++ millioncustomers 0ho 0ould access /an3ing services over the mo/ile1Ae e7pect the Indian /an3ing industry to invest signi6cantattention in technology innovation to drive ne7t generationframe0or3 for transaction /an3ing1

91 Investment banking- It 0ill /e among the fastest gro0ing

segments in the /an3ing industry1 The larger corporatecustomers e7pect to demand higher support for internationale7pansion and mergers and acuisitions over ne7t decade1 %sthe 0holesale de/t mar3ets deepen' the larger corporate 0ouldavail of advisory and capital mar3et services form /an3s toaccess capital mar3ets1 The revenue 0ill shift from traditionalcorporate /an3ing to investment /an3ing11 C+! and data .arehousing4 Customer &elationshipManagement and data 0arehousing 0ill drive the ne7t 0ave of

technology in /an3s1 There is signi6cant potential for crossselling amongst all categories of /an3s in india1 Hiven that

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cross selling is highly cost-eective as compared to all othermeans of customer acuisition' /an3s 0ill adopt C&M strategiesaggressively in pursuit of cost-eective /usiness model

Banking sector per/ormance in F)6

%s the domestic economy remained sluggish' the gro0th in theIndian /an3ing sector too remained under pressure in F=,#1Credit o ta3e slo0ed do0n to


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In terms of pro6ta/ility' the return on assets &o%$ remainedstatic at +1;R 0hereas the return on euity &o($ dippedslightly from ,+1:R to ,+1"R in F=,#1 %mong /an3s' pu/licsector /an3s reported a marginal decline in &o% from +1#R to

+1".R1 Private sector /an3s sa0 their &o% improve from ,1.#Rto ,1.;R during the year1 The capital adeuacy ratio C%&$ of /an3s slipped from over,8R to ,*1


27/32

assets as they 0ill /e a/le to 6ght the recalcitrant corporate

/orro0ers 0ith vigour1

Fifth' allo0ing sponsors to hold up to ,++R in asset

reconstruction companies %&Cs$ 0ill also help tac3le /ad

assets1 Currently' foreigners can hold up to ,++R in %&Cs /ut

an individual foreign entity cannot hold more than "


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auditor general 4inod &ai1 Other mem/ers are 0ell chosen and

the team could play a seminal role in overhauling the

governance structure in pu/lic sector /an3s 0hich many /lame

for the mess these /an3s are in1

Facts and Figures

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Conclusion

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%s 0e have noted' these are challenging times for the /an3ingsector /ut as the clichXd prover/ goes (very cloud has a silverlining1 The future leaders in the /an3ing industry 0ould /ethose 0ho identify this silver lining early and initiate necessary

steps to leverage the opportunity1 The impending competitionfrom ne0 /an3s and the large num/er of ne0 accounts openedunder the PMG2= Scheme are t0o instances that readily cometo mind of the challenges that could /e turned intoopportunities1 Besides this' /an3s as the 3ey players in thecountrys 6nancial system also carry the responsi/ility of supporting economic gro0th' once the economic cycle turnsfavoura/le1 Ban3s have to prepare themselves for meeting thisresponsi/ility /y nurturing a healthier /alance sheet1

The pre and post li/erali@ation era has 0itnessed variousenvironmental changes 0hich directly aects the aforesaidphenomena1 It is evident that post li/erali@ation era has spreadne0 colours of gro0th in India' /ut simultaneously it has alsoposed some challenges1 This article discusses the variouschallenges and opportunities li3e Qigh transaction costs' ITrevolution' timely technological up-gradation' intensecompetition' privacy Y safety' glo/al /an3ing' 6nancialinclusion1 Ban3s are striving to com/at the competition1 The

competition from glo/al /an3s and technological innovation hascompelled the /an3s to rethin3 their policies and strategies12ierent products provided /y foreign /an3s to Indiancustomers have forced the Indian /an3s to diversity andupgrade themselves so as to compete and survive in themar3et1

The /iggest challenge for /an3ing industry is to serve the massand huge mar3et of India1 Companies have /ecome customercentric than product centric1 The /etter 0e understand our

customers' the more successful 0e 0ill /e in meeting theirneeds1 In order to mitigate a/ove mentioned challenges Indian/an3s must cut their cost of their services1 %nother aspect toencounter the challenges is product dierentiation1 %part fromtraditional /an3ing services' Indian /an3s must adopt someproduct innovation so that they can compete in gamut of competition1 Technology up gradation is an inevita/le aspect toface challenges1 The level of consumer a0areness issigni6cantly higher as compared to previous years1 Do0-a-days

they need internet /an3ing' mo/ile /an3ing and %TM services1

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+e/erences

http)550001/is1org5revie05r,#+#,,f1htmhttp)550001i/ef1org5industry5/an3ing-india1asp7http)550001i/ef1org5industry5/an3ing-presentationhttps)55en10i3ipedia1org50i3i5Ban3ingZinZIndia0001iosrjournals1org5iosr-j/m5papers54ol,.-issue*51115H+,.*,#*.,1pdf https)55r/i1org1in5Scripts5BSZSpeeches4ie01asp7WId[

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Indian Banking Sector Final