For IRMA 2009 Analysis visit below :
IRMA Analysis
Source : Test Funda
November 21, 2009
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.
ACTION POINTS ARISING OUT OF VISION
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.
Banking Sector In India
FDI in banking
The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil by 2010, with the second phase of opening expected to com¬¬mence in April 2009.The RBI roadmap demarcates two phases for foreign bank presence. During the first phase, between March 2005 and March 2009, permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. RBI may, if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the investee bank, permit such acquisition subject to the overall investment limit of 74 percent of the paid up capital of the private bank. Appropriate amending legislation will also be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights. Further, the notification announces that foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into WOS. A clause on one-mode-presence, i.e. one form of banking presence, as branches or as WOS or as a subsidiary with a foreign investment in a private bank, has been added as the only safeguard against concentration. There are no caps specified for individual ownership (except the 74 per cent overall limit), which in the first phase would be left to RBI’s discretion. The second phase had to commence on April 2009 after a review of the experience of the first phase. This phase would allow much greater freedom to foreign banks. It would extend national treatment to WOS, permit dilution of stake of WOS and allow mergers/acquisitions of any private sector banks in India by a foreign bank subject to the overall investment limit of 74 percent. India’s financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies.
The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking sector in India has so far been moderate. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations.
The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal. Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance. Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with.
At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.FDI in banking sector can solve various problems of the overall banking sector. Such as –
i) Innovative Financial Products
ii) Technical Developments in the Foreign Markets
iii) Problem of Inefficient Management
iv) Non-performing Assets
v) Financial Instability
vi) Poor Capitalization
vii) Changing Financial Market Conditions
If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as –
Technology transfer:- Due to the globalization local banks are competing in the global market, where innovative financial products of multinational banks is the key limiting factor in the development of local bank. They are trying to keep pace with the technological development in the banks. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this need (e.g in consumer lending – credit management).
Better risk management :- As the banks are expanding their area of operation, there is a need to change their strategies including reassessing business practises, local lending practises as the whole banking sector is in need of a strategic policy for risk management. Through FDI, the host countries will know efficient management technique. The best example is Basel II. Most of the banks are opting Basel II for making their financial system more safer. Risk management is the process where we can minimize controllable risk and should take precautions for uncontrollable risks. Banking operations are complicated and are difficult for supervisor to monitor and control. It is always not only mandatory that bank should have adequate capital to cover their risk but also that they employ better risk management practices. As risk has become a predominant factor, Basel II norms find some solutions for risk management. Basel committee has given Risk Based Supervision (RBS). The focus of RBS is on the assessment of inherent risks in the business undertaken by a bank and efficacy of the systems to identify, measure, monitor and control the risks.
Basel II norms include the wide area of risk measurement and risk management. Many foreign banks have started adopting Basel II as their risk management tool. It helps in pricing of loan in against with their actual risk. It follows advanced techniques and software for calculation of risk. As in today's situations almost all the banks and its branches are computerized .So risk can be better managed by adopting these advanced technologies.
Basel II is a unique approach for banks to modernize and upgrade their risk practices. Basel II is popular for its three pillars. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks' risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. These are aimed at improving the transparency in banks and improve reporting.
Basel II norms can be summarized as follows. Basically it specifies the minimum regulatory capital requirement and contains new rules to calculate more refined risk weights for different kinds of loans. Secondly these norms specify supervisor where there should be methodical evaluation of risk. And supervisory authority should have expertise in quantitative and qualitative terms. Thirdly it speaks about market discipline through enhance disclosure of banks.
Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The sustained and gradual pace of reforms has helped avoid any crisis and has actually fuelled growth.
India has 79 scheduled commercial banks with 28 public sector banks, 23 private banks and 28 foreign banks. They have a combined network of over 67,000 branches and 914,241 employees, according to a release by Reserve Bank of India published on Sep 24, 2008. According to a report by ICRA Limited, a rating agency, the public sector banks hold around 75.3 per cent of total assets of the banking industry and the private and foreign banks hold of 18.2 per cent and 6.5 per cent respectively.
Impact of Technology
In Indian banking, technology has become an ‘enabler’ and is moving on to become a ‘driver’ of business. Large scale computerization of branches and operations has enabled the banks to capture more of their business on computers resulting in operational efficiencies including better customer service. this can be called the ‘first phase’ of technology adoption, Banks have now taken up the ‘second phase’ where they are aiming at achieving connectivity between branches, setting up of Central Data Repository, generation of MIS, prevention of frauds, evolving value-added products, reducing transaction costs, and new initiatives like cross selling, CRM, etc. The current emphasis is on providing alternative channels of delivery like ATMs, telebanking, internet banking, etc. The provision of a host of financial services through a versatile technology platform will enable banks to acquire more customers, cut costs, and improve service delivery.
Privatisation
In 1994, the Reserve Bank of India issued a policy of liberalization to license limited number of private banks, which came to be known as New Generation tech-savvy banks. Global Trust Bank was, thus, the first private bank after liberalization; it was later amalgamated with Oriental Bank of Commerce (OBC). Then Housing Development Finance Corporation Limited (HDFC) became the first (still existing) to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. Undoubtedly, being tech-savvy and full of expertise, private banks have played a major role in the development of Indian banking industry. They have made banking more efficient and customer friendly. In the process they have jolted public sector banks out of complacency and forced them to become more competitive. At present, Private Banks in India include leading banks like ICICI Banks, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank, Kotak Mahindra Bank, SBI Commercial and International Bank, IDBI, Indusind Bank
The Reserve Bank of India (RBI), has allowed foreign players to set up branches in rural India and take over weak banks with an investment of up to 74 per cent, and further relaxations are on the anvil by 2010, with the second phase of opening expected to com¬¬mence in April 2009.The RBI roadmap demarcates two phases for foreign bank presence. During the first phase, between March 2005 and March 2009, permission for acquisition of share holding in Indian private sector banks by eligible foreign banks will be limited to banks identified by RBI for restructuring. RBI may, if it is satisfied that such investment by the foreign bank concerned will be in the long term interest of all the stakeholders in the investee bank, permit such acquisition subject to the overall investment limit of 74 percent of the paid up capital of the private bank. Appropriate amending legislation will also be proposed to the Banking Regulation Act, 1949, in order to provide that the economic ownership of investors is reflected in the voting rights. Further, the notification announces that foreign banks will be permitted to establish presence by way of setting up a wholly owned banking subsidiary (WOS) or conversion of the existing branches into WOS. A clause on one-mode-presence, i.e. one form of banking presence, as branches or as WOS or as a subsidiary with a foreign investment in a private bank, has been added as the only safeguard against concentration. There are no caps specified for individual ownership (except the 74 per cent overall limit), which in the first phase would be left to RBI’s discretion. The second phase had to commence on April 2009 after a review of the experience of the first phase. This phase would allow much greater freedom to foreign banks. It would extend national treatment to WOS, permit dilution of stake of WOS and allow mergers/acquisitions of any private sector banks in India by a foreign bank subject to the overall investment limit of 74 percent. India’s financial system has very little exposure to foreign assets and their derivative products and it is this feature that is likely to prove an antidote to the financial sector ills that have plagued many other emerging economies.
The global banking industry weathered turbulent times in 2007 and 2008. The impact of the economic slowdown on the banking sector in India has so far been moderate. Owing to at least a decade of reforms, the banking sector in India has seen remarkable improvement in financial health and in providing jobs. Even in the wake of a severe economic downturn, the banking sector continues to be a very dominant sector of the financial system. The aggregate foreign investment in a private bank from all sources is allowed to reach as much as 74% under Indian regulations.
The third quarter of 2008 saw the beginning of negative net capital inflows into the country. Notwithstanding this bleak scenario, the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. However, owing to the economic downturn, the growth in FDI inflows in fiscal 2009 slowed to 18.6% from the previous fiscal. Despite the surge in investments, the stringent regulatory framework governing FDI has proved to be a significant hindrance. However, FDI norms have been relaxed to a considerable extent with respect to certain sectors. Private banks, for instance. Foreign investment, in addition to technological innovation and expertise, brings with it a plethora of risks. An unwarranted increase in the size of foreign holding in the banking sector will inevitably expose the country to risks not commensurate with those that an emerging market economy such as ours is equipped to grapple with.
At the same time, it is important to recognize that FDI in banking can address several issues pertaining to the sector such as encouraging development of innovative financial products, improving the efficiency of the banking sector, better capitalization of banks and better ability to adapt to changing financial market conditions.FDI in banking sector can solve various problems of the overall banking sector. Such as –
i) Innovative Financial Products
ii) Technical Developments in the Foreign Markets
iii) Problem of Inefficient Management
iv) Non-performing Assets
v) Financial Instability
vi) Poor Capitalization
vii) Changing Financial Market Conditions
If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as –
Technology transfer:- Due to the globalization local banks are competing in the global market, where innovative financial products of multinational banks is the key limiting factor in the development of local bank. They are trying to keep pace with the technological development in the banks. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this need (e.g in consumer lending – credit management).
Better risk management :- As the banks are expanding their area of operation, there is a need to change their strategies including reassessing business practises, local lending practises as the whole banking sector is in need of a strategic policy for risk management. Through FDI, the host countries will know efficient management technique. The best example is Basel II. Most of the banks are opting Basel II for making their financial system more safer. Risk management is the process where we can minimize controllable risk and should take precautions for uncontrollable risks. Banking operations are complicated and are difficult for supervisor to monitor and control. It is always not only mandatory that bank should have adequate capital to cover their risk but also that they employ better risk management practices. As risk has become a predominant factor, Basel II norms find some solutions for risk management. Basel committee has given Risk Based Supervision (RBS). The focus of RBS is on the assessment of inherent risks in the business undertaken by a bank and efficacy of the systems to identify, measure, monitor and control the risks.
Basel II norms include the wide area of risk measurement and risk management. Many foreign banks have started adopting Basel II as their risk management tool. It helps in pricing of loan in against with their actual risk. It follows advanced techniques and software for calculation of risk. As in today's situations almost all the banks and its branches are computerized .So risk can be better managed by adopting these advanced technologies.
Basel II is a unique approach for banks to modernize and upgrade their risk practices. Basel II is popular for its three pillars. The first pillar is compatible with the credit risk, market risk and operational risk. The regulatory capital will be focused on these three risks. The second pillar gives the bank responsibility to exercise the best ways to manage the risk specific to that bank. Concurrently, it also casts responsibility on the supervisors to review and validate banks' risk measurement models. The third pillar on market discipline is used to leverage the influence that other market players can bring. These are aimed at improving the transparency in banks and improve reporting.
Basel II norms can be summarized as follows. Basically it specifies the minimum regulatory capital requirement and contains new rules to calculate more refined risk weights for different kinds of loans. Secondly these norms specify supervisor where there should be methodical evaluation of risk. And supervisory authority should have expertise in quantitative and qualitative terms. Thirdly it speaks about market discipline through enhance disclosure of banks.
Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The sustained and gradual pace of reforms has helped avoid any crisis and has actually fuelled growth.
India has 79 scheduled commercial banks with 28 public sector banks, 23 private banks and 28 foreign banks. They have a combined network of over 67,000 branches and 914,241 employees, according to a release by Reserve Bank of India published on Sep 24, 2008. According to a report by ICRA Limited, a rating agency, the public sector banks hold around 75.3 per cent of total assets of the banking industry and the private and foreign banks hold of 18.2 per cent and 6.5 per cent respectively.
Impact of Technology
In Indian banking, technology has become an ‘enabler’ and is moving on to become a ‘driver’ of business. Large scale computerization of branches and operations has enabled the banks to capture more of their business on computers resulting in operational efficiencies including better customer service. this can be called the ‘first phase’ of technology adoption, Banks have now taken up the ‘second phase’ where they are aiming at achieving connectivity between branches, setting up of Central Data Repository, generation of MIS, prevention of frauds, evolving value-added products, reducing transaction costs, and new initiatives like cross selling, CRM, etc. The current emphasis is on providing alternative channels of delivery like ATMs, telebanking, internet banking, etc. The provision of a host of financial services through a versatile technology platform will enable banks to acquire more customers, cut costs, and improve service delivery.
Privatisation
In 1994, the Reserve Bank of India issued a policy of liberalization to license limited number of private banks, which came to be known as New Generation tech-savvy banks. Global Trust Bank was, thus, the first private bank after liberalization; it was later amalgamated with Oriental Bank of Commerce (OBC). Then Housing Development Finance Corporation Limited (HDFC) became the first (still existing) to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector. Undoubtedly, being tech-savvy and full of expertise, private banks have played a major role in the development of Indian banking industry. They have made banking more efficient and customer friendly. In the process they have jolted public sector banks out of complacency and forced them to become more competitive. At present, Private Banks in India include leading banks like ICICI Banks, ING Vysya Bank, Jammu & Kashmir Bank, Karnataka Bank, Kotak Mahindra Bank, SBI Commercial and International Bank, IDBI, Indusind Bank
SWOT Analysis of Banking sector
Strength of the Indian banking industry lies in its asset quality, growth and profitability over its global peers over the last few years. The banking index has grown at a compounded annual rate of over 51 percent since April 2001 as compared to a 27 percent growth in the market index for the same period. Geographical reach and market penetration have expanded at a very fast pace over the past few years. Customer base is constantly growing. High capital inflows has appreciated a lot over the years. Liquidity position has been quite comfortable in the recent times. The buoyant capital market coupled with an appreciating rupee vis-Ã -vis US dollar has been attracting large foreign institutional inflows during the last two years. Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Thanks to reforms and stringent regulatory measures taken by RBI Indian banks are considered to have clean, strong and transparent balance sheets thus good quality of assets relative to other banks in comparable economies in its region.
Weakness of the sector pertains to factors like limited market penetration in few geographies, lack of fundamental institutional skill level and less household savings. Public sector banks hold over 70 percent of total assets of the banking industry. However they are Severely lacking in sales and marketing, service operations, risk management and as a result these banks have not been able to match the aggressive growth by the private players. Although the semi urban areas have been successfully penetrated the banking sector hasen’t been able to fully penetrate through the rural areas. And if overall profitability needs to be improved this segment cannot be ignored. According to a McKinsey report, even though Indian households save 28% of their disposable income, they invest only half their savings in financial assets. The rest goes towards buying gold, housing, and buying/maintenance of equipment for the various small Indian enterprises.
Opportunities for the Indian banking industry lies in the untapped rural market Banking sector has not penetrated to the rural sector .About 80% of the rural households in India have no access to formal lending. About 46% of these used informal lending channels, 24% of which resorted to unregulated money lenders. These unregulated money lenders charge astronomical interest rates on their loans which reflect that there is scope for cheaper and more formal lending in the rural credit market. The rural economy accounts for more than two-thirds of India's population and has great untapped potential. The Indian economy is expected to grow at a significant rate in the next couple of years not only in India but also overseas. The Indian banking industry is likely to record significant growth in the short to medium term. By the end of 2010, the asset base of the Indian banking industry is expected to exceed the $1 trillion mark, with profits of about $10 billion.
Over the course of the years the number of market player has significantly increased. This Intense competition could adversely affect the margins of the bank. So the there is threat of the stability of the system and threat from existing players. Other better Savings, investment option available. Failure of some weak banks has often threatened the stability of the system. The global banking industry weathered turbulent times in 2007 and 2008. the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. Though the Indian banking system was de-coupled to a large extent but the threat posed by capital market slow down cannot be overlooked.
Weakness of the sector pertains to factors like limited market penetration in few geographies, lack of fundamental institutional skill level and less household savings. Public sector banks hold over 70 percent of total assets of the banking industry. However they are Severely lacking in sales and marketing, service operations, risk management and as a result these banks have not been able to match the aggressive growth by the private players. Although the semi urban areas have been successfully penetrated the banking sector hasen’t been able to fully penetrate through the rural areas. And if overall profitability needs to be improved this segment cannot be ignored. According to a McKinsey report, even though Indian households save 28% of their disposable income, they invest only half their savings in financial assets. The rest goes towards buying gold, housing, and buying/maintenance of equipment for the various small Indian enterprises.
Opportunities for the Indian banking industry lies in the untapped rural market Banking sector has not penetrated to the rural sector .About 80% of the rural households in India have no access to formal lending. About 46% of these used informal lending channels, 24% of which resorted to unregulated money lenders. These unregulated money lenders charge astronomical interest rates on their loans which reflect that there is scope for cheaper and more formal lending in the rural credit market. The rural economy accounts for more than two-thirds of India's population and has great untapped potential. The Indian economy is expected to grow at a significant rate in the next couple of years not only in India but also overseas. The Indian banking industry is likely to record significant growth in the short to medium term. By the end of 2010, the asset base of the Indian banking industry is expected to exceed the $1 trillion mark, with profits of about $10 billion.
Over the course of the years the number of market player has significantly increased. This Intense competition could adversely affect the margins of the bank. So the there is threat of the stability of the system and threat from existing players. Other better Savings, investment option available. Failure of some weak banks has often threatened the stability of the system. The global banking industry weathered turbulent times in 2007 and 2008. the investment pattern with regard to foreign direct investment (FDI) and inflows from non-resident Indians remains resilient and FDI inflows into the country grew by an impressive 145% between fiscal 2006 and 2007 and by a respectable 46.6% between fiscal 2007 and 2008. Though the Indian banking system was de-coupled to a large extent but the threat posed by capital market slow down cannot be overlooked.
Banking Sector In India
Banking Industry – Funding the Economy
Banking Industry is an essential part of any economy. In fact, banks are the single most important supplier of credit. The banking industry has the capital and commitment to support the financial needs of individuals, businesses and all levels of government. In each of these roles, banks support the creation of jobs and the growth of our economy. India has 79 scheduled commercial banks with 28 public sector banks, 23 private banks and 28 foreign banks. They have a combined network of over 67,000 branches and 914,241 employees, according to a release by Reserve Bank of India published on Sep 24, 2008.According to a report by ICRA Limited, a rating agency, the public sector banks hold around 75.3 per cent of total assets of the banking industry and the private and foreign banks hold of 18.2 per cent and 6.5 per cent respectively.
The Indian banking industry is presently in a situation of great flux. There are various developments, changes within the Indian economy and deregulations occurring that have the potential to drastically change the way this industry functions in the future. As per the changes envisaged by the Reserve Bank of India (RBI), a roadmap has been laid down to gradually deregulate this sector to the foreign banks. Banking Industry is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. But currently worldwide the banking industry is facing a tough time due to the failure of financial system in the biggest economy i.e. United State of America. The problem arose due to default in sub-prime mortgage lending clubbed with rising national debt, current account deficit, and fiscal policies of US. This has led to the failure of some big investment banking firm leading to filing bankruptcy. Financial Institutions are the one to face challenge because of liquidity crunch.
Indian Industries have been witnessing today is an indirect, knock-on effect of the global financial situation and is a reflection of the uncertainty and anxiety in the global financial markets. While no country in today’s globalizing world can remain completely insulated from the global financial crisis, Indian banking industry is better placed to cope with the adverse consequences of the financial turmoil. India is relatively better placed due to its robust policy framework, stricter prudential regulations with respect to capital and liquidity and strong growth performance (a growth of ~9 per cent) in recent years. An added obstacle to the sustained improvement of the banking system is the fact that banks are mandated to provide funding to government-defined priority sectors dominated by small-scale business and agriculture. Loans to these sectors are at high risk of becoming non-performing. Private-sector banks must ensure that 25 per cent of their loans are directed towards these priority sectors; for state-owned banks, the figure is 40 per cent. These thresholds restrict the level of credit available to more efficient companies in non-priority sectors. The level of bad loans has been falling in recent years as a result of the creation of asset-reconstruction companies and a rapid expansion in lending. Non-performing assets (NPA) fell to 1.0 per cent for the fiscal year 2007-08, according to the latest data from the Reserve Bank of India. In the near future, for a stint, we expect to see an increase in Non-performing Assets.
Evolution and contours of banking reforms in India
The indigenous system of banking had existed in India for many centuries, and catered to the credit needs of the economy of that time. The famous Kautilya Arthashastra, which is ascribed to be dating back to the 4th century, contains reference to creditors and lending. During the period of modern history, however, the roots of commercial banking in India can be traced back to the early 18th century when the Bank of Calcutta was established in June 1806. This was followed by Bank of Madras in 1843 and the Bank of Bombay in 1868. The three presidency banks were amalgamated in 1921 to form Imperial Bank of India. The Reserve Bank of India was established in 1935 and the State Bank of India in 1955.
Regulation of Banking in India
In the very early phase of commercial banking in India, the regulatory framework was somewhat diffused and the Presidency banks were regulated by their royal charter, the East India company and the government of India at that time. The recommendations of the Indian Central Banking Enquiry Committee (1929-1931) paved the way for legislation for banking regulation in the country. Under the RBI Act 1934 and later the banking Companies Act 1949 the responsibilities relating to licensing of banks, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation were vested on the RBI.
Bank Nationalization: The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalised 14 banks then. These banks were mostly owned by businessmen and even managed by them. Before the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960. The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India was under Government ownership.
The financial reform process is often thought of as comprising two stages – the first phase guided broadly by the Narasimham Committee I report while the second is based on the Narasimham Committee II recommendations. The aim of the former was to bring about “operational flexibility” and “functional autonomy” so as to enhance “efficiency, productivity and profitability”. The latter focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable.
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