Gearing Up for New Competition: Shifting Banking Paradigm

source indian express 20.9.2015

The story of Indian banking has witnessed phenomenal changes in both pre and post Independence course of evolvement of the Indian economy. The aggregate deposit which stood at just Rs 8 billion as on March 1951, grew to Rs 91,446 billion as at end March 2015; the bank credit increased from Rs 5 billion as at end March 1951, to Rs 70,396 billion by March 2015 and the branches which stood at 8,262 in 1969 expanded to 1,25,863 by March 2015.

Some of the defining moments in the Indian banking industry in this growth story have been nationalization of 14 private Indian banks in 1969 and another 6 in 1980; embarking on the road to financial sector reforms – post 1991, by allowing entry of new private sector banks and deregulation of the Indian banking sector. Deregulation by allowing 74% foreign stake in the private sector banks, deregulation in terms of branch bank licensing and interest rates have all been taken up to make the banking industry more competitive and more penetrative.

Indian banking, gearing up for global competition, was first tested for its resilience by the financial market turmoil of 2008. The world however, got a few cues from the Indian system and some of the emerging economies are still grappling with the slackened growth and recessionary symptoms.

In addition to the global challenges, the Indian industry is another paradigm shift transformation of its banking culture and banking profile.  Banks have now evolved further from Core Banking and ATMs to more of virtual banking. Interbank Mobile Payment Service (IMPS), an instant, 24X7, interbank electronic fund transfer service through mobile phones transactions by way of services such as internet banking, mobile banking; mobile wallet etc have metamorphosed the face of Indian banking in last two decades.

Financial Inclusion would need to be placed at the apex of the banking agenda over the next few years, as it is an unfinished agenda of last four decades. Once banks make progress on financial inclusion, they can then go on addressing other constraints. Banks will need to develop profitable models for financial inclusion. For this the delivery model will need to be recast from cost centric to a revenue generation model. Some of the models incorporating provision of overdraft facility coupled with the Saving Banks products and providing entrepreneurial credit in the form of Kisan Credit Cards (KCC)/ General Credit Cards (GCC) etc are already being given by some of the Banks. Licenses given to small payments Banks by RBI recently and more of such impending licenses will generate competition amongst banks to come up with more customised products for the financially deprived strata of our society.

The key of the risk management is to ensure that banks have adequate capital and have a framework for risk based pricing of products and services. While the Basel guidelines will bring out the challenges of capital planning, banks have to strive hard to meet the challenges of capital requirements.