Page 41 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Financial innovation places the interests of the consumers at the core, and follows basic market
principles in approach. Through financial innovation, commercial banks raise their competitive
strengths, improve their risk management skills, and better satisfy the needs of their customers
and market requirements. Financial innovation is one of the most important elements of the
commercial banks' sustainable growth strategy.
A pre-condition of financial innovation is proper risk management. Commercial banks identify,
measure, monitor and control new risks on a timely basis.

Did u know? What is fractional-reserve banking?
Fractional-reserve banking, is a system where banks hold only a certain percentage of
their deposits as ready cash.
Over the years, the banking sector in India has seen a number of changes. Most of the banks have
begun to take an innovative approach towards banking with the objective of creating more
value for customers, and consequently, the banks. Some of the significant changes in the Indian
banking sector are discussed below:
1. Technology for Value Creation: The use of information technology in the Indian banking
sector was a corollary of the liberalization process initiated in the country in the early
1990s.
2. Rural India Catching Up: With a majority of the Indian population living in rural areas,
rural banking forms a vital component of the Indian banking system. Besides, rural banking
operations in India are rather different from urban operations, due to the strong disparity
that exists between urban and rural life, and the needs of these two sections of people are
also different.
The commercial banks in India have seen the huge possibility available to avail profits
through operating in the rural sectors. This has led the rural India to catch up with the fast
pace of banking in the economy.
3. Banking Beyond Banking: While traditionally, banking meant 'borrowing and lending',
in the latter part of the 20th century, the word took on a different meaning altogether.
Banks no longer restricted themselves to traditional banking activities, but explored newer
avenues to increase business and capture new markets.
Indian banks could not be left behind. They innovated their operations into fields
unexplored as yet and started venturing into varied activities already discussed in the
above section.
4. Credit/Debit Cards: In India, there has been an exponential increase in credit/debit cards
utilization in the last 10 years.
It is now difficult to imagine life without these electronic cards. They are a fast, convenient
and safe method for making payments. In the case of credit cards, they are also a key
channel for making short-term, unsecured loans which can enable households to smoothen
their consumption over time. The risk and instability this innovation can cause, of course,
is that some people borrow more than they can afford. But, overall, credit/debit cards are
a key payment/credit innovation which has lowered transaction costs, improved resource
allocation and supported economic growth.

5. Money Market Mutual Funds: Money market mutual funds were an interesting innovation
arising or rather necessitated by the ceilings which governments placed on bank deposit

36 LOVELY PROFESSIONAL UNIVERSITY