Aloysius Institute of Management and

Information Technology

Assignment-1

“Contemporary Banking”
“Examine the weakness of banking sector and causes which led to genesis of
new generation banks. How do these differ from other in their operation?”

Submitted to:
Mr. Shawn Pereira

Faculty
AIMIT

Submitted By
Ravikumar P A
Reg No: 0916097
MBA II Finance
AIMIT

WEAKNESS BANKING SECTOR IN INDIA

The Indian banking sector benefits from a supportive institutional and regulatory
environment and a healthy and stable financial profile. Although growth is expected to
continue for at least the next several years, there are still weaknesses that need to be
addressed, according to a report published today by Standard & Poor's Ratings Services
titled "Indian Banking System: Strongly Placed But Weaknesses Cannot Be Wished
Away."

"For the past four years, India's economy expanded at an average of 8.6% per year and
Standard & Poor's expects this rate to be close to 7.5% in the medium term," said Standard
& Poor's credit analyst, Ritesh Maheshwari. "The country's business environment benefits
from higher consumption and private investment demand, due to a growing middle class
and favorable demographics.

Additionally, India has strengthened its regulatory environment and banking reforms have
gradually tightened operational, prudential, and accounting standards, putting them mostly
in line with international benchmarks."

"The banking sector has experienced a considerable improvement in credit quality in the
past five years. The overall improvement in the past three to four years was supported by
good economic prospects and healthy earnings and represents a sustainable trend,"

Despite the benefits of scale to the banking business, especially with the increasing role of
marketing and technology based systems, the banking sector in India is highly fragmented,
with 53 domestic banks accounting for about 93% of the system's assets. Risk
management is still largely a work in progress, although significant improvements
occurred in the past decade. With strong credit growth and weak risk management
systems, especially in smaller banks, the potential for an understatement of problem assets
increases. These weaknesses could undermine the potential growth of the Indian banking
system, if a strategy to address them is not put in place.

"India is in an enviable position. Nevertheless, the existing strengths should not stop the
banking sector from acknowledging and acting on its weaknesses. These issues will not
disappear and, in some cases, will worsen if a well-thought-out action plan is not
undertaken soon. Increasing the pace of consolidation and providing the sector with an
efficient risk management system, while closely monitoring the potential for increased
problematic assets, should form the basis of such a strategy".
■ PSBs need to fundamentally strengthen institutional skill levels especially in sales and
marketing, service operations, risk management and the overall organisational performance
ethic & strengthen human capital.

■ Old private sector banks also have the need to fundamentally strengthen skill levels.

■The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.

■ Structural weaknesses such as a fragmented industry structure, restrictions on capital

availability and deployment, lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial
Banks (SCBs), unless industry utilities and service bureaus.

■ Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU
banks below 51% thus choking the headroom available to these banks for raining equity
capital.

■ Impediments in sectoral reforms: Opposition from Left and resultant cautious approach
from the North Block in terms of approving merger of PSU banks may hamper their growth
prospects in the medium term.

CAUSES WHICH LED TO GENESIS OF NEW GENERATION BANK

Over the last several years’ internationally active banks have shifted from international
banking to global banking. Some banks, rather than taking deposits in one jurisdiction and
lending in other, have pursued the strategy of taking deposits and offering consumer loans,
mortgages and corporate loans within a variety of national markets through a local presence.
Other banks have pursued a capital market strategy, seeking to fund their portfolios of local
securities locally as well. Whether adopting a globe consumer earlobe wholesale model,
banks are increasingly looking to serve customers through a local presence funded locally.
The ambition to build a ‘global’ (or multinational) bank so defined defers from that to build
and international’ bank, define as a bank that takes deposits in one country and makes loans
in another. Even after shifting to global banking, Country risk remains same.

Although the most compressive time series evidence for the long term shift in business from
cross border to serve local markets happens to cover US in corporate banks, what follows
demonstrates that the global strategy is by no means confined to banks based in the united
states. Indeed, Canadian, Irish, Spanish, swiz and UK banks are more globalised than US
banks. Looking at the data by local banking market, the shift is vary uneven, with European a
major exception and Asian markets more globalize then they are generally considered to be.

From International To Global Banking: 20 Years View:

While different banks have shifted from international banking strategy towards global
banking strategies at different paces, the overall trend was already evident by at least the mid-
1980s. Cross borders business, in a particular lending to developing countries funded with
euro currency deposits, had propelled the expansion of banks foreign assets during the 1960s
and 1970s. By contrast, during the 1980s and 1990s, locally funded business tended to
expand more rapidly than cross borders positions. Data covering banks incorporated in
United States illustrate the growth of foreign banks locally funded business. Whereas US
banks cross borders claims increased by 55%(percent) to $548 bn between 1982 and 2001,
there local claims rose yearly 400% to $385 bn, reaching a ratio of 0.7.Although it spears that
cross borders claim significantly outgrew local claims in 1997,this reflects a series brake that
year from the inclusion of derivative position. Since this brake, the ratio has narrowed the
more broadly measured local claims have continued to grow faster than the cross border
claims.

Globalisation By Nationality Of Banks:

The growth of locally funded business has by no means been confined to US banks. Banks
incorporated in other countries have expanded their local presence in foreign banking markets
as quickly as US banks, if not faster. The expansion of non-US banks is less well
documented, however.

The newly complied data show that the US banking system has not become extraordinarily
global when juxtaposed with its international peers indeed a handful of banking system are
more global than that of the united states. The most recent consolidated banking statistics
indicate that Canadian banks have a ratio of local claims in local currencies to international
claims of 1.2. To a large extent, this reflects the large funding base of their branch and
subsidiary operations in the United States. So it might be said that Canadian banks are as
much regionalized as globalize. Spanish banks are also very global, funding much of their
foreign claims locally, particularly in Latin America. The UK, Swiz, and Irish banks local
claims are nearly equivalent to their international claims. The UK-headquarter banks are well
represented in local markets not only in the western hemisphere but also in East Asia.

Global and International Banking By Market:

Turning from the banks behind the expansion of locally funded claims to the markets into
which they have expanded, the balance between international and global banking varies
across different regions. Bank of international settlement (BIS) reporting banks local claims
on Latin American countries rose sharply in the late 1990s and are now as large as
international claims. In the Asia-Pacific region local claims are quickly approaching the level
of international claims, and in North America the gap is not very wide. Local claims are half
as large as international claims on countries in Eastern Europe, the Middle East and America,
but are rising rapidly. Only reporting banks claims on Western Europe still predominantly
take the form of cross border claims.

Explaining the Shift:

The shift from international from global banking reflects changes both in banks strategies and
in the constraints they face. An interesting question is why international banking seems to
have yielded so little to global banking in the European market.

Bank Strategies:
Over the last generation, many banks altered their business strategies. The new strategies
have trended to lead to a balanced increase in local asset and liabilities. While international
department major banks spend much on renegotiating the loan made in 1980s’ bankers who
have made their name-developing consumer and securities business rose to leadership
positions. And emphasis on consumer banking means trying to turn depositor into credit
cards users and mortgage customer and vice-versa. This naturally tends to lead to balanced
growth of asset and liabilities in foreign market. Similarly, the development of securities
business within the country ten to lead a balance of asset and liabilities, for instant
government bonds financed with repurchases transaction.

Similarly, banks strategic shift from holding to originating and selling international claims
has standard to reduce their cross border footing the renegotiation of the 1980s’ ended up
creating new asset class for institution investors.. Originally Brady bonds and then more
generally emerging market bonds issued by government and companies. While international
banks as holders as well as underwriter such obligations, the widening of the investors base to
include institutional investor has substituted for cross border banks loans to some extent.

Specific lesson drawn from the experiences of the debt cases of the 1980s’ also led banks to
favor global over international banking, particular in riskier markets. In the early 1980s’
foreign exchange crises lead governments to impose payment moratoriums on cross border
loans locally funded assets, while subject to credit risk at such time, did not involve of
foreign exchange drain and so were not necessaries affect by payment moratoriums.

Bank have pursued their altered strategies by de novo entry into new market by organic
expansion of existing operations and through cross border acquisition. In acquiring banks a
cross borders, they have being part of larger wave of cross border mergers and acquisitions.
Cross border mergers and acquisition reached a record level of eight percent of world GDP in
the let 1990s’.

While in the part, have elected to follow their customers explores in order to have a balance
sheet of sufficient size to serve their peak needs, bank expansions has also drawn on the same
conviction that relatively large global players will dominate each business.

Altered Constraints:
Circumstances as well as strategies lay behind the shift to global banking. Among the most
important factor determining the pace of foreign banks expansion into local financial system
is financial sector liberalization. Over the past two decades, many countries have moved from
relatively closed and administrated financial system to more open ones. This has typically
included the relaxation of restrictions on foreign ownership of local banks. For e.g.: – In
Canada restrictions on foreign branch banking on the market share of foreign subsidiaries
effectively led foreign banks to serves customers from outside the country rather then through
local affiliates.

Liberalization has at times been precipitated by financial crisis. Bank with global ambitions
have found it attractive to buy local banks put up for sale following crisis related
nationalizations owing to loan losses. In addition after, the weakness of local banks after a
crisis offer competitive opportunities of multinational banks to expand their extent
operations. In countries with state dominated financial system, liberalization and the
aftermath of crisis were often accompanied by privatization, in which foreign banks could
participate.

Another factor working to domesticate foreign banks operation is the decline of

unremunerated reserve requirements as a part of monitory control. For.e.g: – A foreign bank
landing to a US corporation and funding the loan offshore could previously avoid the federal
reserve’s requirement. In 1990, however the fed lowered this reserve requirement to 0% (zero
percent), removing much of the incentive to book loans offshore

Next-generation banking platforms have changed—or not

Today’s banking platforms need to cope with continuously changing business environments
and a continuous flood of new requirements while staying sufficiently agile. While some
banks have already started to move towards a new banking platform, others still need to do
so. Banking platform renewal requires thorough preparation based on a business foundation,
as well as a clear set of IT requirements to select the right banking platform vendors for their
shortlist and/or to describe the target state architecture for renewal. The path to a shortlist that
Forrester first recommended in 2004 is based on requirements for a next-generation banking
platform and the concept of the banking backbone—both defined in 2003.

Next-generation improved application landscapes and technology change

The requirements for the next-generation banking platform have never primarily been
detailed IT requirements that dive very deep into information technology, architecture and
standards. Nevertheless, three years later, more sophisticated approaches to banking
platforms and advances in technology make it necessary to revisit the next-generation
requirements and to update and modify them where necessary.

New next-generation banks are differing from other banks in their

operation by providing following facilities their customers.

 Party centricity. In general, financial services firms have moved away from the old
design paradigm of product centricity and are now following the new paradigm of
customer centricity. However, if firms define customer centricity in too narrow a way,
this paradigm shift is not sufficient. A party-centric approach is necessary to handle
the data of business partners, potential customers, and existing customers in the same
way. Central data/information provisioning mechanisms with an enterprise wide data
model need to support this approach, and party-related personalisation and individual
self-service capabilities will extend it. Examples include personalised Web sites for
non-customers, customised ATM user interfaces for bank customers, and cross-
channel capability for both—all of which firms must achieve in the most cost-
effective way.
 Process centricity. This includes customisable standard processes out of the box as
well as a process-oriented integrated desktop. This desktop, which is considered a
channel, enables a bank employee to work with multiple customers and processes
simultaneously. In addition, the desktop should provide classic function/task-oriented
entry points to banking applications to help power users work in the most efficient
way. Further, process centricity stresses that platform agility has a strong focus on
agile business process support.
 Regulatory adaptability. A next-generation banking platform must support known
and foreseeable regulatory requirements and be sufficiently agile to handle future
regulatory changes in a cost-efficient way. Banks cannot afford to keep spending on
the scale of a Basel II project—at least not without creating additional business value.
Consequently, regulatory adaptability will require at least a comprehensive data
model, proactive data management—including handling future information needs—
and agile business process definition and execution. Ideally, a potential basis for
 strategic bank management would also be available. User companies like Germany’s
Fiducia IT and banking platform vendors like SAP and i-flex have already started
moving in this direction.
 Parameterisation. Banks already use a myriad of parameters. However, the next-
generation banking platform needs a structured approach for implementation. It must
handle structural organisation, branch hierarchy, authorisation, role concepts, account
relationships, business process and workflow, product definition, product/channel
allocation, and pricing, as well as deal with multiple countries, their national laws,
languages, character sets, time zones, sets of business hours, calendars, banks,
business units, corporate identities, legal forms, and account formats —just to
mention a few. Parameter usage also includes putting a new financial services product
into production—a product that will probably span divisions, even companies—and
supporting it. Put together, parameterisation and platform agility will also support
lower-effort collaboration with third-party software packages.
 Multi channel enabling. Support of all products and services must be seamless via
all channels at all times, including both visual and non-visual formats. Channels may
be for customers, other external users, or employees; devices include PCs, PDAs,
ATMs and self-service systems. Channels need to support communications within
front-, mid-, and back-office workplaces, as well as external communications with
corporate customers and other financial services business partners. From a business
perspective, channel alignment means that different products will have different
mixes of products and channels—and the banking platform must support this (right-
channelling) in a cost-effective manner. Cross-channel capability is an essential part
of this type of system.
 Security. Security is a core element of a next-generation banking system and needs to
cover the complete range of channels, applications and systems in a holistic way. This
approach includes integrating more infrastructure-oriented system security on one
side, and application security oriented more towards roles, functions and structural
organisation on the other. A key requirement for selecting or designing a next-
generation banking platform is to avoid a ‘security by patches’ approach but instead
design the platform for security. This can also drive a broader approach to security,
like incorporating channel security, security management and identity management.
  Near-time capability. Some banking platforms are supposedly able to work online
and in real-time. While this may be true, near-time capability can benefit many banks,
considering that current-banking platforms can be somewhat old-fashioned. A
patchwork of functionality added over a period of decades characterises these
platforms. Other characteristics are complex batch and pseudo-non-batch
architectures; exception cases; home-grown integration architectures; business
processes not fully supported by IT; and the resulting back-office workload.
Consequently, near-time capability includes both nearly immediate updates to
positions and straight-through processing.
 Platform agility. The banking platform must be designed around the concept of a
banking backbone, integrating third-party and home-grown customised banking
software applications or services that will be used on a service-by-service basis with
varying levels of functional granularity. Platform agility will also require the
capability to manage processes on both the macro and micro levels. In addition,
platform agility comprises the ability to run a banking platform using different
application platforms, OSs, and combinations thereof. In the ideal world of the future,
platform agility will also incorporate standardised, well-defined industry and
application-specific interfaces on a semantic level.

Next-generation requirements provide high-level design directions

Forrester’s next-generation banking platform requirements can’t provide detailed design

principles from which banks can directly derive implementation-level criteria—nor are they
intended to. However, they do provide guidance on what kind of essential functions and
architectural building blocks the banking platform of the future will need. Our approach can
help avoid at least some of the mistakes of the past and create a banking platform that is as
agile and flexible as possible. In the medium to long term, this will also prevent banks from
moving into the Bermuda Triangle of long time-to-market, high costs, and low quality when
trying to cope with the dynamically changing and ever-increasing flood of business
requirements.