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by themselves or through their subsidiaries. wealth management. Today. pension fund regulation. change in CRR and interest rate) to provide better options to potential and new customers.. Further. the banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001. mutual funds. stock broking services. as compared to a 27 per cent growth in the market index during the same period. life and general insurance. It is projected that the sector has the potential to account for over 7. The Reserve Bank of India (RBI). custodian services. this has emerged as a resurgent sector in the Indian economy. . over the last few years. Many big banks operating in the market have made use of the changed regulations (viz.7 per cent of GDP with over Rs. As per the McKinsey report ‘India Banking 2010’. In the current decade. The past year witnessed a lot of turmoil in the Indian banking industry owing to the global financial crisis. setting up offices in foreign countries. most of the leading Indian banks are going global.7. and to provide over 1. banks have diversified their activities and are getting into new products and services that include opportunities in credit cards. Indian banks have performed favorably on growth.5 million jobs. Compared to other regional banks. investment banking. consumer finance. The banking index has grown at a compounded annual rate of over 51% from April 2001 compared to the market index for the same period. Ministry of Finance and other regulatory authorities have made several notable efforts to improve regulation in the sector. etc.Introduction The Banking sector in India has always been one of the most preferred avenues of employment. asset quality and profitability.500 billion in market cap. Adoption of new practices to cater to the demanding economy situation has enabled the banks to meet the changing customer requirements. private equity. The Present Scenario The current economic situation provides a lot of opportunities as well as challenges to the existing banks. It is up to the banks to leverage the opportunities to meet the challenges to the best of their abilities. which registered a growth rate of 27%.
restriction on collection practices and soaring real estate prices. Analysts and credit rating agencies in their reports showed marginal to moderate increases in NPLs in assets such as two-wheelers.The crisis that hit the financial services industry initially in the US and almost immediately in the entire world has moved our focus towards critical systemic issues—not only in the US banking business but also in India. the situation resulted in banks totally stopping the outflow of new credit. To ensure survival. in India. According to Indian Banks Association Data. this check also meant a clear pulling down of new/additional credit outflow. unless and until their positions were clear. banks tried to quickly assess their liquidity reserves and capital position to check if they had any exposure to the failing global entities. these systemic issues are being tackled at the legislative and regulatory levels. was also hit due to upward movement in interest rates. Globally. industry and infrastructural interventions. Over a short span of time. . the solution to the systemic issues will require significant inputs and regulatory. Growth in mortgages. commercial vehicles and unsecured loans. owing to increased pressure on existing loan portfolios and the fear of anticipated mass job losses which would result in high NPAs. which forms 50% of banks' retail portfolio. Additionally. retail credit growth dropped drastically from 30% in 2007 to 10% in 2008.
and application of advanced technology. outsourcing risks. enhancing corporate governance. Basel II implementation Basel II implementation is widely acknowledged as a significant challenge faced by both banks and the regulators internationally. viz. how effectively capital is used will determine return on equity and a consequent enhancement of shareholder value. therefore. a transition from capital adequacy to capital efficiency. In this transition. Besides the increase in the number of risks. Basel II has brought into focus a larger number of risks requiring banks to focus on a larger canvas. I would like to highlight two opportunities that are offered to banks.Issues and Challenges in Banking Global challenges in banking An overview of the global challenges would include the following: Basel II implementation. Comprehensive risk management: Under Basel I banks were focused on credit and market risks...e. Basel II implementation. refinement of risk management systems. It is true that Basel II implementation may be seen as a compliance challenge. I would venture to mention that Basel II implementation has another dimension which offers considerable opportunities to banks. Capital efficiency: Basel II prescriptions have ushered in a transition from the traditional regulatory measure of capital adequacy to an evaluation of whether a bank has found the most efficient use of its capital to support its business i. is being increasingly seen as a medium through which banks constantly endeavour to upgrade the risk management systems to address the changing environment. I propose to cover these aspects now. and improvement in capital efficiency. banks are now beginning to focus on their inter-linkages with a view to achieve a more comprehensive risk management framework. alignment of regulatory and accounting requirements. While it may be so for some banks. Enhancing corporate governance: The issues related to corporate .
Accounting standards are now a part of the set of twelve standards that have been identified by the Financial Stability Forum as conducive to a robust financial infrastructure. which is a relatively new area for Indian banks (particularly more in respect of structured products).governance have continued to attract considerable national and international attention in light of a number of high-profile breakdowns in corporate governance. . In view of the importance of the banking system for financial stability. Derivative activity in banks in India has been increasing at a brisk pace. which is happening in the Indian banking system. sound corporate governance is not only relevant at the level of the individual bank. rules may not be able to capture its essence effectively. is an essential pre-requisite. the need to upgrade the accounting framework needs no emphasis. Therefore. the absence of clear accounting guidelines in this area is matter of significant concern. A good “governance culture” is crucial for financial stability but since it is an ‘intangible’. banks may have to cultivate a good governance culture building in appropriate checks and balances in their operations. Compliance with international accounting standards One of the prime international standards considered relevant for ensuring a safe and sound banking system is the ‘Core Principles for Effective Banking Supervision’ issued by the Basel Committee on Banking Supervision (BCBS). It is widely accepted that as the volume of transactions increases. While the risk management framework for derivative trading. but is also a critical ingredient at the system level.
Conclusion . Application of advanced technology Technology is a key driver in the banking industry. data processing and back office related activities etc. credit card). banks need to focus on motivating their skilled staff and retaining them. banks need to focus on appropriate capacity building measures to equip their staff to handle advanced risk management systems and supervisors also need to equally equip themselves with appropriate skills to have effective supervision of banks adopting those systems. document processing. Recognising the benefits of modernising their technology infrastructure banks are taking the right initiatives. which creates new business models and processes.Outsourcing risks Banks are increasingly using outsourcing for achieving strategic aims leading to either rationalisation of operational costs or tapping specialist expertise which is not available internally. investment management. The beneficiaries are those banks which have invested in technology. and also revolutionises distribution channels. 'Outsourcing' may be defined as a bank's use of a third party. marketing and research. Capacity building As dictated by the changing environment. supervision of loans. Typically outsourced financial services include applications processing (loan origination. to perform activities on a continuing basis that would normally be undertaken by the bank itself. including an affiliated entity within a corporate group. In the likelihood of a high level of attrition in the system. Adoption of technology also enhances the quality of risk management systems in banks. Banks which have made inadequate investment in technology have consequently faced an erosion of their market shares.
The strength provided through timely measures has helped the industry and the economy in many ways. while the credit growth is only 5.4%. However. The Indian banking industry gathered the strength to sustain during such times through its huge deposit base. The alarm will start ringing if the regulator decides to continue with the stimulus package for long. These factors enabled the Indian banking sector to become stronger on the capitalization front and also ensure lower level NPAs and better spreads in the past one-and-a-half decade. The high liquidity with banks forced them to invest in the liquid funds of mutual funds.Thus. banking in India involves the cooperation and participation of many stakeholders for the desired changes to be made in the existing system. the economy witnessed perhaps the biggest and positive impact of higher credit growth in infrastructure. telecom and others. it was partially compensated by the reduction in other funding sources such as private equity and foreign institutional investors. resulting in the banks' looking for other investment opportunities. and a demand in the economy for physical asset creation. which in turn invested in commercial papers of corporates at a lower coupon— corporates would have otherwise borrowed at a higher cost from the banks for their working capital requirements. Last year. when the banking system globally went for a toss. central bank's proactive measures to steadily improve banks' balance sheet strength. the YTD growth in deposits is 9%. The downturn which the economy witnessed has discouraged the banks . an increase in domestic liquidity has had a cascading effect on the asset price inflation. which is consistently on a growth path. leading to fiscal deficit eventually. the Indian banking industry emerged as a strong performer owing to the coordinated efforts of policy makers and the banks in bringing these policies to action for the best of the economy. However. According to a report by Tata Securities.related companies—power. Last year. during the economic slowdown. With dried-up liquidity and no borrowers (given the low credit growth). the banking system will continue to invest excessively in government securities.
the State Bank of India (SBI) which is the first Indian bank to be ranked among the Top 50 banks in the world. According to a research report from Tata Securities. has improved its position from 36th to 34th. retail loans showed a CAGR of 22% during FY05-FY09. Banks are expected to have a low cost of deposits owing to a stable interest rate scenario and ample liquidity in the system. Indian banks continue to build on their strengths under the regulator's watchful eye and hence. Thus. have emerged stronger. and a revival in this segment is not expected to happen soon. 18 Indian banks have been included in the Brand Finance Global Banking 500. as per the Brand Finance study released on February 1. ICICI Bank. the only other Indian bank in the top 100 club has improved its position with a brand value of US$ 2. . Within the retail segment.741 million and grew by 19 per cent in 2011. In the annual international ranking conducted by UK-based Brand Finance Plc. we can very well say that the current situation has provided a lot of opportunities and challenges to the existing banks. The brand value of SBI has enhanced to US$ 1. 2011. housing loans grew by 20% CAGR during the same period and consisted ~10% of the total bank credit. According to the study. Now. The banking system remains. improvement in spreads and stable yield on investments to improve NIMs. Besides the favorable condition for liquidity and high bond yield. the most dominant segment of the financial sector. The banks need to have higher incremental CD ratio. it is up to the banks as to how well they leverage the opportunities to meet the challenges to the best of their capacities. In the past few years.501 million. Indian banks contributed 1. In fact. it is expected that the Net Interest Margin (NIM) will not expand much. Another important area which requires critical attention is fee income.7 per cent to the total global brand value at US$ 14. as always.from having any exposure to unsecured consumer credit. fee income has been the major contributor of revenue for private sector banks.119 million.
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