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Changing Dimensions Of Banking Sector In India

Posted in Finance Articles, Total Reads: 5970 , Published on October 22, 2012

Primarily being an agrarian economy, the liberalization in India saw resurgence of Services sector on the fast lane. Post liberalization and globalization of the Indian economy, Indian banking sector has undergone paradigm shift in scope, content, structure, functions and governance. Their very character, composition, contours and chemistry have changed. And, the process continues.

The advent of information and communication technology has further brought about radical and perceptible change in the operational environment of the banks. Presently, banking sector is faced with multiple and concurrent challenges, increased competition, rising customer expectations and diminishing customer loyalty. What best the banks can do? In this fast changing and complex scenario, possibly, the only solution seems for each bank to give the customers optimum blend of technology and personalized services in the most convenient manner at low cost.


At the time of liberalization, the Indian banking industry was operating in a highly regulated, regimented and protected region. Realizing that the banking sector would have to play a key role in the economic reforms process, the Narsimhan Committee had been formed to recommend reforms in the banking sector with the objective of granting autonomy and flexibility to the banking industry and improving its efficiency and profitability. The major important reform measures recommended by the Narsimhan Committee were:

• Reduction in Statutory Liquidity Ratio (SLR)

• Reduction in CRR

• Redefining the scope of Priority Sector Lending

• Freeing of Interest rates on Deposits and Advances to promote competition in the financial sector

• Capital Adequacy Norms

• Access to capital markets

• Prudential Accounting Norms

• Competition through permission to private sector banks

Most of the measures suggested by the committee were accepted by the Government and Indian banking sector witnessed an unprecedented shift from regulated to liberalized banking practices. Interest rates were deregulated, branch licensing procedures relaxed, SLR and CRR reduced, entry to foreign banks and new private sector banks rationalized resulting into introduction of element of competition into it. In 1994, SEBI, for the first time, notified regulations to bankers pertaining to public issue. Public sector banks were now allowed to access the market to raise funds, leading to the dilution in the shareholding of the government. Another important dimension of the banking sector reforms was introduction of “income recognition” norms.


  • Pressure on profitability
  • Low productivity
  • Problem of Non-Performing Assets (NPA)
  • Problems from customers
  • Competition from private banks
  • Competition from MNCs
  • Problem of managing ownership and competition
  • Problem of managing diversified customers
  • Challenge of qualitative changes in banking paradigm


With ever changing face of banking industry worldwide, visualizing the scenario in the years ahead, success would crucially depend on strategically effective and intelligent management of marketing and customer relationships.


The market has changed drastically and has become largely customer centric. The key to success in this changed competitive environment will be one’s ability to reach the client at his door step and meet his requirements of products and services in a customized manner. This development is indeed welcome as it has immense potential for growth of banking business in future but it has its own draw back as there could be adverse selection of customers.


Technology is increasingly finding its use in banking by way of convenience in product delivery and access, managing productivity and performance, product design, adapting to market and customer needs and access to customer market. For the Indian banking sector, these developments are of significant interest in the future. The ability to access and share information will contribute in improving efficiency and value adding, moreover; focus on e-banking will open new business potential and opportunities for banking sector.


Globalization has brought sever competitive pressure to bear on Indian banks, from international banks. In order to compete with these entities effectively, Indian commercial banks need to possess matching financial strength, as fair competition is possible only among equals. Size, therefore, assumes criticality even in these days of virtual banking. Mergers and acquisitions, route provides a quick step forward in this direction offering opportunities to share synergies and reduce the cost of product development and delivery.


The process of relationship banking which has been ushered in on the Indian banking scenario would become sharper and widespread. The competencies required from a banker in the future include expertise in information technology and functional knowledge. This would warrant that the banks have to be careful in selection of personnel as regards to their skills, as the requirement of job would be to take decisions based on risk-reward paradigm rather than process-based administration. The training and skills up gradation system is also required to be aligned to desired competencies.


It is a method which can pro-actively monitor customer satisfaction, identifies the areas where most beneficial improvements can be implemented and suggest the uses of web to market measurable improvements to a wide audience. It is a revolutionary and cost effective approach to link customer satisfaction with internal improvements, performance and increased business. Delight results from exceeding the expectations of satisfied customer.


The road ahead for the banking industry will be entirely different from the tracks traversed hitherto. Banks will be compelled to concentrate more on how to improve performance with regard to capital adequacy, asset quality, management performance, liquidity and systems and controls. While capital adequacy, asset quality and profitability can be ascertained from balance sheet management, system and controls will involve subjective evaluation.


Corporate Social Responsibility is the continuing commitment by any business to achieve commercial success in ways that honor ethical values, addresses legal issues and contributes to economic development with improving the quality of experience of the workforce and their families as well as the local community and society at large.


It has become imperative that for meeting the challenges and opportunities in future, there will be great need for bringing about changes in the mindset of the human resource available within the banks. Training and development in updating the skills would be essential to face the emerging challenges. In a service industry like banking, human resources will occupy the pivotal part for making the bank services enduring. With the entry of new private banks and foreign banks, the system of hire-and-fire will be revisited. Security and age old practices of conducting traditional banking will undergo revolutionary change. Retention of best talent would be a trying exercise that banks will have to undertake and practice through robust reward and retention policy.


In future, the non-performing assets will become the major causes of banks concern. Imbibing the credit management skills will become all the more important for improving the bottom line of the banking sector. It becomes essential to master the expertise for monitoring exposure levels, industry scenarios and timely action in respect of troubled industries.


The growth in disposable incomes, changing lifestyles, global changes and their impact on the economy will result in ever changing and diversified needs to the customers. Banks in future will have to understand the dynamic needs of a changing society through detailed market surveys and structure innovative products so as to canalize the savings of the community and also to satisfy the credit requirements of various sectors of the economy.


For a successful banking business management, analysis of large data and information play key roles in devising new strategies, products and services. Due care will have to be made while embracing technology and transforming traditional touch points to electronic ones, so that human touch with customers is also not lost. In the end, it can be rightly said that productivity and efficiency will be the watch words in the banking industry in the years ahead. Strategizing organizational effectiveness and operational efficiency will govern the survival and growth of profits; besides bringing changes in the mindset of the employees, which is imperative with the changing times. Continuous quest for skill upgradation at all levels, development of Vision and Mission statements with commitment to meet them with dogged values, are some of the aspects which will require continuous and urgent attention by the banking sector in the times to come.

This article has been authored by Gopi Krishna Venigalla & Devansh Bajpai from IIFT.

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