The banking industry is the backbone of any economy. India’s banking sector supports one of the world’s largest and fastest growing economies. It comprises of 27 public sector banks, 21 private sector banks, 49 foreign banks, and 56 regional rural banks amongst many others. It also has a large number of cooperative credit institutions. The Indian retail market is the fourth largest amongst those from the emerging countries. Due to this large market size and diverse factors affecting it, the sector sees dynamic changes in its nature. It has been hit time and again with economic crisis that occur around the world. Despite this, studies based on credit, market and liquidity suggest that Indian banks are resilient and have withstood the global depressions in economy.
When we look back on it, the Indian banking sector has an exhilarating amount of history associated with it. It commercially began in 1770, with the setting up of the Bank of Hindustan, the first Indian Bank. The Presidency Banks in Madras, Calcutta and Bombay came up in the early 19th century, kick-starting modern banking. These were eventually combined to form the Imperial Bank of India in 1921. In 1934, the Reserve Bank of India Act was passed, and the RBI came up with regard to this in 1935, being an apex monetary authority with no major government ownership. However, it was then nationalized in 1949, following India’s Independence. Owing to their contribution to the Indian economy, and role as large employers, Indira Gandhi nationalized 14 of the other large commercial banks in 1969.
The LPG Policy adopted in 1991 opened the gates of the Indian market for foreign firms, owing to which the competition in the Indian banking industry significantly increased. Followed by this, in the early 21st century, digitalization took over and led to the introduction of various facilities such as internet banking, digital wallets, mobile banking etc. which tremendously impacted the way of daily transactions.
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In spite of all the transitions and developments the Indian banking industry has been through, it continues to face various challenges. In the following part of this essay we will be addressing a few of them.
Firstly, as a result of the adoption of liberalization and globalization, various foreign firms entered the Indian market. This integration process posed a severe challenge for the domestic enterprises, in the form of competition with global players. Presently 49 foreign banks are operational in India, with 286 banking branches. These foreign banks are large in size, technically advanced, and have a presence in the global market, which makes it very difficult for the nationalized and private sector banks to sustain themselves in the competition.
A separate problem encountered is that with the increasing spread of smartphones and computers, and increasing access to the internet, the banking industry of India has seen a significant shift to customers using digital means of dealing with their transactions. This exponential increase in usage of digital channels and thrust towards cashless economy on one hand, has increased the transparency of transactions, but on the other hand, has made them more vulnerable to cyber-attacks and thus has drawn attention towards the need to strengthen cyber security postures. The FSR labelled cyber-attacks as a high risk zone for India’s banking sector. Cyber-attacks may lead to financial and reputational losses. Banks may also loose the confidence of their customers, which can further increase the impact of these attacks.
The RBI has suggested banks to finance the development of protective software in order to avoid these. It has also recommended a frequent assessment of risks at hand, for in-house operations as well has external vendors employed by lenders.
As evident from the above discussion, the Indian banking industry does succeed in providing a wide range of facilities. However, the reach of even the very basic of these facilities pertains to be one of the major concerns of the present. Even after great initiatives by the government, such as the ‘Pradhan Mantri Jan Dhan Yojana’, ‘Issuance of KCC and GCC’, ‘Simplified Branch Authorisation Policy’ and many more, almost 20% of the Indian households still do not have access to basic banking services. Eager to reach out to a wider audience, and also increase their market size, many of the public, private and foreign banks are now focusing on extending their reach to rural India, thus contributing to counter this problem.
Every industry completely relies upon its employees for its smooth functioning. The banking industry in India has underwent great transition into an environment of intensive competition and over all this time retention of employees has been very challenging for the banks. The competition is always ready to hire the employees away. At times, staff and clients have strong intrinsic ties, owing to which loosing those employees puts the customer relationships on stake.
Top-level executives and HR departments spend large amounts of time, effort, and money trying to figure out how to keep their people from leaving.
In addition to all the above, asset quality deterioration continues to be one of the major challenges faced by the banking industry. The biggest risk to the Indian banks is the rise in bad loans or non-performing assets (NPAs). These are the loans which are not repaid by the borrower and are thus loss for the banks. They squeeze banks’ profitability and capital positions, threatening the health of some of India’s biggest banks. These stressed assets account for 10.9% of the total loans in the system. According to the IMF report 36.9% of the total debt in India is at risk whereas banks have the capacity to absorb only 7.9% loss. Hence, if these debts turn bad too, banks will face major losses.
Despite all these drawbacks and constraints, the banking sector in India has the potential to improve, and be the best in the world. This is owing firstly to the fact that India’s GDP is on a constant increase. Also, the constantly upward moving middle class has transformed retail banking in India. These changes are expected to continue in the future, as about 89 million households are further included in this segment by 2025. These customers, on average, would have 20% more banking relationships than those of today, increasing the market significantly.
As we discussed above, digitalization brings out a major problem of cyber-threats. However, it is also a boon, since the improved access to the internet and mobile phones has exponentially increased the usage of banking apps and digital services. As banks shift their channels to a digital platform, their reach and returns can increase on a drastic scale. Both newcomers and existing players will have an advantage in reaching out to serve customers.
Although the potential for drastic improvement exists, the sector does require a few tweaks to realize that potential. One of the most significant points is that partnerships are one of the most important avenues for Indian banks implement strategies for diversification and customer care. For example, a payments bank would allow customers to deposit or withdraw money from local retailer outlets, instead of depending on bank branches or ATMs. This, however, would require banks to partner with individual retailers and also develop digital infrastructure that span their individual platforms.
Another arena where the banks in India can change their approach is the provision of loans to small and midsize enterprises (MSEs). The MSEs turn to the informal sectors, nonbanking financial companies and financial technologies, since they cannot put up the collateral that banks traditionally require. To change this current state of affairs, banks must consider a flexible loan limit structure and credit worthiness assessment, determined on the basis of prior transaction details, data from GST platforms, or even social media.
