INTRODUCTION TO BANKING SECTOR AND ITS FUTURE SCENARIO

INTRODUCTION TO BANKING SECTOR AND ITS FUTURE SCENARIO

BANKING SECTOR:

The banking system of India consists of the central bank (Reserve Bank of India), commercial banks, co-operative banks and development banks (development finance institutions). These institutions which provide a meeting ground for the savers and the investors, form the core of Indias financial sector. Through mobilization of resources and their better allocation, Bank plays an important role in the development process of underdeveloped countries.

Banking development in India has been, by and large, a state-induced activity. The Reserve Bank of India was nationalized in 1949 followed by the nationalization of Imperial bank of India i.e. now The State Bank of India in 1955.In 1969, 14 major commercial banks were nationalized and the exercise was repeated when 6 more commercial banks were nationalized in 1980.Thus, prior to economic reforms initiated in early 1990s, banking business in India was a near- monopoly of the government of India and banking activities were characterized by barriers to entry, control over pricing of financial assets, high transaction costs and restrictions on movement of funds from one market to another. The underlying philosophy of this approach was to encourage growth, via availability of adequate credit at reasonable/concessional rates of interest, in areas where commercial considerations are not allowed for disbursal of credit.

Nationalization of commercial banks was a mixed blessing. After nationalization there was a shift of emphasis from industry to agriculture.  The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalization created its own problems like excessive bureaucratization, red-tapism and disruptive tactics of trade unions of bank employees.

Today banks have to look much beyond just providing a multi-channel service platform for its customers. There are other pressing issues that banks need to address in order to chalk-out a roadmap for the future. To cope with cost pressures and increased competition as well as to retain existing customers, banks have started venturing into newer territories.

This is one of the main reasons why banks are focused on retail banking in a big way. The main advantage of getting into retail banking is that the risks involved are lesser in this segment. There are lower Non Performing Assets (NPAs) in retail banking. This is one of the reasons why loans such as those for housing, automotive, etc are being touted by banks like never before. Credit cards and debit cards is another focus area for banks. Therefore Indian banking industry, today is in the midst of an IT revolution.

BANKING INDUSTRY VISION:-

Consequent to nationalisation in 1969 and economic liberalisation in 1991, banks. In India are on fast track growth in size, technology and deliverables to customers. Every aspect of banking will be transformed by new technology, Customer friendly products, delivery channels, relationship banking, dependency on IT systems and competitive pricing would be the driving forces. The most successful institutions will be those that combine visionary technology and very competitive pricing with strong relationships and brands built on trust.

Indian Banking sector has undergone a thorough change and remarkable transformation during the last 17 years. The banking reforms implemented on the basis of the blue print provided by narasimham committee and other wide ranging supportive measures initiated and implemented by government of India and RBI have contributed significantly to the enhancement of financial strength soundness resilience and operational efficiency of banks. Banks in India have been showing stronger balance sheet footing with better asset quality in post reform period. The post-reform has also witnessed advent of new players and introduction of new instruments. Banks today operate in an increasingly deregulated and market driven competitive environment of operational flexibility. We are also aware that there has been constant strengthening of financial supervision and prudential regulation in India. With re-inforced strength and stronger financials Indian Banks are now capable of taking advantage of increasing opportunities both domestic and global for further growth with diversification.

Indian banks have been able to achieve good results on a wide front in spite of adoption of prudential norms relating capital adequacy, asset classification, income recognition and provisioning and other regulatory norms and guidelines and adherence to the social objectives of expanding financial inclusion and directing credit to weaker and neglected sections of society.

GROWTH OF NEW PRIVATE BANKS:

It is amazing the way the new private sector banks have established themselves within a short period of their existence with only a 5% share in the total number of branches they had a share of 16% in the total assets. The old private sector banks, on the other hand, despite being in existence for long had to be content with a share of 5% in the total. Agriculture and the priority sectors continued to be neglected as far as credit deployment is concerned. While credit to industry expanded by 32%, the growth in advances to priority sector fell to 16.5% from 25% previously. Banks in the private sector seemed to shy away from the priority sector. Growth in agricultural credit decelerated to 20%. None of the private sector banks have achieved the separate individual targets for the agriculture and weaker sectors. Services sector got the largest share in the incremental credit after industry.

As the banks resorted to use of derivatives as a tool of risk mitigation and diversification of income, the off-balance sheet exposures of the banks scored significant growth. The off-balance sheet exposure of foreign banks was highest at 2830% of their total assets; the share of new private sector banks at 301% was next in order. Public sector banks and private sector banks had a share of 61%and 57%, respectively. Foreign banks had the highest share of non 0 interest income in the total income. Public sector banks had the lowest non-interest income.

CONCENTRATION:

Top100 banking centres in the country continued to have the largest share in the balance sheet of commercial banks if in 2001 this centres had 22% of the bank offices, 59% of deposits and 75% of credit by 2008 the top100 centres had 26% offices, 70% deposits and 79% of credit, suggesting a concentration of banking growth in metropolitan and urban centres. Similarly, most of the expansion in bank branches took place in urban and metropolitan areas, while the share of rural branches declined further to 40% in the total.

Various gropus of banks reported improvement in net profits, return on assets(indicating efficient deployment of assets),and return on equity(indicating prudent use of capital). Capital to risk weighted assets and the quality of assets are the two important indicators of a sound banking system. Both the indicators showed considerable improvement over the years. However, in absolute terms, the gross non-performing assets of the banks increased for the first time in six years. How far it is due to to their choosing high risk return loans is not clear. The amount recovered through SARFAESI which was the preferred channel of non-performing asset recovery. The report also analyses the extent to which the use of information technology transformed the functioning of the Indian financial sector. Technology has helped banks to handle the phenomenal expansion of the volume of transactions, reduce costs and improve accessibility to remote and rural areas.

Banks would have adopted the following strategies to move to hi-tech banking as a necessity of e-commerce, e-banking etc:-

  The key to survival of banks, therefore, is retention of customer loyalty by providing value added services tailored to their needs, using state-of-the-art technology, instead of relying on outdated practices.

  With the identified select number of branches for creating hi-tech banking, an ideal centralised solution can be considered. A countrywide network of computers could offer banking products to select corporate clients and high net worth individuals.

  Needless to say, flawless security and seem less integration of operations through untiring efforts of employees and cohesive support from the management would be the key factors that will enable banks to make successful inroads into enabled 'New Age' banking.

  Once the centralised topography is put in place, the infrastructure required for banking and commerce'(with the necessary security) can be built to provide state-of-the-art innovative services

  Flexi-work atmosphere with banking officials working out of their homes, without the need to go to offices, may be put in place. Instead of intra bank

  Cross country transfers, there may be interbank movement of senior officers in the public sector domain, if at all it remains so.

  Allocation of capital for each product/service and also borrower wise capital allocation, as far as credit, market and operational risks are concerned, through sophisticated risks management techniques

  All performance measurements shall be risk-adjusted, as Risk Adjusted Performance Measurement (RAPM) plays a key role in assessing the effectiveness. Risk-adjusted salary packages cannot be ruled out.

  In the case of settlement in the retail segment, extensive use of debit card by the public and acceptance by merchant establishments would replace cheque cutting habit of customer, as currency/paperless financial deals would dominate.

A combination of regulatory and competitive reasons have led to increasing importance of total banking automation in the Indian Banking Industry. The technology oriented banking has become one of the latest mantras of success in the market, especially to win over the customers.

Quality people often need more than money to relocate themselves. Nearly four decades ago, man landed on the moon. Within a decade and a half from now, perhaps man can avail of banking services there, if the exponential technology boom both in the art and science of banking can be taken as an indicator.