PRE GOLDEN JUBILEE ANNUAL CONFERENCE OF
GUJARAT ECONOMIC ASSOCIATION
ON
23, 24 FEBRUARY, 2019
ISSUES AND CHALLENGES IN
INDIAN BANKING SECTOR
PRESENTED BY
Dr. R.S. Jinjala
Department of Economics
Arts & Commerce College, Manavadar,
Dist. Junagadh - 362630
VENUE
R.R. LALAN COLLEGE ,
AT BHUJ – KUTCH
ISSUES AND CHALLENGES IN INDIAN BANKING SECTOR
Abstract:
In the present paper author has explained issued and challenges which are faced by Indian
banking sector. India is the largest economy in the world having more than 120 crore
population. The economic reforms initiated by the Government of India about two decades
ago have changed the landscape of several sectors of the Indian economy. The Indian
banking sector is no exception. This sector is going through major changes as a consequence
of economic reforms. Today in India the service sector is contributing half of the Indian GDP
and the banking is most popular service sector in India. The significant role of the banking
industry is essential to speed up the social economic development. Banks plays an important
role in the economic development of developing countries. Economic development involves
investment in various sectors of the economy. The banking industry in India has a huge
canvas of history, which covers the traditional banking practices from the time of Britishers
to the reforms period. Therefore, Banking in India has been through a long journey. This
paper explains the issues and challenges faced by the Indian Banking Sectors.
Keywords: E-Banking, Economic reforms, GDP, Indian Banks
INTRODUCTION
Bank can be defined as a monetary institution that provides banking and other financial
services to their customers. A bank is an institution which provides fundamental banking
services such as accepting deposits and providing loans. There are also non-banking
institutions that provide certain banking services without meeting the legal definition of a
bank. Banks are a subset of the financial services industry. India is one of the top 10 economies
in the world, where the banking sector has tremendous potential to grow. The last decade saw
customers embracing ATM, the internet, and mobile banking. India‗s banking sector is
currently valued at Rs. 81 trillion (US$ 1.31 trillion). It has the potential to become the fifth
largest banking industry in the world by 2020 and the third largest by 2025, according to an
industry report. The face of Indian banking has changed over the years. Banks are now
reaching out to the masses with technology to facilitate greater ease of communication, and
transactions are carried out through the Internet and mobile devices.
While a banking system is a system provided by the bank which offers cash management
services for customers, reporting the transactions of their accounts and portfolios, throughout
the day. The banking system in India should not only be hassle free but it should be able to
meet the new challenges posed by the technology and any other external and internal factors.
For the past three decades, India‘s banking system has several outstanding achievements to its
credit. The Banks are the main participants of the financial system in India. The Banking sector
offers several amenities and opportunities to their customers. All the banks protect the money
and valuables and provide loans, credit, and payment services, such as checking accounts,
money orders, and cashier‘s cheques. The banks also offer investment and insurance products.
As the variety of models for cooperation and addition among finance industries have emerged,
some of the traditional distinctions between banks, insurance companies, and securities firms
have diminished. In spite of these changes, banks continue to maintain and perform their
primary role—accepting deposits and lending funds from these deposits.
OBJECTIVES OF THE STUDY
1. To study the challenges of banking sector
2. To analyse the major issues of banking sector
3. To make an effort so as to know the significance of banks in India.
INDIAN BANKING STRUCTURE
In any country bank plays a vital role in the development of the nation with its high social
content and commitment. The banks act as a development agency and are the source of hope
and aspirations of the masses. Banking and finance are like oxygen to any democracy. The
structure of the banking system is determined by two basic factors – economic and legal. The
development of the economy and the spread of banking habit calls for increasing banking
services. The demand for these banking services affects the banks‟ structure and organization.
National objectives and aspirations result in government regulations, which have a deep
influence on the banking structure.
The banks in India are being segregated in dissimilar groups. Each group has their own return
and benefits, own devoted target markets and customer base with limitations of operation in
India. The banking industry in India functions under the eagle's eye of Reserve Bank of India
which is the dictatorial central bank. Banking Industry mainly consists of Commercial Banks
and Cooperative Banks.
Sources: D&B Industry Research Service
VARIOUS ISSUES AND CHALLENGES FACED BY INDIAN BANKING INDUSTRY
The Indian banking sector has made quick strides in streamlining & aligning itself to the new
aggressive business environment. One of the major challenges that Indian banks are facing
today is how to cope with competitive services in order to strengthen their balance sheet.
Nowadays, banks are whimpering with the burden of Non Performing Assets (NPA). It is truly
felt that these debts, if not recovered, will eat into the very vitals of banks.
Rural Market
Banking in India is generally fairly mature in terms of product range, supply, and reach, even
though reach in rural India still remains a challenge for the private sector and foreign banks. In
terms of quality of capital adequacy and quality of assets, Indian banks are considered to have
clean, strong and clear balance sheets relative to other banks in comparable economies in its
region.
Global Banking
If we look at the Indian Banking Industry, then we find that there are 36 foreign banks
operating in India, which becomes a major challenge for Nationalized and private sector banks.
These foreign banks are large in size, technically advanced and having a presence in the global
market, which gives more and better options and services to Indian traders.
Financial inclusion
Financial inclusion has become an essential in today’s business environment. Whatever is
produced by business houses that have to be under the test out from various perspectives like
environmental concerns, corporate governance, social and ethical issues? Apart from it to
bridge the gap between rich and poor, the poor people of the country should be given proper
awareness to improving their economic condition.
High Transaction Costs
A major concern before the banking industry is the high transaction cost of carrying non-
performing assets in their books. The growth led to strains in the operational efficiency of
banks and the accumulation of non- performing assets (NPAs) in their loan portfolios.
Competition
With the ever increasing pace and extent of globalization of the Indian economy and the
systematic opening up of the Indian Banking System to global competition, banks need to
equip themselves to operate in the increasingly competitive Environment. This will make it
imperative for Banks to enhance their systems and procedures to international standards and
also simultaneously fortify their financial positions.
Non Performing Assets
NPAs have become a grave concern for the banking sector in couple of years and impacted
credit delivery of banks to a great extent.
As per a survey, net NPAs amount to only 2.36 percent of the total loans in the banking system.
However, if restructured assets are taken into account, stressed assets account will be 10.9
percent of the total loans in the system. As per the International Monetary Fund (IMF), around
37 percent of the total debt in India is at risk.
India’s largest lender State Bank of India (SBI) reported a massive 67 per cent fall in
consolidated net profit at 1259.49 crore rupees in the third quarter of the 2015-16 financial year
and classified loans worth 20692 crore rupees as having turned bad.
As per an estimate, the cumulative gross NPAs of 24 listed public sector banks, including
market leader SBI and its associates, stood at 393035 crore rupees as on 31 December 2015.
Issue of Monetary Transmission
Like reduced profits, this is also an off-shoot of burgeoning NPAs in the system. With the easing
of inflation and moderation in inflationary expectations, the RBI reduced the repo rate by 100
basis points between January and September 2015.
However, change in the key policy rate was not reflected in lending rates as banks are not
willing to transmit the benefits of low interest policy regime due to low-availability of liquidity
against the backdrop of high NPAs.
Corruption
Scams in the erstwhile Global Trust Bank (GBT) and the Bank of Baroda show how few
officials misuse the freedom they granted under the guise of liberalisation for their personal
benefit. These scams have badly damaged the image of these banks and consequently there
profitability.
Crisis in Management
Public-sector banks are seeing more employees retire these days. So, younger employees are
replacing the elder, more-experienced employees. This, however, happens at junior levels.
As a result, there would be a virtual vacuum at the middle and senior level. The absence of
middle management could lead to adverse impact on banks' decision making process.
CONCLUSION
India is one of the top 10 economies in the world, where the banking sector has tremendous
potential to grow. The number of ATMs has doubled over the past few years, with more than
100,000 in the country at present (70 percent in urban areas). They are estimated to further
double by 2016, with over 50 per cent expected to be set up in small towns. Also, the scope for
mobile and internet banking is big. At the start of 2014, only 2 per cent of banking payments
went through the electronic system in the country. Today, mobility and customer convenience
are viewed as the primary factors of growth and banks are constantly exploring new
technology, with terms such as mobile solutions and cloud computing being used with greater
regularity. Banks are at the core of any economic system whether developed or developing.
Essentially, a technologically advanced, transparent and efficient banking system is the need of
the hour for the growing economy like India. In our country, need for qualitative banking
surpasses the conservative economic or financial logic as the financial inclusion is still a
distant dream. In addition to the provision of traditional services, many social functions are
attached to the banking system financial inclusion and inclusive growth.
REFERENCES
[1] Dev, S.M. ―Financial Inclusion: Issues and Challenges ―. Economic and political Weekly,
41 (41): 2006.
[2] Sethi Jyotsna, Bhatia Nishwan (2012) ―Elements of Banking and Insurance‖ New Delhi,
PHI Learning Pvt. Ltd.
[3] Shastri, R.V. (2003), ―Recent Trends in Banking Industry: IT Emergence‖, Analyst,
(March), pp. 45-46.
[4] Wolgast, M. ―M & As in the financial industry: A matter of concern for bank
supervisors?‖ Journal of Financial Regulation and Compliance, 9(3): 225-236, 2001.
[5] Manoj Kumar Banking Sector Reforms in India. International Research Journal of
Commerce
[6] www.ijarcsms.com
[7] www.e-journals .com
