Introduction:
”An establishment authorized by a government to accept deposits, pay interest, clear checks, make loans, act as an intermediary in financial transactions, and provide other financial services to its customers.”
– Business dictionary[1]
The above defination brings out the key aspects of banking which can be broadly classified into acceptance of deposits from public, make loans and act as intermediary to the public in various ways. With this broad defination this essay has been drafted to bring ou the Challenges and opportunities in the Indian banking sector.
Challenges in Indian banking sector:
Banking system across the globe has be challenged by the global economic slow down and the Indian banking sector is no exception to this case. Apart from the global economic slow down the following factors also have a significant impact on the Indian banking system.
1. Non-performing asstes:
‘Non-performing asset’ (NPA) is defined as a credit facility in respect of which the interest and/ or instalment of principal has remained ‘past due’ for a specified period of time. From 31st March 2004 the specified period which classifies the asset as a NPA was set at 90 days since the date on which the payment to the bank falls due.
In the past decade the NPAs in India have increased in an alarming rate and stand as a significant hurddle to the economy compared to the NPAs in other countries. CARE has ranked India as the 5th with the largest NPA levels. RBI on 28th Aug 2018 have stated that in India the NPA levels are 12.1% of the of the gross advances made by the end of March 2018.[2]
NPAs cannot be regarded as the failure of as asset to yield returns alone it can also be taken as a sign that there is an economic slow down in the country. The 4 other counties ranked over India by CARE on largest NPA levels are Greece, Italy, Portugal and Ireland and all of the these counties have battled severe debit cricis in the recent past.
One of the predominant ways in which major countires have fought NPAs were through creation of state owned asset management companies to manage them and buy reducing the tax rates. The other major reform carried out buy the countires was the securitisation of debit to equity in prospective businesses.
2. Monsoon and weather:
Agriculture plays a major role in the Indian economy. Every farmer is linked with the banks mainly for loan purposes. The Monsoon and climatic conditions in our country is becoming more and more unpredictable that these farmers lose their produce at adverse situations. This in turn results in them not being able to pay back their dues to the banks and thereby piling up the NPAs of such banks. This is more prevalent in states such as Utttar Pradesh, Tamil Nadu, Maharashtra etc. This is a major challenge to public sector banks rather than private banks as they refrain from lending to farmers. The poor recovery of such loans and the former Government’s decision to waive all loans to farmers, by the former government cost around Rs.10,000 crores to the banking sector. Banks cannot possibly take even precautionary steps to abstain from such situations.
3. Gaining People’s Trust:
Banks are institutions that deal with people’s hard earned money. The main reason why people of the previous generation found it hard to deposit money in banks is due to lack of trust. But eventually banks especially public sector ones evolved to gain people’s trust. The scenario is going south at present due to various scandals that are emerging one after the other in the banking sector. Businessmen who borrowed huge sums of money failing to pay their debts, slander in the top management, alleged inside involvement in frauds etc are recent events that has come to light. These circumstances make people feel that the common money lost in such scandals are part of their deposits. The recent FRDI bill created chaos among people that their deposits were at risk. Only after extensive awareness initiatives by banks this issue came to a halt. These kind of news has the tendency to affect human psychology adversely and thus, gaining back people’s trust after such events proves to be of a greater challenge to banks.
4 . BASEL III and Capital Adequacy Ratio (CAR) minimum requirement:
RBI has notified all Scheduled Commercial banks to maintain a minimum CAR of 11.5% inclusive of Capital Conservation Buffer (CCB) by 31st March 2019.[3] The Government of India has been involved injecting capital into the banking structure in a phased manner through a scheme ‘Indradhanush’ to meet the above requirement. The increase in CAR is expected to reduce the ROE and with the BASEL III norms restricting the banks from enjoying higher leverage the cost of capital for the banking sector can expect to increase.
5. Cyber threats
With the advent of smart phones and the ease in internet accessibility, customers are relying more and more on the digital channels for their banking needs. Simultaneously, anti-social elements have also increased considerably. As a result, cyber crime has become a huge threat to the banking system. The FSR had labelled cyber-risks as a high risk zone for India’s banking sector. This came to light when a massive data breach of 32 lakh debit and credit cards happened in 2016. Some of the common attacks include phishing, vishing and social engineering. In the last 5 years, the volume of bank fraud has increased by 19.6%.
6. Knowledge engineering:
AI in banking is on the uprise, in the last few years. But for a diverse nation like India, the various languages and the lack of credible data seem to be challenging. There are many potential risks in the AI implementation if the data sources are incorrect. The structured mechanism of Artificial Intelligence cannot operate without the right kind of data, especially systems like fraud detection AI or KYC compliance AI system. Also, the need for skilled personnel is apparent in the face of scarcity of trained human resources.
7. Cash crunch:
In the months of April and May this year the news of cash crunch hit the national media with ATMs not able to dispense cash demanded by the depositors. This situation have said to have arised in the nation due the slowing down of deposits due to investments channeled towards other asset atracticve asset classes over the bank deposits probabily due to lower interest rates and the panic that has hit the public with respect to the FRDI bill. The Economic Times reported that bank deposits grew by 6.7% during 2017-18, lowest growth rate since 1963.[4]
Opportunities in Indian banking sector:
Indian Banking sector is growing at a rapid pace with the increasing number of banks both public and private operating in the market. The following are a few opportunities that the Indian Banking sector can exploit to improve performance.
- Financial Inclusion:
Financial Inclusion refers to making banking accessible to every single induvidual present in the nation. In the Indian scenario financial inclusion is often identified as a challenge rather than an opportunity due to the fact that the degree of variation present in the financial needs of the Indian population is huge. But the very fact can be turned into an opportunity by developing customised products that suit the varying needs. Such a step will increase the customer base of the banks thereby increasing the operations of the banks and consequently resulting in its growth, if handled with due diligence.
Financial Inclusion Schemes in India
The Government has been ardent in its objective to bring every section of the society under the purview of banking regulations. Following are the schemes that contributed towards achieving the same.
- Stand Up India Scheme
- Pradhan Mantri Mudra Yojana
- Pradhan Mantri Jan Dhan Yojana
- Pradhan Mantri Suraksha Bima Yojana
- Atal Pension Yojana
- Pradhan Mantri Vaya Vandana Yojana
- Jeevan Suraksha Bandhan Yojana
- Varishtha Pension Bima Yojana
- Sukanya Samriddhi Yojana
- Credit Enchancement Guarantee Scheme for Scheduled Castes
- Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives.
In addition to the above, demonitisation of the 500 and 1000 rupee notes made the common people understand the importance of holding a bank account and the LPG subsidy scheme actually made people belonging to the rural areas open and operate a bank account.
2. Growth of Technology:
The world today is becoming more and more tech-savvy with new inventions and innovations entering the market every now and then. Indian Banking sector is no exception to this universal phenomena. Growth of technology is seen by many as an hindrance to the everyday working of bank. But this notion is shared by the people who are resistant to change. With proper change management practices, this can be identified as a great opportunity for the growth of banking industry. We see how change has become inevitable in the present world. Growth in technology is one of the prime factors that has helped people adapt to the new changes occurring in the way of smart phones and other digital devices. This has made people more adaptable to the changes that happens elsewhere. Banking industry can make use of this opportunity to bring about reforms with respect to the products and services offered.
3. Innovations
With the enormous growth in the technology innovating has become simple at present. Customising banking products according to the needs of the consumers can provide for improvement in the performance of the banks.
4. Human Resources
Human resources decide the success of any enterprise. With the growth of technology and the present youth who grew-up along with this growth it becomes easy for banks to train its employees who are already aware of the nuances of the technology.
5. Artificial Intelligence
AI is the technology that tries to recreate human intelligence processes such as learning, reasoning and self correction in machines through way of programming. Induction of chat-bots in the customer service is the basic application of AI in the banking field. Implementing AI in the back-office operations of banks will help in reducing frauds and lower seciruty risks. According to Accenture’s recent Accenture Banking Technology Vision 2018 report, 83% of Indian bankers believe that AI will work alongside humans in the next two years — a higher than the global average of 79%.[5]
6. Digital Indian campaigne:
With the recent reforms on the Indian govenment to promote cash/paper less economy through Aadhar which allows identification through biometrics, the distribution of LPG subsidary through banks, Implementation of GST in July 2017 and demonitisation the country has significantly moved towards the digital platform. The above mentioned reforms along with the growth of IT in the country gives a boom to the banking sector in terms of oppurtunities like e-KYC, digital signatures.
Digital India campaigne has also helped in a great extent to aid in financial inclusion of various catagoy of population who would not be a part of the formal banking structure if not for this campaigne.
With a digitally connected banking structure gives room for wide reach among the public and acts a great advantage in implementing any changes to the economy or the banking system.
Conclusion:
Though the Indian banking sector faces a considerable level of challenges it is necessary for a rapidly developing country to effectively over come those challenges and turn those challenges to the oppurtunities then capitalise on them to turn them into the strenghts of the system.
With continous economic growth in terms GDP and being rated as one of the fastest growing economy in the globe coupled with the extensive growth in Information technology and digitalisation campaign across the country a strong banking system is the need of the hour for the Indian economy to direct the growth in the right channel and have the desired effect on the economy through effective policies.
[1] bank.BusinessDictionary.com.WebFinance,Inc.November 26,2018 http://www.businessdictionary.com/definition/bank.html
[2] News Business NPA woes may continue for banks in 2018-19 due to current economic situation: RBI IndiaToday.i, New Delhi, August 29, 2018, UPDATED: August 29, 2018 15:57 IST
[3] RBI/2013-14/538 DBOD.No.BP.BC.102/21.06.201/2013-14
[4] Joel Rebello – Growth in bank deposits falls to five-decade low ET Bureau|Updated: May 04, 2018, 08.48 AM IST
[5] Kul Bushan, Artificial Intelligence in Indian Banking:Challenges and opportunitites, july 09 2018, http://www.livemint.com
Accounting and finance simplified 