FUTURE CHALLENGES FOR FINANCIAL

SERVICE INDUSTRIES

Impact of globalization:-
Globalisation and liberalisation has created substantial impact on the financial service industry. They are
as follows:

A. Increase in global competition,

B. Reduction of distinction between universal and specialised financial institutions,

C. Blurring of separation between banks and other financial intermediaries/institutions,

D. Increase in complexities of banking activities and operations to the extent of integration with
international arena,

E. Increase in challenges to bank managers/owners/regulators in fulfilling their respective

responsibilities,

F. Increase in availability of arbitrage opportunities by undertaking operations at favourable locations.

COVID-19 CRISIS:-
Various challenges that the financial sector faces are as
follows:-

- The banks may run the risk of increased bad loans or non-performing assets (NPAs)
if the borrowers who avail the moratorium are unable to generate cash or the cash
generated is insufficient to honour the required payments of interest and instalments in
a timely manner.
- There could be an aggregation or accumulation of provisions and losses in the period
in which the exemptions are lifted.

- If the pandemic continues for a longer time than anticipated, there could withdrawals
of deposits, which could result in the replacement of low cost deposits with high cost
borrowings resulting in an adverse impact on net interest income, spreads and
margins.

- Banks may not find proper avenues for lending due to the status of the economy
resulting into either excess funds lying idle or being invested in low yielding
investments

There would definitely be challenges faced by banks. However, if the banks have
robust risk management functions and can partner with borrowers who show potential
and can adapt to the new normal, there would be enough positives and benefits. The
key would be to identify the right set of borrowers and partner with them to help them
through this entire cycle.

BASEL 3 NORMS:-
Higher Capital Requirement: Presently, in India, most banks' common
equity ratio falls in the range of about 6-10 per cent. Hence, in my opinion,
banks may able to comply with the higher capital requirement as per Basel III
norms at least till 2014/15. This, without infusing any fresh equity, even while
taking into account the marginal increase in capital requirement.

However, the increase in the minimum capital ratio, combined with loan
growth outpacing internal capital generation in most government banks, will
lead to a shortfall of capital. This will mount mainly between 2015/16 and
2017/18 due to introduction of a Capital Conservation Buffer (CCB). The CCB
is designed to ensure that banks build up capital buffers during normal times,
which can be drawn down as losses are incurred during a stressed period. The
requirement of capital will be less to large private sector banks due to their
higher capital ratios and stronger profitability. However, some public sector
banks are likely to fall short of the revised core capital adequacy requirement
and would therefore depend on government support to augment their core
capital.

Pressure on Return on Equity: To meet the new norms, apart from

government support a significant number of banks have to raise capital from
the market. This will push the interest rate up, and in turn, cost of capital will
rise while return on equity (RoE) will come down. To compensate the RoE
loss, banks may increase their lending rates. However, this will adversely
affect the effective demand for loan and, thereby, interest income. Further,
with effective cost of capital rising, the relative immobility displayed by Indian
banks with respect to raising fresh capital is also likely to directly affect credit
offtake in the long run. All these affect the profitability of banks.

Pressure on Yield on Assets: On account of higher deployment of funds in

liquid assets that give comparatively lower returns, banks' yield on assets, and
thereby their profit margins, may be under pressure. Further higher
deployment of more funds in liquid assets may crowd out good private sector
investments and also affect economic growth.
Creating Low cost Liability Portfolio:-
Assets Liability Management:-