Indian Banking – the requirements and the challenges ahead

The Indian banking sector, dominated largely by the public sector banks (accounting 70% of businesses/transactions), has seen a significant transformation since the introduction of economic reforms in 1991. The streamlining of systems and procedures aided by technology (computerisation, ATMs, anytime anywhere banking, etc.) and the calibrated regulatory oversight has ensured that the sector is protected from systemic risk. A case in point is almost unscathed Indian banking sector during the global financial crisis of 2008-2009 when the banking sector globally was in fits and bouts. In the aftermath of the crisis, the beginning of the new decade has unveiled some very critical requirements and challenges for the sector which if addressed will throw open a substantial opportunity for the sector to not only improve earnings and expand footprints but also scale heights towards attaining maturity.

The first and foremost is the requirement of large quantity of capital. As per an estimate, Indian banking will require about US $ 18-20 billion of capital each year for the next five years, to meet with the credit expansion and inclusion requirements to meet the economic growth at 7.5-8.5% level. In addition, this requirement of capital will also be essential to maintain capital adequacy ratio at the current level. The second important resource requirement is skilled manpower and technology.  The global financial crisis has exposed several flaws in the quantitative risk management models used by the banks globally. As the Indian banks are looking for increased global footprint and presence, there will be challenge of upgrading risk management systems and there will be challenge of learning to make complex judgement calls. The Indian banking sector will have to strive towards developing largely reoriented as well as well-trained personnel. The banking sector will be required to rebuild its manpower and skill base besides reshaping its technology environment.  

Indian banking is conspicuous by its absence from the global banking. As per the current global league tables based on the size of assets, our largest bank, the State Bank of India, together with its subsidiaries, comes in at No.74 followed by ICICI Bank at No.145 and Bank of India at 188. The top five banks in India may not collectively account for a recognisable share of international banking. This is likely to change gradually. The proponents of go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong global presence. If we look at the other emerging economies, which have been receiving sizable inflows of capital, the trend emerges it that they after a certain period are investing in opportunities beyond their domestic shores. This has commenced with Indian corporate as well, albeit in a small way.

We would all agree that banks, banking and bankers are very much in public consciousness in the backdrop of global crisis. These are some of the important issues which require attention of the government (the major stake holder), RBI and the Indian banks. The Indian banking sector will have to evaluate the lessons of the global crisis in right perspective and keep in mind that they cannot play with the public money entrusted to them in a fiduciary capacity.

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