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Future of Banking in India

Future of Banking in India

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Published by sumesh894

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Published by: sumesh894 on Mar 31, 2010
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Future of Banking in India – Changing Imperatives
 The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the longrun. The effective management of credit risk is a critical component of comprehensiverisk management essential for long-term success of a banking institution.Although capital serves the purpose of meeting unexpected losses, capital is not asubstitute for inadequate decontrol or risk management systems. Coming years willwitness banks striving to create sound internal control or risk management processes.With the focus on regulation and risk management in the Basel II framework gaining prominence, the post-Basel II era will belong to the banks that manage their riskseffectively. The banks with proper risk management systems would not only gaincompetitive advantage by way of lower regulatory capital charge, but would also addvalue to the shareholders and other stakeholders by properly pricing their services,adequate provisioning and maintaining a robust financial structure.
The future belongs to bigger banks alone, as well as to those which have minimised their risks considerably.
Consolidation, which has been on the counter over the last year or so, is likely to gather momentum in the coming years. Post April 2009, when the restrictions on operations of foreign banks will go, the banking landscape is expected to change dramatically. Foreign banks, which currently account for 5% of total deposits and 8% of total advances, aredevising new business models to capture the Indian market. Their full-fledged entry isexpected to transform the business of banking in many ways, which would be reflected interms of greater breadth of products, depth in delivery channels and efficiency inoperations.Thus Indian banks have less than three years to consolidate their position. Despite the stiff resistance from certain segments, consolidation holds the key to future growth. This viewis underpinned by the following:► Owing to greater scale and size, consolidation can help save costs and improveoperational efficiency.► Banks will also have to explore different avenues for raising capital to meet normsunder Basel-II► Owing to the diversified operations and credit profiles of merging banks, consolidation
is likely to serve as a risk-mitigation exercise as much as a growth engine.Though there is no confirmation yet, speculative signals arising from the market point tothe prospect of consolidation involving banks such as Union Bank of India, Bank of India,Bank of Baroda, Dena Bank, State Bank of Patiala, and Punjab and Sind Bank. Further,the case for merger between stronger banks has also gained ground — a clear deviationfrom the past when only weak banks were thrust on stronger banks. There is a case beingmade for mergers between banks with a distinct geographical presence coming together toleverage their respective strengths.
 Growing integration of economies and the markets around the world is making global banking a reality. The surge in globalization of finance has already begun to gainmomentum with the technological advancements which have effectively overcome thenational borders in the financial services business. Widespread use of internet bankingwill widen frontiers of global banking, and make marketing of financial products andservices on a global basis possible. In the coming years globalization will spread further on account of the likely opening up of financial services under WTO. India is one of the104 signatories of Financial Services Agreement (FSA) of 1997. This gives India’sfinancial sector including banks an opportunity to expand their business on a quid pro quo basis.As per Indian Banks' Association report ‘Banking Industry Vision 2010’, there would begreater presence of international players in Indian financial system and some of the Indian banks would become global players in the coming years. So, the new mantra for Indian banks is to go global in search of new markets, customers and profits.
There is an imperative need for not mere technology upgradation but also its integrationwith the general way of functioning of banks to give them an edge in respect of services provided to their constituents, better housekeeping, optimizing the use of funds and building up of MIS for decision making, better management of assets & liabilities and therisks assumed which in turn have a direct impact on the balance sheets of banks as awhole. Technology has demonstrated potential to change methods of marketing,advertising, designing, pricing and distributing financial products and services and costsavings in the form of an electronic, self-service product delivery channel. Thesechallenges call for a new, more dynamic, aggressive and challenging work culture to meetthe demands of customer relationships, product differentiation, brand values, reputation,corporate governance and regulatory prescriptions. Technology holds the key to the futuresuccess of Indian Banks.Internet, wireless technology and global straight-through processing have created a paradigm shift in the banking industry. The explosive growth of both the Internet andmobile and wireless technology is revolutionizing the way the financial industry conducts
 business. The overall wireless technology market is expected to grow profoundly in thecoming years.
 The RBI's approval for banks to raise funds abroad through innovative capital instrumentsholds great significance. Such fund-raising, which includes preference shares, will,however, not just substitute equity; it could have unintended consequences on thestrategies of banks and their profitability. While the cost of raising monies through suchinstruments is likely to be higher (close to 10 per cent), the consequent higher leverage onequity funds is likely to result in expansion of return on net worth. This is because thesame amount of capital supports a higher volume of business, generating higher profits.Banks are likely to be able to raise long-term preference shares at coupon rates betweensix per cent and eight per cent. The positive impact on bank profitability could thus besignificant.Preference capital can be used as the currency for acquisition. The advantage for publicsector banks is that they no longer need to bother about government stake falling below 51 per cent. Banks such as Dena Bank, Oriental Bank of Commerce and Andhra Bank aremost likely to benefit from this move.
 There will be a sea change for employees too. Secure jobs will be replaced by contractualappointments, for a specified period of time. The unions will merge into the shadows and bank managements will turn effective. As a result there will be swifter turn over of  personnel in banks. But at the same time, skilled personnel from other disciplines willenter banks in increasing numbers.Factors like skills, attitudes and knowledge of the human capital play a crucial role indetermining the competitiveness of the financial sector. The quality of human resourcesindicates the ability of banks to deliver value to customers. Capital and technology arereplicable but not the human capital which needs to be valued as a highly valuableresource for achieving that competitive edge.Business model, which comprises a comprehensive range of business solutions deliveredthrough a unique balance of portfolio and relationship management must be incorporated.
 Challenges►Competition►Customer Retention►Globalization►Shrinking MarginSuggestions

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