Indian Banking Changing Paradigm

There has been a paradigm shift in the Indian banking industry since the calibrated and gradual deregulation process from the early 1990s. The shift has made markets more efficient and complex. It has also brought in uncertainties resulting from higher volatility in interest rates, exchange rates and commodity prices.

Under WTO commitments, the Indian private banking sector may have to be opened to foreign competition. Pending RBI approval, a foreign bank can then acquire up to 74 % stake in any Indian private bank. Today, the foreign banks hold 7 % market share in the country with 0.5% of the branch net work. The PSBs hold 71 % of market while the private banks have a share of 22 %.

Foreign banks will bring with them a huge capital base, professional management and modern work culture. In contrast, the PSU banks are at present saddled with unhealthy legacies—ageing work force; antiquated work practices (of course this is being addressed in BPR initiatives); the capital raising capability of PSU banks is limited because the government holding cannot come down below 51%. However, the banks need to gear up for their additional capital requirement under Basel- II dispensation; the HR policies of the PSU banks call for radical changes in terms of compensation package; The shadow of vigilance mechanism hampers the decision making process.

Indian banking is on a growth mode. Driven by robust economic growth, the financial sector is emerging strong, diversified and integrated. Not withstanding its strengths, certain vulnerabilities too exist, which merit attention and remedy. Indian banking is considered too fragmented by global standards with the top 10 banks accounting for about 65% of the banking assets and about 40 banks sharing among themselves 27% of the assets. Given the significance of scale in the context of global banking industry, too many banks sharing a low market share might lead to inefficiencies that could hinder sustained growth.

While great advances have taken place in regard to technology absorption amongst public sector banks, issues of integration and networking across its universe of branch network remains a major challenge. Banks need to reinforce more focus in harnessing technology on its entire network of business and operations.

Similarly developing and refining skill sets and employee productivity will continue to be a major task for the public sector banks. Public sector banks have been quite successful in trimming the staff strength, but these banks need to increase employee productivity to regional and global benchmarks.

Public sector banks, which account for 70% of the assets, depend mainly on plain vanilla banking. Off balance sheet business is relatively less and so is dealing with the other major alternative asset markets. Though the current regulatory framework might not provide for too much diversification, in the background of the sophisticated financial system that is emerging, public sector banks need to take note of the possibilities and potential in designing a more effective composition of business.

Fragmentation calls for consolidation, an issue that has not been addressed adequately in the Indian banking industry. Though some distressed banks have been merged or amalgamated with a few existing ones, no major policy initiative in designing an effective structure of the banking industry that would cope with the emerging trends in global banking is envisaged.

Even with these limitations, Indian banking is showing great promise and progress. It has been able to impress and influence global markets by its smart turnaround with relatively low fiscal support, rapid advances in technology, faster pace of growth in business and profitability, increase in efficiency, robust capitalisation, higher returns to investors and above all generating rapid pace of growth with lesser levels of non performing assets.

With all these Indian banking seems safe in the economy. What do you say?