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BANKING AND INDIAN ECONOMY: ISSUES IN MILLENNIUM Dr. Ajay Prashar1, Professor in Business Management, APJIM, Jalandhar.

Email:, Mobile: 09815815957 Megha Munjal Sharma2, Assistant Professor in Business Management, DAVIET Jalandhar. Email:, Mobile: 8437947555 Rajan Sharma3, Assistant Professor in Business Management, DAVIET Jalandhar. Email:, Mobile: 9888898963 Abstract

The Indian banking industry is considered as one of the largest in the world both in terms service providers and consumer base. The phase of transition in Indian Banking during the period immediate after the Banking Reforms, commencing from 1991-92 and spreading over a decade. The future of Indian Banking as seen at the beginning of the 21st century represented a unique mixture of unlimited opportunities amidst insurmountable challenges. Banking sector is considered as a booming sector in Indian economy recently. Banking is a vital system for developing economy for the nation. However, Indian banking system and economy has been facing various challenges and problems still banking in India has attained fair amount of maturity in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Since Indian economy is witnessing strong growth the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. . In other words the present prospects for Indian Banking represent a unique mixture of future hopes of unlimited opportunities amidst insurmountable challenges presently loaded on account of past sins and carried over legacy.

Keywords: Investment, Banking Industry, Millennium Issues.

INTRODUCTION The banking business has evolved. Where once banks were preoccupied with commodity cash transactions, today theyve become dynamic, multi-channel organizations constantly challenged by unpredictable, highly competitive markets and pressures to improve profitability. But their legacy mainframe core banking systems were designed 2030 years ago and lack the inherent flexibility needed to meet todays challenges; theyre costly to maintain, increasingly incompatible with new business requirements, and do not provide a foundation for future growth. To compete and succeed in todays business environment, banks need to become more agile so that they can better understand market dynamics and anticipate customer needs; design, introduce, or modify products and services; implement a new value delivery system, even if that means reshaping the information infrastructure; and identify resources (people and goods) internally or externally. Banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. Currently as per 2007 , India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

OBJECTIVES OF THE STUDY If you owe a bank thousands, you have a problem; owe a bank millions, the bank has a problem ---Jean Paul Getty

Theres an old banking proverb: If you owe the bank thousands (a small amount), then you have a problem. If you owe the bank millions (a large amount), then the bank has a problem. 1. To study the role of banking sector in the Indian economy. 2. To study the challenges faced by the banks in the millennium 3. To study the governance practices being followed by the banks. 4. To generate an overall view of the Indian Banking Sector.

CHALLENGES FACED BY BANKS IN INDIA The Indian financial sector today is significantly different from what it used to be a few decades back, in the 1970s and 1980s. The Indian financial system of the pre-reform period essentially catered to the needs of planned development in a mixed-economy framework where the Government sector had a predominant role in economic activity. It is by now well recognised that India is one of the fastest growing economies in the world. Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. India has a better banking system in place vis a vis other developing countries, but there are several issues that need to be ironed out. 1. The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. 2. Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks as Interest rate risk which can be defined as exposure of bank's net interest income to adverse

movements in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk. 3. With increased interest in India, competition from foreign banks will only intensify. The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporates. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail segments completely. 4. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. 5. Credit risk is not the only type of risk that banks face. These days the operational risks that banks face are huge. The various risks that come under operational risk are competition risk, technology risk, casualty risk, crime risk etc. The original BASEL rules did not take into account the operational risks. As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect themselves against operational risks. The banking sector in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. NEED FOR CORPORATE GOVERNANCE STANDARDS: The corporate world in general is following a relentless march towards better corporate governance standards and adoption of uniform accounting standards and disclosure requirements. These twin requirements are particularly relevant to the banking sector where depositors funds are many times higher than the equity of the promoters. Instances are not wanting which indicate that members of a few bank boards show reluctance to ratify and adopt the covenants circulated by the Reserve bank in India containing the recommendations

of Dr Ganguly Committee of the professionalization of bank boards. The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalization of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges. Technology is a key driver in the banking industry, which creates new business models and processes, and also revolutionises distribution channels. Banks which have made inadequate investment in technology have consequently faced an erosion of their market shares. The beneficiaries are those banks which have invested in technology. Adoption of technology also enhances the quality of risk management systems in banks. INDIAN ECONOMY AND BANKING SECTOR My bank is always thinking up new ways to help me, and it's been like that my whole life. When I was a kid, my dad took me downtown to the First National, which was right next door to a Theatre. Anyhow, we gave Mr. XY, my life savings, and he gave me a little blue book that had all my information in it. Every month, my dad told me, the bank is going to add some money to your account as a way of saying thanks for your deposit. It's called interest. Time passed, and I got new banks, and each did nice things for me. Which brings us to last week, when I found out that my bank has been doing something new to help me. It's called overdraft protection that is a new role being played by every bank in our economy and in every individuals life. By fixing prudential standards, the regulators can improve the corporate governance and RBI has already taken a number of steps during the recent years to enhance the usefulness of good corporate governance. However, there is lot, which the banks themselves have to do, since adherence to prudential norms is the minimum level of compliance and banks have to achieve higher standards for good governance. The success of corporate governance lies in minimising the regulatory norms and adoption of voluntary codes. As a rule, banking systems are adapted to the structure and needs of the particular economy they exist in. Indian economic policy has been founded on the philosophy of economic growth with social justice. Indian banking system has several outstanding achievements to its credit. The most striking feature is its reach. As a natural corollary to the development in the field of branch banking, development of banking habits in India during the last few decades

has been at an unparalleled pace. The banking system in the country has made a significant contribution to ensure such progress. Sustained efforts have been made by banks to induce people to keep a part of their savings as bank deposits, to expand and diversify their lending portfolio to cover a considerably large number of borrowers than ever before.

CONCLUSION The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super power. There are certain issues which, from the viewpoint of a central banker, are critical for Indian financial sector to become globally competitive. A cautious approach towards increasing efficiency within the framework of overall financial stability can significantly contribute towards India becoming a leading financial force in the world.

Journals/Magazines/Articles 1. O. Mlbert ,Peter (2010), Corporate Governance of Banks after the Financial Crisis - Theory, Evidence, Reforms ,ECGI - Law Working Paper No. 130/2009 . 2. Ubaidullah ,Jerinabi , Corporate Governance Of Banks In India 3. Y V Reddy (2005), Corporate governance in banks in India, BIS Review 88/2005. the Corporate Governance for Banking Organizations May 29, 2006 Karachi, Pakistan 5. Chakrabarti, Rajesh corporate governance in India-evolution and challenges 6. Gennaro Mauro Di(2007), The Role of Internal Audit in Corporate Governance. Case: Fiat Group International In-house Counsel Journal Vol.1, No.2, November 2007. 7. Basel Committee on Banking Supervision(2010), Principles for enhancing Corporate Governance ISBN 92-9197-818-3 (online) 8. Bajaj, Jyotika(2008) Role of RBI in a liberalised economy 9. Kumar Ram K,(2010), RBI wants role for depositors in management of urban coops The Hindu-Business line. 4. International Finance Corporation(2006)The 2006 BCBS Guidelines on Enhancing

10. LEELADHAR V (December 2004) , Corporate Governance in Banks Reserve Bank of India Bulletin. 11. Jadhav Narendra ( ), Emerging Issues in Banking and Financial Sector in India

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