An industry note - Banking in India Issues and Challenges for the Future

Executive Summary

A healthy banking system is essential for any economy striving to achieve good growth and yet remain stable in an increasingly global business environment. The Indian banking system, with one of the largest banking networks in the world, has witnessed a series of reforms over the past few years like the deregulation of interest rates, dilution of the government stake in public sector banks (PSBs), and the increased participation of private sector banks. The growth of the retail financial services sector has been a key development on the market front. Indian banks (both public and private) have not only been keen to tap the domestic market but also to compete in the global market place. New foreign banks have been equally keen to gain a foothold in the Indian market.

The momentum in credit growth has been maintained during 2005-06 due to two factors: The corporate sector has stepped up its demand for credit to fund its expansion plans; there has also been a growth in retail banking. However, even as the opportunities increase, there are some issues and challenges that Indian banks will have to contend with if they are to emerge successful in the medium to long term. This report discusses these issues and challenges -- both intrinsic and external, such as

• Risk management and Basel II
• Consolidation
• Overseas expansion
• Technology
• Government reforms
• Non Performing Assets (NPAs)
• Skilled manpower
• Consumer protection

The report concludes with thrust areas for future growth.

Keywords

Banking, Financial services, Retail banking, Technology in banking, Basel, Risk mitigation, Reserve Bank of India, Consolidation, Mergers and Acquisition, Non performing assets, Foreign direct investment, Public sector banks, Private sector banks, Foreign banks, State Bank of India, ICICI Bank, Mobile commerce, Reforms, Consumer protection, Banking Codes and Standards Board of India, Indian Banks'Association, Rural credit, Microfinance, Small and medium enterprises, SME Rating Agency of India (SMERA), Value added services, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the SARFAESI Act)

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