Case - Banking in India issues and challenges for the future case Case Summary

A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system, with one of the largest banking networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), and the increased participation of private sector banks. The growth of the retail financial services sector has been a key development on the market front. Indian banks (both public and private) have not only been keen to tap the domestic market but also to compete in the global market place. New foreign banks have been equally keen to gain a foothold in the Indian market.

Banking Sector Reform

Indias reform program included wide-ranging reforms in the banking system Banking sector reforms included: (a) Measures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities; (b) Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision; (c) Measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. These steps have produced some positive outcomes. There has been a sharp reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards. However, these figures may overstate the improvement because domestic standards for classifying assets as non-performing are less stringent than international standards. Indias banking reforms differ from those in other developing countries in one important respect and that is the policy towards public sector banks which dominate the banking system. The government has announced its intention to reduce its equity share to 33-1/3 percent, but this is to be done while retaining government control. Improvements in the efficiency of the banking system will therefore depend on the ability to increase the efficiency of public sector banks.

Growth of Banking Era in India.

Retail banking in India has grown at a rapid pace in recent years as number of consumers continuously relied upon the new banking products offered under the retail banking Broadly categorized by RBI . Moreover, retail banking has widened the scope of technology and internet by introducing various services related to information technology, telecommunication and electronic data processing. With a contribution of 14% to the national GDP and employing 7% of the countrys total workforce in banking, the retail banking has emerged as the fastest growing banking service in India.

Issues and Challenges

Risk Management & Basel II This step was taken by Bank for International Settlements (BIS) with an objective to focus on credit risk and to create in incentives for the industry to improve its risk management systems. Intention was to decrease risk as much as possible by maintaining quite amount of capital with bank. The whole regulation will in the hand of regulator i.e Central Bank of the Country. Following are three main pillars Minimum capital Requirement. Supervisory Review Process Market Discipline

Consolidation This step was taken to realize banking groups of India to behave like international players as in other sectors India were on fast developing stage. Through this consolidation steps many of the banks step to acquisition and merger to increase their operations for example.

Overseas Expansion As India was emerging a industrial growth globally so to make presence in other countries the decision to go global became important for banks. It will provide quite good exposure to Indian banks to increase operations globally. As international banks are doing the same. Technology Technology became important factor of the growth in Indian banking industry. With development of ATM machines, security, mobile, E- Banking had made banking operation easy i.e transaction making cost bank were reduced. Many Private banks like ICICI, HDFC etc had taken great benefit of it than PSBs. Government reforms The steps through govt. reforms helped lot PSBs as well as Private bank too. Deregulation policy. FDI for banks so global players also to get a chance. Announcement of non objection of going into Banc assurance to PSBs.

Non performing assets Non Performing Assets (NPAs) have a direct impact on the profitability of a bank. The bank will not only lose income on the account but will also have to make a provision for these loans. A high level of NPAs among banks also has a destabilizing effect on the financial system as a whole. Under making standardization of NPA through Acts like SARFEAESI Act and Government Amendment act.

Skilled manpower To increase quality staff with sufficient area knowledge is made important in banking sector. As employees efficiency would only be chance of banks growth. Consumer Protection Through this step various laws regarding consumer protection made so that customer should not get cheated. Conclusion The reforms of government and steps by RBI had made banks efficient today with having lots of facilities and level of competition between banks had made wide choices for their customers. Various regulations saved bank from higher risk and maintain capital. Government also encouraged banks to go global and also expand to other sectors like insurance. Technological development was important which made retail banking easier to grow in India.