Changing scenario of Indian banking

sector
1

Prof.RupeshR.Dahake,
1st & 3rd

Prof.Sachin S. Panchabhai,

Prof.Pravin Katariya

Author Assistant Professor (MBA Department)

Affiliation: -DattaMeghe Institute of Engineering Technology &Research, SawangiWardha

Email: -rupeshdahake786@gmail.com
Mobile no: - 9371699986
2nd

Author Assistant Professor (MBA Department)

Affiliation: -Dr. Ambedkar Institute of Management Studies & Research, Nagpur.

Email: -panchabhai_ss@rediffmail.com
Mobile no: - 9423407072

Abstract
Indian banking industry is one of the most important pillar in the Indian economy,
banking sector is a backbone of economy of any country. Development of banking
sector always leads development of country we can judge if this sector grow
positively it means economy growing. That why everyone say the Indian banking
sector, being the barometer of the economy, is reflective of the macro-economic
variables. While the Indian economy is yet to catch strength, the Indian banking
system continues to deal with improvement in asset quality, execution of prudent
risk management practices and capital adequacy, improving customer services
experience and expansion of banking activities in rural area.

In this paper an

attempt has been made to study changing scenario of Indian banking sector and
also study opportunities and challenges ahead of Indian banking sector.
Keywords: Nonperforming assets, Risk management, financial inclusion,
Rapo Rate, monetary policy

INTRODUCTION:
Today world economy health is not well, many big nations economy collapsing due
to weak financial system. It now cleared if country dont have good financial system
that country will definitely in danger. Main components of the financial system is
banks, we all knows most of the financial crisis arise do to only bankruptcy of bank.
In the year 2008 financial crisis in the USA due heavy loss arise in the financial

institutions due to insolvency and NPA etc. do to this crisis entire world face heat of
this in the form of heavy job cutting, low investment in developing nations etc.
financial sector play vital role to shape country economy.

Now many European

nations economic condition not well. Since the Lehman Brothers declared
bankruptcy in 2008, incidences, every now & then, have sustained the concerns
over global financial stability. While most emerging market economies (EMEs),
including India, have recovered from global financial crisis, advanced countries
continue to be plagued with growth figures looking dismal. Euro zone crisis seems to
be spreading across the EU countries following ripple effect, political turmoil persists
in Middle East & North African (MENA) region, economic stagnation in US augurs no
imminent respite from the worsening global situation. Indian banks, however, not
only emerged unscathed from the global financial crisis but continued to manage
growth with resilience during 2010-11. Over the past couple of years, the Indian
banking sector has displayed a high level of resiliency in the face of high domestic
inflation, rupee depreciation and fiscal uncertainty in the US and Europe. In order to
stimulate the economy and support the growth of banking sector, the Reserve Bank
of India (RBI) adopted severe policy measures such as increasing the key monetary
policy rates such as repo and reverse repo 16 times since April 2'009 to Oct 2011
and tightening provisioning requirements. Amidst this economic scenario, the key
challenge for the Indian banking system continues in improving their operational
efficiency and implement prudent risk management practices. Some of the key
trends expected to emerge in the near future are as under-Economic slowdown
likely to impact the demand for credit. Today in India Reserve Bank of India enough
to handle this type of crises within the country. Primarily being an agrarian
economy, the liberalization in India saw resurgence of Services sector on the fast
lane. Post liberalization and globalization of the Indian economy, Indian banking
sector has undergone paradigm shift in scope, content, structure, functions and
governance. Their very character, composition, contours and chemistry have
changed. And, the process continues.
The advent of information and communication technology has further brought about
radical and perceptible change in the operational environment of the banks.
Presently, banking sector is faced with multiple and concurrent challenges,
increased competition, rising customer expectations and diminishing customer
loyalty. What best the banks can do? In this fast changing and complex scenario,
possibly, the only solution seems for each bank to give the customers optimum

blend of technology and personalized services in the most convenient manner at

low cost.
HISTORICAL BACKGROUND:In India, the modern banking system was initiated with the establishment of the
Presidency Bank of Bengal in 1806, and the Presidency bank of Madras in
1840.However, the post-independence period witnessed the massive growth in the
Indian banking sector. Reserve Bank of India, was nationalized on January 1, 1949
under the terms of the Reserve Bank of India Act, 1948. In 1949, the Banking
Regulation Act was enacted which empowered the Reserve Bank of India to
regularize, control and inspect the banks in India. The Banking Regulation Act also
provided the number of new banks or branches of an existing bank would be
opened with a license from the Reserve Bank of India. Before Nationalization of
Banks, despite control and regulation by Reserve Bank of India, banks in India
except the State Bank of India continued to be owned and operated by private
personnel. But by that time the Indian Banking Industry had grown in size and
employed a large number of people thus became an important tool for the
development of Indian economy. In order to ensure more equitable and purposeful
distribution of credit on July 19, 1969 the Government of India issued an ordinance
and nationalized 14 largest commercial Banks. In April 1980 six more commercial
banks were nationalized. With nationalization of these banks the Government of
India controlled an overwhelming majority of the banking business in India.
During 1990s India started opening up with changes in the economic policies and
introduction of new institutional mechanisms of economic liberalization and financial
sector reforms. The government, initially licensed small number of private banks
which increased over the years. Now, the next stage for the Indian banking has
been set up with the proposed relaxation in the norms for Foreign Direct
Investment, where all Foreign Investors in banks may be given voting rights which
could exceed the present cap of 10%, at present it has gone up to 74% with some
restrictions.

In the evolution of this strategic industry spanning over two centuries,

immense developments have been made in terms of the regulations
governing it, the ownership structure, products and services offered and the

technology deployed. The entire evolution can be classified into four distinct
phases.
1. Phase I- Pre-Nationalization Phase (prior to 1955)
2. Phase II- Era of Nationalization and Consolidation (1955-1990)
3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and
Partial Liberalizations (1990-2004)
4. Phase IV- Period of Increased Liberalizations (2004 onwards)

Literature Review:A comprehensive study by Dr. Krishna A. Goyal & Vijay Joshi they stated Over the
years, it has been observed that clouds of trepidation and drops of growth are two important
phenomena of market, which frequently changes in different sets of conditions. The pre and

post liberalization era has witnessed various environmental changes which directly affects
the aforesaid phenomena. It is evident that post liberalization era has spread new colors of
growth in India, but simultaneously it has also posed some challenges.(Indian Banking
Industry: Challenges And Opportunities International Journal of Business Research and
Management (IJBRM), Volume (3) : Issue (1) : 2012)

Prof.Shilpi Singh attempted to find out organizations all over are rushing to
implement the latest ideas on management, sometimes to the point of overuse. The
major challenge now for banks as well as any ot her organisation is therefore how to
develop their social architecture that generates intellectual capital as the
quintessential driver of change. Developing the individual or human capacity is an
integral element of building capacity and, in fact, capacity building initiatives are
now increasingly becoming almost an index of institutional quality. Taking the
banking industry to the heights of excellence, especially in the face of the a
forehead

detailed

emerging

realities,

will

require

combination

of

new

technologies, better processes of credit and risk appraisal, treasury management,

product diversification, internal control and external regulations and, not the least,
human resources. (International Journal ofApplication or Innovation in
Engineering & Management (IJAIEM) Volume 2, Issue 1 January 2013 ISSN
2319 -4847)
Prof.Sunita Agrawal1 and Prof.Ankit Jain2 the banking sector in India has
undergone

significant

transformation

in

the

past

few

years.

conducive

macroeconomic environment, the landmark foreclosure law, falling interest rates,

ample liquidity in the system, the fast spreading technological revolution, and huge
potential in the retail segment augur well for Indian banks. However, the numerous
challenges faced by banks such as increasing competition, pressure on spreads, and
systemic changes to align with international standards have necessitated a
reevaluation of strategies and processes in order to remain competitive in this
dynamic environment. As per the census records, only 30.1 per cent of the rural
households are availing banking services. One of the reasons may be nonavailability of bank branches in the neighborhood. The existing rural branches of
many of the big banks are being closed as they have become unviable. Banks need
to think out of the box where box is the representation of all the tested, tried
things that always worked in the past. They would have to think outside the
boundaries of current practices, products, services, organizations, and industries as
they fall behind the treadmill of faster and more rapid pace of change. The new
business environment thus puts a premium on creativity and innovation more than

ever before. This calls for innovative solutions. Banks may have to go for mobile
banking services for a cluster of villages. Alternatively, technological institutions
have to come out with low cost, self service solutions/ ATMs. The government and
the RBI should actively support such research efforts. (ABHINAV NATIONAL
MONTHLY

REFEREED

JOURNAL

OF

REASEARCH

IN

COMMERCE

&

MANAGEMENT VOLUME NO.2 ISSUE NO.1ISSN 2277- 1166)

Objective of the Study:

To
To
To
To

know the banking sector of India

study current scenario of banking sector in India
find the challenges & opportunities of banking sector.
suggest improvement.

Research design:The report has been developed based on quantitative. Data and information
collected from various web sites, various banking sector research report of various
research institute etc.
Methodology:1. Desk research: A detailed review of relevant literature for the Indian banking
sector was conducted at this stage.
2. Collation and analysis of information:

All data and information gathered

through secondary data was collated and analyzed for the purpose of developing
the research paper.

CHALLENGES BEFORE THE INDIAN BANKING SECTOR

The main challenges faced by banks encompass both the prevailing economic and
business environment as well as evolving developments of this industry. These have
been summarized below

Deceleration in economic growth impacting banking sector growth. Quite

clearly this is one factor which affects the growth and prospects of this sector.
The fact that the Indian economy has slowed down in the last three years is

significant here.
Maintaining asset quality in the face of growing NPAs and restructuring of
advances. There is a clear link with the overall state of the economy.

Augmenting capital and maintaining prudential capital adequacy in view of

the implementation of Basel III.

Preserve and augment profitability of banks in a stressed environment. Banks
are witnessing pressure on margins on account of capital requirement,

provisioning, regulation, liquidity, volatile interest rates etc.

Achieving desired credit growth in a weak economy.
Implementation of Financial Inclusion & DBT (Direct Benefit Transfer). As the
RBI has been reiterating the need for focusing on financial inclusion this
factor has become a challenge as it has to be addressed while keeping an

eye on capital, quality of assets and profitability.

Increased competition from both within the banking sector with various banks
becoming aggressive in the existing space as well as potential competition

from new entrants.

Adopting and adapting to technological changes/ innovation to meet

regulatory requirements as well as to tap alternative channels in banking

Dealing with technology related frauds and improving risk management

systems of banks
Improving quality of human resources for efficient working of banks in view of
the latest technological developments.

Measures:

Stringent norms pertaining to NPAs and restructured assets. The level of NPAs
has gone up sharply this year which becomes more worrisome when the
restructured assets are also factored in.

Target Consolidation/mergers and entry of new players. This would involve:

Conversion of some urban co-operative banks into full-fledged commercial

banks,

Separate licenses for niche/specific banking operations/functions such as

wealth management, investment banking, wholesale banking or retail
banking. This has been spoken about in some detail by a special Committee
set up by RBI on financial inclusion.

Reforms in Corporate debt market, Government Debt Market & Money

Market. Activating corporate funding through alternative channels of money
market and bonds by introducing benchmark spreads and transparency in the
markets. (The RBI has already reintroduced IRFs and also has put up a paper
on financial benchmarks).

Focus on asset liability management for banks.

Increased

Usage

of

Technology

in

Banking.

Leveraging

of

technical

developments on various banking activities

Focus on Financial Inclusion/Deepening

Introduce measures for the removal of structural bottlenecks on credit

delivery and free pricing of financial assets

Bring about transparency and improvement in clearing and settlement

practices

Reforms aimed at creating liquidity and depth for efficient price discovery of
all banking products

Impact of Measures:

Norms on NPAs would improve quality of assets & recovery, liquidity and the
overall balance sheets of banks.

Consolidation of banks and new players would result in competition and

consequently in innovation and efficiency/productivity of banks. It would also
bring about economies of scale and economics of scope for banks.

-Conversion of some urban cooperative banks into full-fledged commercial

banks will help Banks to participate in main stream line of business on lower
risk.

-Increased usage of technology could lead to technological up gradation and

more e-products would be designed. Technology will help sustain and scale
business.

-Financial

deepening

would

make

banking

more

inclusive,

improve

geographical coverage, reduce regional imbalances and credit to the

unorganized sector would see an increase.

Ten Major Trends that will Shape the Indian Banking Industry
1. Mortgages to cross Rs 40 trillion by 2020:
Mortgages typify the retail banking opportunity in an economy. The total
mortgages in the books of the banks have grown from 1.5 percent to 10
percent of the total bank advances, in a period of ten years. The ratio of total
outstanding mortgages, including the Housing Finance Companies (HFCs) to

the GDP is currently 7.7 percent. If by 2020, this ratio were to reach 20
percent, a number similar to that of China, we could expect the mortgage
industry growing at an average rate of over 20 percent during the next
decade.
2. Wealth management will be big business with 10X growth:
Going forward, wealth is expected to get further concentrated in the hands of
a few. As illustrated in Exhibit 1d, the top band of income distribution is
expected to grow most rapidly over the next decade.
3. The Next Billion will be the largest segment:
Also illustrated in Exhibit 1d is the fact that the income group right below the
middle class in the annual house hold income range of Rs 90,000 to Rs
200,000 per annum will be the largest group of customers. These customers
will be profitably served only with low cost business models having low break
even ticket size of business. The next decade would witness banks
experimenting with different low cost business models, smaller cost effective
branches and new use of technology to serve this segment profitably.
4. The number of branches to grow 2X; ATMs to grow 5X:
India has a very low penetration of branches and ATMs as compared to some
of the other developed and developing nations as illustrated in Exhibit 1e.
Exhibit 1f highlights the usage pattern of various banking channels in terms
of number of visits. It is evident that the bank branches and ATMs are by far
the most popular channels, despite a decade of promotion of alternate
channels. The experience in developed economies also corroborates that
branches and ATMs continue to be the critical channels, although certain
transactions have shifted to alternate channels. As such, there is a
requirement of at least 40,00050,000 additional branches and 160,000
190,000 additional ATMs in the coming decade. This will be 3 times more
than the branches and ATMs launched in the last decade.

5. Mobile banking to see huge growth and will redefine transaction

banking paradigm:
As illustrated in Exhibit 1f, the uptake of internet and call centers is low in all
segments other than foreign banks. Comparing with usage pattern in US, the
significant potential in online and phone channels is apparent. However,
India may evolve differently. The penetration of internet and broad band
access in India has been low so far. However, with the advent of mobile
banking, the access to banking facilities could completely get revolutionized
over the next decade.

6. Customer Relationship Management (CRM) and data warehousing

will drive the next wave of technology in banks:
Exhibit 1h illustrates that the average number of banking products per
customer in India is significantly lesser than the global benchmarks. There is
a significant potential for cross selling amongst all categories of banks in
India. Given that cross selling is highly costeffective as compared to all
other means of customer acquisition, banks will adopt CRM strategies

aggressively in pursuit of costeffective business models described in point 3

above.
7. Banking margins will come under pressure:
The next decade will see a dramatic change in margins as the wholesale
debt markets deepen and corporate customers access the whole sale
markets directly. Further, should the savings bank rate be liberalized, banks
will move to a regime of low margins. Exhibit 1i illustrates the findings of a
recent IBA survey conducted across banks to understand their perception of
the future trends.
8. New models to serve the Small and Medium Enterprises (SME):
Exhibit 1k illustrates the results of a survey conducted by FICCI to gauge the
level of satisfaction among large, medium and small business customers with
regard to banking services.
9. Investment banking will grow over tenfold:
Investment banking will be among the fastest growing segments in the
banking industry rising from 4 percent to 7 percent of the entire corporate
banking revenue pool. The larger corporate customers expect to demand
higher support for international expansion and mergers and acquisitions over
next decade as shown in Exhibit 1l. Further, as the wholesale debt markets
deepen, the larger corporates would avail of advisory and capital market
services from banks to access capital markets.
10. Infrastructure financing to hit over Rs 20 trillion on commercial
banks books:
As India continues to rely on private funding for infrastructure development,
infrastructure will occupy a larger share of the balance sheets. Half of the
debt finance for infrastructure today comes from banks.
CONCLUSION

Indias banking sector now in new era, there so many challenges and
opportunities we already discussed in this paper.

In coming year Indian

banking sector will is real backbone of economy there are huge scope for
banker to expand his operation and earn more profit with help of new
technology like mobile banking, cloud computing, internet bank etc. In my
point of view banker should give more focus on customer relationship
management than new technology and also train and recruit good
employees for the organization so they can handled customer properly.
Indian banking sector will be the world biggest market in the world.
Bibliography:

Indian Banking 2020 Report September 2010 By bcg.com

Indian Banking Industry: Challenges And Opportunities International

Opportunities & Challenges of Indian Financial Markets Report By PwC India

Reimagining Banking in India 2013 Report by by McKinsey & Company, Inc.

Journal of Application or Innovation in Engineering & Management

(IJAIEM) Volume 2, Issue 1 January 2013 ISSN 2319 -4847

Wikipedia.com