Page 42 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 3: Indian Banking System

The way forward for the banks of India is to innovate to take advantage of the new business Notes
opportunities and simultaneously ensure the continuous assessment of risks.
From traditional banking practices during the British Rule to reforms period, nationalization to
privatisation and to the present trend of increasing number of foreign banks, Indian banking
sector has undergone substantial transformation. The move from old to new business
environment has created fresher demands on Indian banks like enhanced work flow, full access
of customers to banking transactions through electronic mode etc. In the emerging scenario of
cutthroat competition backed by parallel force of deregulation and technology, the degree of
competition in the Indian financial Sector has increased to unprecedented level. Hence the
functional efficiency of banks has achieved huge significance for their survival in the present
scenario. In contrast to earlier 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning, modern outlook and tech-savvy methods of working for traditional banks has
been ushered. All this has led to the retail boom in India. People are not just demanding more
from their banks but also receiving more. With easy credit facilities the banks are transforming
the consuming tendency of Indians with everything from microwave ovens to houses on sale at
easy monthly installments EMIs.
Using information technology, banks have upgraded their systems to provide better customer
services. Automatic Teller Machines (ATMs) dispensing any time money are visible in most
localities of big cities and users are increasingly responding to banking transactions without
visiting the banks. Online and mobile banking has brought the banks virtually to their doorsteps.
However, all this has exposed the banks to new kinds of risks. The intimacy between bank
employees and customers has become increasingly remote. Though the banks allot various
back end and front end operations to minimize risk and use highly secures socket layers SSLs,
digital certificates and facilities like virtual key boards to reduce the risks in online transactions,
attacks like phishing and pharming have been hit up. Since the Lehman Brothers declared
bankruptcy in 2008, incidences, every now & then, have sustained the concerns over global
financial stability.
While most Emerging Market Economies (EMEs), including India, have healed from global
financial crisis, advanced nations continue to be plagued with growth figures looking dismal.
Euro zone crisis seems to be spreading across the EU countries following ripple effect, political
turmoil persists in Middle East & North African (MENA) region, and economic stagnation in US
forecasts no imminent respite from the worsening global situation. Indian banks, however, not
only emerged unscathed from the global financial crisis but continued to manage growth with
resilience during 2010-11. Presently, domestic demand stays restrained on account of slower
pace of growth & high level of commodity prices but favourable demographics & growth
potential of Indian economy are expected to mitigate the dampening effect in the long run. As
per Census 2011, about 40 % of households still do not avail banking facilities. Banks with their
forward looking strategies, improved customer relationship, diversification of revenue sources
etc. are anticipated to continue their impressive performance. The idea of creating bigger banks
to take on competition sounds attractive.

Notes It is crucial to note here that even the biggest banks amidst banks of India are small
by global measures.
The lack of global scale for banks of India came into sharp focus during the recent financial crisis
which saw various international banks reneging on their funding commitments to Indian
companies, but local banks could not step into the breach because of balance sheet limitations.
In this light, 93.75% of all respondents to our survey are considering expanding their operations
in the future.

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