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November 15, 2009

Banking Industry Vision : 2020

With domestic and international competition brewing up banks have to shift their focus to ‘cost’ which will be determined by revenue minus profit. Cost-control in tandem with efficient use of resources and increase in productivity will determine the winners and laggards. Banks have to focus on cost -savings to survive in future. The growth of banking in the coming years is likely to be more qualitative than quantitative, Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. On the liability side, there is likely to be large additions to capital base and reserves. As the reliance on borrowed funds increases, the pace of deposit growth may slow down. On the asset side, the pace of growth in both advances and investments is forecast to weaken. On the growing influence of globalisation on the Indian banking industry we would see a number of global banks taking large stakes and control over banking entities in the country. The pressure on banks to gear up to meet stringent prudential capital adequacy norms under Basel II and the various Free Trade Agreements that India is entering into with other countries will also impact on globalisation of Indian banking. the flow need not be one way. Some of the Indian banks may also emerge global players. the growing pressure on capital structure of banks is expected to trigger a phase of consolidation in the banking industry. In the past mergers were initiated by regulators to protect the interest of depositors of weak banks. In recent years, there have been a number of market-led mergers between private banks. This process is expected to gain momentum in the coming years. Consolidation could also take place through strategic alliances or partnerships covering specific areas of business such as credit cards, insurance etc.

The ability to gauge the risks and take appropriate position will be the key to successful banking in the emerging scenario. Risk management has to trickle down from the corporate office to branches. As audit and supervision shifts to a risk-based approach rather than transaction oriented, the risk awareness levels of line functionaries also will have to increase. Also banks to deal with issues relating to `reputational risk' to maintain a high degree of public confidence for raising capital and other resources. With the advent of new technologies the conventional definition of banking might undergo changes. The sector will see the emergence of new players doing financial intermediation. For e .g we could see utility service providers offering, say, bill payment services or supermarkets or retailers doing basic lending operations. banks are likely to resort more and more to sharing facilities in the areas of payment and settlement, back-office processing, date warehousing, and so on. ll these developments need not mean banks will give the go-by to social banking. Lending would be business driven. Consumer growth is taking place at a fast pace in 17,000-odd villages with a population of more than 5,000. Of these, more than 50 per cent are concentrated in just seven states. Small-scale industries would remain important for banks. However, instead of the narrow definition of SSI based on the investment in fixed assets, the focus may shift to small and medium enterprises (SMEs) as a group. Changes could be expected in the delivery channel for small borrowers, agriculturists and unorganised sectors also. The expected integration of various intermediaries in the financial system would require a strong regulatory framework. Development of best practices could evolve better through self-regulation rather than based on regulatory prescriptions. For instance, to enlist the confidence of the global investors and international market players, the banks will have to adopt the best global practices of financial accounting and reporting. It is expected that banks would migrate to global accounting standards smoothly, although it would mean greater disclosure and tighter norms. The first phase of banking reforms was born out of panic. The second phase can be implemented from a position of strength and confidence in a compressed time-frame.


1. Banks will have to adopt global standards in capital adequacy, income recognition and provisioning norms.

2. Risk management setup in banks will need to be strengthened. Benchmark standards could be evolved.

3. Payment and settlement systems will have to be strengthened to ensure transfer of funds on real time basis eliminating risks associated with transactions and settlement process.

4. Regulatory set up will have to be strengthened, in line with the requirements of a market-led integrated financial system.

5. Banks will have to adopt best global practises, systems and procedures.

6. Banks may have to evaluate on an ongoing basis, internally, the need to effect structural changes in the organization. This will include capital restructuring through mergers/acquisitions and other measures in the best business interests.IBA and NABARD may have to play a suitable role in this regard.

7. There should be constant and continual upgradation of technology in the banks, benefitting both the customer and the banks. Banks may enter into partnership among themselves for reaping maximum benefits, through consultations and coordination with reputed IT companies.

8. The skills of bank staff should be upgraded continuously through training. In this regard, the banks may have to look at the existing training modules and effect necessary changes, wherever required. Seminar and conferences on all relevant and emerging issues should be encouraged.

9. Banks will have to set up Research and Market Intelligence units within the organization, so as to remain innovative, to ensure customer satisfaction and to keep abreast of market developments. Banks will have to interact constantly with the industry bodies, trade associations , farming community, academic/research institutions and initiate studies, pilot projects etc.for evolving better financial models.

Industry level initiatives will have to be taken, maybe at IBA level, to speed up reform measures in legal and regulatory environment.

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