INDEX

Sr.no Topics
01 Introduction
02 Changing Imperatives
a. Risk Management
b. Consolidation
c. Globalization
d. Technology development
e. Government regulation
f. Nonperforming assets
g. Skilled manpower
h. Economic position
i. Inflow of capital
j. Customer retention
03 Indian Banking-a new vision
04 New opportunities for banks
05 Social development aspect
06 Changing scenario
07 Future landscape of banking industry
08 Technology-future in banking
09 Technology innovations by Indian banks
 a. Automated teller machine(ATM)
b. Interbranch network
c. Debit cards, credit cards& charged cards
d. Banking through mobile phone
e. Internet banking services
f. Tele banking
10 Product innovation and process re-engineering
11 Regulatory and legal environment
12 Human resource management
13 Potential scenario
14 Road ahead
15 Case study
16 Conclusion

FUTURE OF BANKING SECTOR

Introduction
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 has witnessed a series of reforms in the past, like
deregulation of interest rates, dilution of government stake in PSBs, and
increased participation of private sector banks. It has also undergone rapid
changes, reflecting a number of underlying developments. This trend has created
new competitive threats as well as new opportunities. This paper aims to foresee
major future banking trends, based on these past and current movements in the
market.

Given the competitive market, banking will (and to a great extent already has)
become a process of choice and convenience. The future of banking would be in
terms of integration. This is already becoming a reality with new-age banks such as
YES Bank, and others too adopting a single-PIN. Geography will no longer be an
inhibitor. Technology will prove to be the differentiator in the short-term but the
dynamic environment will soon lead to its saturation and what will ultimately be
the key to success will be a better relationship management.

If one were to say that the future of banking in India is bright, it would be a gross
understatement. With the growing competition and convergence of services, the
customers (you and I) stand only to benefit more to say the least. At the same time,
emergence of a multitude of complex financial instruments is foreseen in the near
future (the trend is visible in the current scenario too) which is bound to confuse
the customer more than ever unless she spends hours (maybe days) to understand
the same. Hence, I see a growing trend towards the importance of relationship
managers. The success (or failure) of any bank would depend not only on tapping
the untapped customer base (from other departments of the same bank, customers
of related similar institutions or those of the competitors) but also on the
effectiveness in retaining the existing base.
India has witness to a sea change in the way banking is done in the past more than
two decades. Since 1991, the Reserve Bank of India (RBI) took steps to reform the
Indian banking system at a measured pace so that growth could be achieved
without exposure to any macro-environment and systemic risks. Some of these
initiatives were deregulation of interest rates, dilution of the government stake in
public sector banks (PSBs), guidelines being issued for risk management, asset
classification, and provisioning. Technology has made tremendous impact in
banking. ‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The
financial sector now operates in a more competitive environment than before and
intermediates relatively large volume of international financial flows. In the wake
of greater financial deregulation and global financial integration, the biggest
challenge before the regulators is of avoiding instability in the financial system.

Changing imperatives

The banking industry in India is undergoing a major transformation due to changes

in economic conditions and continuous deregulation. The multiple changes
happening one after the other has a ripple effect on a bank trying to graduate from
completely regulated sellers market to completed deregulated customers market.

This continuous deregulation has made the banking market extremely competitive
with greater autonomy, operational flexibility, ad decontrolled interest rate ad
liberalized norms for foreign exchange. The deregulation of the industry coupled
with decontrol in interest rates has led to entry of a number of players in banking
industry. At the same time reduced corporate credit off take thanks to sluggish
economy has resulted in large number of competitors battling for the same pie.

As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with lucrative
pricing and freebees to offer. Natural fall out of this has led to a series of
innovation product offerings catering to various customer segments, specifically
retail credit. This in turn has made it necessary to look for efficiencies in the
business. Banks need to access low cost funds and simultaneously improve the
efficiency. The banks are facing pricing pressure, squeeze on spread and have to
give thrust on retail assets. 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 discuss these issues
and challenges – both intrinsic and external, such as

1. Risk management
2. Consolidation
3. Globalization
4. Technology Development
5. Government Regulations
6. Non Performing Assets (NPAs)
7. Skilled manpower
8. Economic Position
9. Inflow of Capital
10.Consumer retention
Risk Management

The future of banking will undoubtedly rest on risk management dynamics.

Only those banks that have efficient risk management system will survive in the
market in the long run. The effective management of credit risks is a critical
component of comprehensive risk management essential for long term success
of a bank in institution. Although capital serves the purpose of meeting
unexpected losses, capital is not a substitute for inadequate decontrol of risk
management systems. Coming years will witness banks striving to create sound
internal control of risk management processes.
With the focus on regulation and risk management in the Basel II frame work
gaining prominence, the post Basel II era will belong to the banks that manage
their risks effectively. The banks with proper risk management system would
not only gain competitive advantage by way of lower regulatory capital charge,
but would also add value to the share holders at other stake holders by properly
pricing their services, adequate provisioning and maintaining a robust financial
structure. ‘The future belongs to bigger banks alone, as well as to those which
have minimized their risks considerably’.

Consolidation

Consolidation, which has been on the counter over the last year or so is likely to
gather momentum in the coming years. Post April 2009, when the restrictions
on operations of foreign banks will go, the banking landscape is expected to
change dramatically. Foreign banks, which currently account for5% of total
deposits and 8% of total advances, are devising new business models to capture
the Indian market. Their full-fledged entry is expected to transform the business
of banking in many ways, which would be reflected in terms of greater breadth
of products, depth in delivery channels and efficiency in operations.
Thus Indian banks have less than three years to consolidate their position.
Despite the stiff resistance from certain segments, consolidation holds the key
of future growth. This view is underpinned by the following:

• Owing to greater scale and size, consolidation can help save costs and
improve operational efficiency.
• Banks will also have to explore different avenues for raising capital to
meet norms basel-2 norms.
• Owing to the diversified operations and credit profiles of merging
banks, consolidation is likely to save as a risk-mitigation exercise as
much as a growth engine.

Though there is no confirmation yet, speculative signals arising from the

market point to the prospect of consolidation involving banks such as union
bank of India, Bank of India , Bank of Baroda, Dena Bank, State Bank of
Patiala, and Punjab and Sind bank. Further, the case of merger between
stronger banks has also gained ground - a clear deviation from the past when
only weak banks were thrust on stronger banks. There is a case being made
for mergers between banks with a distinct geographical presence coming
together to leverage their respective strengths.
Globalization

Growing integration of economics and the markets around the world is

making global banking reality. The surge in globalization of finance has
already begun to gain momentum with the technological advancements
which have effectively overcome the national borders in the financial
services business. Widespread use of internet banking will widen frontiers of
global banking, and make marketing of financial products and services on a
global basis possible. In the coming years globalization will spread further
on account of the likely opening up of financial services under WTO. India
is one of the 104 signatories of Financial Services Agreement (FSA) of
1997. This gives India’s financial sector including banks an opportunity to
expand their business on a quid pro quo basis.

As per Indian Banks’ Association report ‘Banking Industry Vision 2010’,

there would be greater presence of international players in Indian financial
system and some of the Indian banks would become global players in the
coming years. So, the new mantra for Indian banks is to go global in search
of new markets, customers and profits.

Technology Development

Technology has thrown new challenges in the banking sector and new issues
have started cropping up which is going to pose certain problems in the near
future. There is an imperative need for not mere technology up gradation but
also its integration with the general way of functioning of banks to give them
an edge in respect of services provided to their constituents, better
housekeeping, optimizing the use of funds and building up of MIS for
decision making, better management of assets and liabilities and the risk
assumed which in turn have a direct impact on the balance sheets of the
banks as whole. Technology has demonstrated potential to change methods
of marketing, advertising, designing, pricing and distributing financial
products and services and cost savings in the form of an electronic, self-
service product delivery channel. These challenges call for a new, more
dynamic, aggressive and challenging work culture to meet the demands of
customer relationships, product differentiation, brand values, reputation,
corporate governance and regulatory prescriptions. Technology holds the key
to the future success of Indian banks.

Internet, wireless technology and global straight-through processing have

created a paradigm shift in the banking industry. The explosive growth of
both internet and mobile and wireless technology is revolutionizing the way
the financial industry conducts business. The overall wireless technology
market is expected to grow profoundly in the coming years. The new
entrants in the banking are with computer background. However, over a
period of time they would acquire banking experience. Whereas the middle
and senior level people have rich banking experience but their computer
literacy is at low level. Therefore, they feel the handicap in this regard since
technology has become an indispensable tool in banking,
Government Regulations

The RBIs approval for banks to raise funds abroad through innovative
capital instruments holds great significance. Such fund-raising, which
includes preference shares, will, however, not just substitute equity; it could
have unintended consequences on the strategies of banks and their
profitability. While the cost of raising money through such instruments is
likely to be higher(close to 10 per cent), the consequent higher leverage on
equity funds is likely to result in expansion of return on net worth. This is
because the same amount of capital supports a higher volume of business,
generating higher profits.

Banks are likely to be able to raise long-term preference shares at coupon

rates between six per cent and eight per cent. The positive impact on bank
profitability could thus be significant.
Preference capital can be used as the currency for acquisitions. The
advantage for public sector banks is that they no longer need to bother about
government stake falling below 51 per cent. Banks such as Dena bank,
oriental bank of commerce and Andhra bank are most likely to benefit from
this move.

Skilled Manpower

There will be a sea change to employees too. Secured jobs will be replaced
by contractual appointments, for a specific period of time. The unions will
merge into the shadows and bank management will turn effective. As a result
there will be swifter turn over of personnel in banks. But at the same time,
skilled personnel from other disciplines will enter banks in increasing
numbers.

Factors like skills, attitudes and knowledge of the human capital play a
crucial role in determining the competitiveness of the financial sector. The
quality of human resources indicates the ability of banks to deliver value to
customers. Capital and technology are replicable but not the human capital
which needs to be valued as a highly valuable resource for achieving that
competitive edge.
Business model, which comprises a comprehensive range of business
solutions delivered through a unique balance of portfolio and relationship
management must be incorporated.

Economic Position

Keeping in mind the impact of real sectors shocks on financial stability , any
assessment of the banking sector needs to be done in the backdrop of
national as well as international economic outlook. During the last couple of
years, global growth has been above the forecast in almost every region
stimulated by strong monetary and fiscal measures. The domestic economic
outlook is also bright with the real GDP growth rate surpassing 8% last year
and estimated to be around 7% in the current year. Industrial performance
also improved considerably with a strong manufacturing growth for the
second consecutive year. Inflation rate has been under control, barring some
hiccup for a short period.

Aided by a good macroeconomic environment, banks bottom line has

improved significantly over the last two years. However, let us not forget
that a major contributor to the wind fall gains has been treasury profits
fuelled by a secular decline in interest rate during the three years period from
2001 – 2004 and consequent profit booking on sale of government securities.
From the current year, with the hardening of interest rates, this trading
component of profits is no longer going to shore up banks profitability. On
the contrary, most banks have been required to provide for the decline in the
market value of their investments portfolio. Thankfully, one of setting has
been strong pick up in the credit off take due to buoyant demand in the
economy and revival of industrial activity, which have resulted in substantial
increase in banks core interest income.

Inflow of Capital

As we know, liquidity position in the financial sector has been quite

comfortable in the recent times. The buoyant capital market coupled with an
appreciating rupee vis-à-vis US dollar has been attracting large foreign
institutional inflows during the last two years. While we have an all time
high foreign exchange reserves of more than $ 130 Billion, high capital
inflows pours a big challenge to monetary and exchange rate management.
In this context, operationalization of market stabilization scheme has given
an additional instrument for liquidity and monetary management. To some
up the challenge we would like to quote a statement of Dr.Y.V.Reddy,
Governor, Reserve bank of India, which he made at the annual meeting of
bank for international settlement (BIS) on June 28th 2004. And we quote , “
….Special defenses need to be put in place for ensuring financial stability
in the case of countries like India that are faced with the prospect of volatile
capital flows. The issues relating to cross border supervision of financial
intermediaries in the context of greater capital flows are just emerging and
need to be addressed.”

Problem of Non-performing assets

The Indian banking sector is facing a serious problem of NPA. The extent of
NPA is comparatively higher in public sectors banks. To improve the
efficiency and profitability, the NPA has to be scheduled. The government
has taken various measures to reduce quantity of NPA. Some of them are

1. One time settlement/compromise scheme

2. Lok Adalats
3. Debt recovery tribunals
4. Securitization and reconstruction of financial assets and enforcement
of Security Interest Act 2002.
5. Corporate reconstruction companies
6. Credit information on defaulters and role of credit information bureaus

It is not possible to have zero percentage of NPA. But at least Indian banks
can try competing with foreign banks to maintain international standard.
Consumer Retention

The banking industry in India is undergoing a major transformation due to

changes in economic conditions and continuous deregulation. These multiple
changes happening one after other has a ripple effect on a bank trying to
graduate from completely regulated sellers market to completed deregulated
customers market.

This continuous deregulation has made the banking market extremely

competitive with greater autonomy, operational flexibility, and decontrolled
interest rate and liberalized norms for foreign exchange. The deregulation of
the industry coupled with decontrol in interest rates has led to entry of a
number of players in the banking industry. At the same time reduced
corporate credit off take thanks to sluggish economy has resulted in large
number of competitors battling for the same pie.

As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with
lucrative pricing and freebees to offer. Natural fall out of this has led to a
series of innovative product offerings catering to various customer
segments, specifically retail credit.

This in turn has made it necessary to look for efficiencies in the business.
Banks need to access low cost fund and simultaneously improve the
efficiency. The banks are facing pricing pressure, squeeze on spread and
have to give thrust on retail assets. This will definitely impact Customer
preferences, as they are bound to react to the value added offerings.
Customers have become demanding and the loyalties are diffused. There are
multiple choices, the wallet share is reduced per bank with demand on
flexibility and customization. Given the relatively low switching costs;
customer retention calls for customized services and hassle free, flawless
service delivery.
Indian Banking – A new Vision

Indian economy is one of the faster growing economics in the world. The
Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a
large employer. Indian banks have a chequered history. The British legacy
left behind a host of large and small privately – held banks. The late 60s saw
the nationalization of banks, leading to the emergence of the public sector
banks. The 90s saw the banking industry embracing technology in a massive
way, led in particular by the new private banks and MNC banks. The Indian
banking has finally worked up to the competitive dynamics of the ‘new’
Indian market and is addressing the relevant issues to take on the
multifarious challenges of globalization.

The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive and dynamic entity. This transformation has
been largely brought about by the large dose of liberalization and economic
reforms that allowed banks to explore new business opportunities rather than
generating revenues from conventional streams (i.e. borrowing and lending).
The banking in India is highly fragmented with 30 banking units
contributing to almost 50% of the deposits and 60% of advances. Indian
nationalized banks continue to be the major lenders in the economy due to
their sheer size and penetrative net works which assures them high deposit
mobilization. The Indian banking can be broadly categorized in to
nationalize, private banks and specialize banking institutions.

The Reserve Bank of India acts as a centralized body monitoring any

discrepancies and short comes in the system. It is the foremost monitoring
body in the Indian financial sector. The nationalized banks (banks owned by
the government) continue to dominate the Indian banking arena. Industry
estimates indicate that out of 274 commercial banks operating in India, 223
banks are in the public and 51 are in the private sector. The private sector
bank grid also included 24 foreign banks that have started their operations
here. Under the ambit of the nationalized banks come the specialized
banking institutions. These co-operatives, rural banks focus on areas of
agriculture, rural development etc., unlike commercial banks these co-
operative banks do not lend on the basis of a prime lending rate. They also
have various tax sops because of their holding pattern and lending structure
and hence have lower overheads. This enables them to give a marginally
higher percentage on savings deposits. Many of these cooperative banks
diversified into specialized areas (catering to the vast retail audience) like
car finance, housing loans, truck finance etc. in order to keep pace with their
public sector and private counterparts, the co-operative banks too have
invested heavily in information technology to offer high-end computerized
banking services to its clients.

Complementing the roles of the nationalized and private banks are the
specialized financial institutions or Non Banking Financial Institutions
(NBFCs). With their focused portfolio of products and services, these Non
Banking Financial Institutions act as an important catalyst in contributing to
the overall growth of the financial services sector. NBFC’s offer loans for
working capital requirements, facilitate mergers and acquisitions, IPO
finance, etc. apart from financial consultancy services. Trends are now
changing as banks (both public and private) have now started focusing on
NBFC domains like long and medium-term finance, working cap
requirements. IPO financing to etc. to meet the multifarious needs of the
business community.
New Opportunities for Banks

The overall growth in the sector is being brought about by deregulation,

which has opened several new opportunities for banks to increase revenues
by diversifying into areas like investment banking, insurance, credit cards,
depository services, mortgage financing, securitization, etc. This has
resulted in a marked improvement in the financial health of commercial
banks in terms of capital adequacy, profitability and asset quality. While a
rate cut by Reserve Bank of India would make the sector even more
attractive, we believe the sector is worth investing in even without banking
upon a rate cut. Clearly, therefore, the sector’s future prospects are good.

As a premier financial services group with world-class standards and

significant global business, the bank is committed to excellence in customer,
shareholder and employee satisfaction. “To retain its premier position, the
bank will aim at sustained profitability through greater attention to cutting
costs, increasing volumes, improving asset quality, expanding fee-based
incomes including treasury operations, customized products, and new
products, with close attention to risk management and asset liability
management”.

In the past, the bank’s lending was concentrated mainly in industry, which
made it vulnerable to any downturn in industry. In the last decade, economic
reforms increased incomes in the economy, particularly in services. At the
same time, with increasing competition, customers have also become more
demanding. Deregulation offered banks the opportunity to expand the
frontiers of their business. All this has increased the scope for consumer
finance and retail banking. To leverage its reach covering a large number of
consumers all over the country and diversify its asset portfolio the bank has
made consumer finance and retail banking a key focus area. The bank will
also focus on infrastructure enlarging coverage of mid-corporates, trade,
housing finance, and agriculture.

The idea is to focus on key areas and support it fully. In the personal banking
area, for instance, the bank has set up a dedicated network of specialized
fully computerized personal banking branches, using state-of-the-art
technology. These branches are targeted at middle and higher-end of
personal banking clientele and provide a complete range of personal banking
products and services like internet banking, tele-banking and home banking.
The bank will also concentrate on specialized branches for other segments,
including commercial branches for mid-corporates, specialized branches for
top customer, SSI branches for small industries and hitech agricultural
finance branches for high-value agricultural customers.

At the same time, the long term IT strategy and MIS support will put the
bank on a fully integrated technology platform and this will be backed by
efficient customer service.
Social Development Aspect

While stressing the need to create a market-driven banking sector with

adequate focus on social development, McKinsey proposes a strong focus
on “social development by moving away from universal directed norms to an
explicit incentive-driven framework by introducing credit guarantees and
market subsidies to encourage leading public sector, private and foreign
players to leverage technology to innovate and profitably provide banking
services to lower income and rural market.” Standard & Poor’s also makes a
reference to the rural banking of public sector banks: “Although they are
significant in terms of deposit gathering, the bulk of rural branches (of public
sector banks) tend to bed unprofitable, counter balanced by the profitable
urban and metropolitan branches.”

“The most urgent and immediate need is to increase credit provision to the
rural areas for both agricultural and non-agricultural purposes,” states the
Independent Commission. “Given the option the scheduled commercial
banks would not like to operate in rural areas. This has been proved clearly
since March 1995 after the disbanding of the branch licensing policy and the
granting of freedom to bank boards to decide on their bank branch expansion
programme. Since then, there has been a reduction of roughly 840 rural
branches instead of an addition of at least 8000 bank branches in rural areas
under the erstwhile policy thrust. This approach has thus spawned a series
institutional vacuum in the rural credit structure, “ it added.

It is necessary to modify the nature of expectations of profitability of rural

branches. It is wrong to consider, according to the commission, even as a
business proposition, that every rural branch should reach a break-even point
and attain positive profits in three years or so.

Today, the overall level of non-performing loans (NPLs)in the entire

financial system is around Rs. 120000 crore. Of this, around Rs. 50000 crore
are NPLs on account of the corporate sector, the rest accounted for by the
rural and cooperative sector. The cooperative sector is not ruined by the rural
poor, but by politicians and other manipulators. What India needs is a proper
banking structure to ensure that these funds reach the end users.

Changing Scenario
The changes starting in the face of bankers relate to the fundamental way of
banking – which is undergoing rapid transformation in the world of today in
response to the forces of competition, productivity and efficiency of
operations, reduce operating margins, better assets/liability management, risk
management, anytime and anywhere banking. The major challenges faced by
banks is to protect the falling margins due to the impact of competition.
Falling profit margins call for the increasing volumes so as to result in better
operating results for banks. This will be best achieved by exploiting the
advantages of technology which facilitates handling increased volumes at
higher levels of efficiency and enhancing customer relationship.

It is in this context that there is an imperative need for not mere technology
upgradation but also its integration with the general way of functioning of
banks to give them an edge in respect of the services provided to their
constituents, better housekeeping, optimizing the use of funds and building
up of MIS for decision making, better management of assets and liabilities
and the risks assumed which in turn have a direct impact on the balance
sheet of banks as a whole. Technology has demonstrate potential to
change methods of marketing, advertising, designing ,pricing and
distributing financial products and services and cost savings in the form of
an electronic, self service product delivery channel. These challenges call for
a new, more dynamic, aggressive and challenge work culture to meet the
demands of customer relationship, product differentiation, brand values,
reputation, corporate governance and regularity prescriptions. Technology
holds the key to the future success of Indian banks.

Having discussed about the changed and constantly changing scenario, and
before I focus on human resources and skills that are required to coop with
these rapid changes, I would like to answer certain general questions which
are surely in your mind viz what to change? How to change? and why to
change? business leaders in US in one of the annual surveys done in early
90’s where asked as what changes they considered important for their
success in business. They came out with several aspects and out of which
they said the following fourteen and vital and crucial viz

• Initiating major reorganization plans

• Improving competitiveness through implementation of total quality
management processes.
• Incorporating information systems as an integral part of business and
production strategy.
• Responding to new or increased global competition.
• Right sizing the work force.
• Initiating cost containments mechanism.
• Adjusting to the changing profile and needs of today’s employees.
• Ensuring customer focus with emphasis on customer service attitude
and behavior throughout the organization.
• Establishing new products and markets.
• Dealing with the turmoil associated with mergers, acquisitions and
leveraged buyouts.
• Redefining organization culture to be more supportive of corporate
business objectives.
• Complying with new government regulations.
• Establishing employee involvement programmes to generate a sense
of empowerment and commitment.
• Incorporating new production/manufacturing procedure and
machinery.
Future landscape of Banking Industry

The key function of the Indian financial systems will be to make available
investable resources to the potential investors in the required form and tenor
viz equity, debt and loans, short and long term. Infrastructure funding will be
around Rs.1,20,000 crores. Foreign direct investment cap in banking sector
will move upto 35%. Rupees will be fully convertible. Education and health
sectors will enjoy larger investment from abroad. Non banking financial
intermediaries will be integrated into the financial systems.

The future landscape of the banking sector accordingly will have the
following four characteristics:

1. consolidation of players through mergers and acquisition

2. globalization of operations
3. development of new technologies
4. universalisation of banking

Technology- future in Banking.

We do stand on a precipice, stepping into new era a time of changes and

challenges coupled with uncertainity characterize by the study emergency of
a truly borderless, interconnected global economy. The macro environment
has undergone radical change with liberalization, privatization, globalization
process. With entry of multinational companies and foreign direct
investment in major thrust areas have led to an altogether new infrastructural
set up, economic demote, business strategies and outlook. Information and
technology has shrunk the world as a result of which time and distance have
become non entities to a large extent. The information technology has
changed the structure of Indian banking. The concept of banking has
drastically changed from a business dealing with money transaction along to
a business related to information on financial transaction. The technology
has been the main facilitators in the process of transformation. The precise
impact, technology had on the banking industry since 1980 is difficult to
access, because of the intimacy of relationship between the industry and
technology, it is impossible to separate the two. The use of new technology
means revolutionary innovation of products and services and delivering them
to customers covering aspects like nowhere, when and at what price they
want. Thus banks and customers are now receptive to new ways and types of
approaches to delivering services and facilitates remotely. Electronic fund
transfer at point of sale with e-cards is catching up fast. This does not mean
the branches that dead indeed, in the future the fate of the branch banking
will be a most hotly debated issue. The adoption of philosophies and policies
based on international standard and increase in competition both at domestic
as well as international level will have heavy impact on the Indian banking
business. Moreover, with the introduction of technology a person in financial
sector is able to carry out a wide range of banking insurance and other
financial services simultaneously. Banks also will be expected to innovate
new product and services to encourage new entrepreneurs and finance new
schemes and projects brought in by educated youths including venture
capitalists.
This implies that IT will play a critical role in the years to come by providing
better customer service, presumably at a lower cost several innovative IT
based derives such as automatic teller machine, electronic fund transfer,
anywhere any time banking , smart cards, net banking etc. The consumer
banking needs are getting more complex and demands are for more
innovative products. The want more mobility of investment, inter active
account of better segmentation of banking products. As a result, the
technology architecture of banks needs to be more flexible and achieve faster
go to market product strategy. Banks are able to provide single window
system to their customer, where all need of the customers are taken care of
at a single counter.

Till a few years ago, it was difficult to believe that banking could be on your
fingertips. Today, a mobile handset with a connection is all you need to
make a banking transaction. Morever, ATMs, net banking and SMS banking
has made sure that you don’t need to visit a branch for your banking needs.
So is that the end of innovation in banking?

Not really. Cisco’s future bank branch promises to make transactions even
easier. Packed with a combination of technologies — including radio
frequency identification (RFID) tags, application-oriented networking
(AON) solutions, video telephony and digital signages, the bank of
tomorrow promises to make interaction simpler and more secure.

Headquartered in San Jose, California, Cisco designs and sells networking

and communications technology and services. It is in the process of making
the future happen. In the not so distant future, as soon as a customer walks
into the bank, even before the customer identifies himself, the RFID enabled
ATM card would identify the customer to customer service officer at the
bank. Very few customer in India have RFID enabled ATM cards as it’s
usually given to very high net worth individuals at present. The AON
technology would instruct surveillance cameras to take the picture of the
customers which will pull out the customer profile from customer
relationship management database placing it on the customer service officer
mobile tablet PC and branch manager's IP phone (internet protocol-enabled
phone).

In the future, a customer could get several issues resolved from an IP phone.
A phone-based kiosk would allow customers to swipe their card and use the
IP phone for non-cash transaction, much like the phone-banking service
offered at present.

Cisco has also included digital media systems or digital signages, in its
development, which could be a revenue generator for banks. A bank can
market its various financial services products with the next stop being the
Cisco Unified Meeting Place Express, an integrated voice, video, and web
conferencing solution that is deployed over networks.

Cisco’s Unified Personal Communicator is a solution that easily accesses

voice, video, instant messaging, web conferencing, voicemail, and presence
information from a single, multimedia interface on your PC or Mac. It helps
connect with colleagues, partners, and customers in office or on the go. All
this may sound a bit esoteric at present, but it won’t take us long to get used
to the bank of the future. After all, interacting with a machine for banking
needs sounded quite esoteric, not that long ago.
Technology innovations by Indian Banks

Innovations normally results in the creation of a product or services.

Innovations can take place in the process, service or procedure.
Technological innovations service area important as it in products in could
encompass enhancing the quality of reliability of an existing service by
changing g the service delivery systems or by totally revamping it in line
with the changes in the market place. The introduction of ATM in case in
point. It has entirely changed the way a major percentage of personal
banking transactions. Some of the innovation which the technology has
bought in banking industry are explained hereby.
1. Automated Teller Machine (ATM) or cash machine

The cash machine or automated teller machine as it is more formally known

is the most visible and perhaps most revolutionary by element of the virtual
banking revolution. Everyday , millions of people around the world in
thousands of walk of life rely on the speed and convenience of cash machine
to get access to the money they need and get on with their daily business
with the minimum of delay

Functions of ATM: The ATM of banks is providing banking services to

customer in 24 Hrs a day, 365 days in year without entering the bank. The
ATM is like credit card size plastic card that customer can insert into the
ATM to access his account, personal identification number is allotted to the
customer along with the ATM card. Pin is a secret four digits code number
randomly generated by a computer for customer. The following functions
can be performed on ATM.

1. Withdrawal of cash upto a particular limit

2. Deposit of cash ,cheques or Drafts, the ATM will immediately print out is
receipt for the same

3. Transfer of money from one account to another account can be done

2. Inter-branch network

All branches of new private sector banks are working as a single

computerized network. It gives power to customers to operate his bank
account from any branch of bank from anywhere in India. Customer can with
draw cash from his saving account from another branch where he has not
having any account, by giving a self cheque to that branch. Customer can
deposit a cheque in one branch to be credited to his saving account in
another branch of another city. He can also transfer money between two
accounts in different cities. It is called electronic fund transfer the branches
of these banks are inter-linked through artificial satellite.
3. Debit cards, Credit cards and Charged cards

Banks provide various types of debit and credit card facilities. Many bank
customers have a doubt as to whether they should go in for an ATM card,
Debit card, Credit card or may be even a charged card. Which card is best
for customer, it depends upon customers need as well as nature and comfort
with which a customer would lie to make expenses.

A debit card in simple term is an ATM card and more. An ATM card allows
to access money from the ATM. What a debit card is in addition can also be
used in and other merchant establishment where one can make payments for
his purchase. Using a debit card means that a customer is using his own
money, the balance on which is already in the customers account.
The credit card is the card with which most of the people are quite familiar.
Where the mantra is have no cash but spend as the payment has to be made a
later date. The money of credit card company is used. The amounts spend up
to the limit sanction will be paid by the customer when credit card period is
over and the bill arise. If the money is not paid within specify time by the
customer then a huge rate of interest is charged from the customers.

Many people use a credit card as a charge card. This means that pay off the
amount of expense to the due date. Thus not caring forward any expense
avoiding the interest trap. These cards are now issued by all NPSBs in
association with other world- wide credit card companies.

4. Banking through mobile phone

The mobile vowing customers of major Indian banks particularly a NPSBs

are now be able to give their approval for the clearance of cheques with the
help of this way communication technology development. The two way text
messaging system technology allows consumers to submit request and get
answers from the bank on their mobile phones about banking transactions
like clearance of cheques, credit card balance etc.
5. Internet banking services

Rapid growth in the number of internet connections and users has opened up
a large market or cyber consumer , as more and more useful services are
being offered over the internet business and home users internet use looks
set to rise in popularity to compete with other forms of communication such
as telephone and televisions. Internet banking is experiencing rapid growth ,
initially, seen as an efficient way to market bank services, recent
developments have enabled bank to provide extended home details and
corporate inter – faces over the internet to their customers.

A customer can operate his bank account from anywhere in the world from
any personal computer at any time with an internet connection. Customer
can carry all the banking transactions safely and with total secrecy through
internet banking. The entire internet banking system is secured with fool
proof technology security network. Following services are availed
1. Funds transfer between customers accounts
2. Request for making fixed deposits
3. Cheque book request etc

6. Tele banking

Tele-banking refers to banking on phone services. It enables the customer

transact his banking operations over a telephone call. Tele-banking is
extensively user friendly and cost effective in nature. It offers a range of
options to the users to choose from

1. Information on the current interest rates

2. To get a particular work done through the bank the users may leave his
instructions
3. Facility of stop payment on request
4. Information with regard to foreign exchange rates

Every user is given a personal identification number by the bank at the time
of operating an account and willing to avail the Tele-banking services.

The above listed technologies have a very bright future which would help the
customers for a speedy transaction.
PRODUCT INNOVATION AND PROCESS RE-ENGINEERING
With increased competition in the banking Industry, the net interest margin of
banks has come down over the last one decade. Liberalization with Globalization
will see the spreads narrowing further to 1-1.5% as in the case of banks operating
in developed countries. Banks will look for fee-based income to fill the gap in
interest income. Product innovations and process re-engineering will be the order
of the day. The changes will be motivated by the desire to meet the customer
requirements and to reduce the cost and improve the efficiency of service. All
banks will therefore go for rejuvenating their costing and pricing to segregate
profitable and non-profitable business. Service charges will be decided taking into
account the costing and what the traffic can bear. From the earlier revenue = cost
+ profit equation i.e., customers are charged to cover the costs incurred and the
profits expected, most banks have already moved into the profit =revenue - cost
equation. This has been reflected in the fact that with cost of services staying
nearly equal across banks, the banks with better cost control are able to achieve
higher profits whereas the banks with high overheads due to under-utilisation of
resources, un-remunerative branch network etc., either incurred losses or made
profits not commensurate with the capital employed. The new paradigm in the
coming years will be cost = revenue - profit.

As banks strive to provide value added services to customers, the market will see
the emergence of strong investment and merchant banking entities. Product
innovation and creating brand equity for specialized products will decide the
market share and volumes. New products on the liabilities side such as forex
linked deposits, investment-linked deposits, etc. are likely to be introduced, as
investors with varied risk profiles will look for better yields. There will be more
and more of tie-ups between banks, corporate clients and their retail outlets to
share a common platform to shore up revenue through increased volumes.

Banks will increasingly act as risk managers to corporate and other entities by
offering a variety of risk management products like options, swaps and other
aspects of financial management in a multi currency scenario. Banks will play an
active role in the development of derivative products and will offer a variety of
hedge products to the corporate sector and other investors. For example,
Derivatives in emerging futures market for commodities would be an area offering
opportunities for banks. As the integration of markets takes place internationally,
sophistication in trading and specialized exchanges for commodities will expand.
As these changes take place, banking will play a major role in providing financial
support to such exchanges, facilitating settlement systems and enabling wider
participation.

Bank assurance is catching up and Banks / Financial Institutions have started

entering insurance business. From mere offering of insurance products through

network of bank branches, the business is likely to expand through self-designed
insurance products after necessary legislative changes. This could lead to a spurt
in fee-based income of the banks.

Similarly, Banks will look analytically into various processes and practices as
these exist today and may make appropriate changes therein to cut costs and
delays. Outsourcing and adoption of BPOs will become more and more relevant,
especially when Banks go in for larger volumes of retail business. However, by
increasing outsourcing of operations through service providers, banks are making
themselves vulnerable to problems faced by these providers. Banks should
therefore outsource only those functions that are not strategic to banks’ business.
For instance, in the wake of implementation of 90 days’ delinquency norms for
classification of assets, some banks may think of engaging external agencies for
recovery of their dues and in NPA management.

Banks will take on competition in the front end and seek co-operation in the back
end, as in the case of networking of ATMs. This type of co-opetition will become
the order of the day as Banks seek to enlarge their customer base and at the same
time to realize cost reduction and greater efficiency.
REGULATORY AND LEGAL ENVIORNMENT
The advent of liberalization and globalization has seen a lot of changes in the focus
of Reserve Bank of India as a regulator of the banking industry. De-regulation of
interest rates and moving away from issuing operational prescriptions have been
important changes. The focus has clearly shifted from micro monitoring to macro
management. Supervisory role is also shifting more towards off-site surveillance
rather than on-site inspections. The focus of inspection is also shifting from
transaction-based exercise to risk-based supervision. In a totally de-regulated and
globalised banking scenario, a strong regulatory framework would be needed.
The role of regulator would be critical for:
a) ensuring soundness of the system by fixing benchmark standards for capital
adequacy and prudential norms for key performance parameters.
b) adoption of best practices especially in areas like risk-management,
provisioning, disclosures, credit delivery, etc.
c) adoption of good corporate governance practices.
d) creation of an institutional framework to protect the interest of depositors.
e) regulating the entry and exit of banks including cross-border institutions.

Further, the expected integration of various intermediaries in the financial system

would add a new dimension to the role of regulators. Also as the co-operative
banks are expected to come under the direct regulatory control of RBI as against
the dual control system in vogue, regulation and supervision of these institutions
will get a new direction.

Some of these issues are addressed in the recent amendment Bill to the Banking
Regulation Act introduced in the Parliament.

The integration of various financial services would need a number of legislative

changes to be brought about for the system to remain contemporary and
competitive. The need for changes in the legislative framework has been felt in
several areas and steps have been taken in respect of many of these issues, such as,

i) abolition of SICA / BIFR setup and formation of a National Company

Law Tribunal to take up industrial re-construction.
 Ii) enabling legislation for sharing of credit information about borrowers
among lending institutions.

Integration of the financial system would change the way we look at banking
functions. The present definition of banking under Banking Regulation Act
would require changes, if banking institutions and non-banking entities are to
merge into a unified financial system

While the recent enactments like amendments to Debt Recovery Tribunal

(DRT) procedures and passage of Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI
Act) have helped to improve the climate for recovery of bank dues, their impact
is yet to be felt at the ground level. It would be necessary to give further teeth
to the legislations, to ensure that recovery of dues by creditors is possible within
a reasonable time. The procedure for winding up of companies and sale of
assets will also have to be streamlined.

In the recent past, Corporate Debt Restructuring has evolved as an effective

voluntary mechanism. This has helped the banking system to take timely
corrective actions when borrowing corporates face difficulties. With the
borrowers gaining confidence in the mechanism, it is expected that CDR setup
would gain more prominence making NPA management somewhat easier. It is
expected that the issue of giving statutory backing for CDR system will be
debated in times to come.
In the emerging banking and financial environment there would be an
increased need for self-regulation. This is all the more relevant in the context of
the stated policy of RBI to move away from micro-management issues.
Development of best practices in various areas of banks’ working would evolve
through self-regulation rather than based on regulatory prescriptions.

Role of Indian Banks’ Association would become more pronounced as a self

regulatory body. Development of benchmarks on risk management, corporate
governance, disclosures, accounting practices, valuation of assets, customer
charter, Lenders’ Liability, etc. would be areas where IBA would be required to
play a more proactive role. The Association would also be required to act as a
lobbyist for getting necessary legislative enactments and changes in regulatory
guidelines.

HR practices and training needs of the banking personnel would assume greater
importance in the coming days. Here again, common benchmarks could be
evolved. Talking about shared services, creation of common database and
conducting research on contemporary issues to assess anticipated changes in the
business profile and market conditions would be areas where organizations like
Indian Banks’ Association are expected to play a greater role.

Evolution of Corporate Governance being adopted by banks, particularly those

who have gone public, will have to meet global standards over a period of time.
In future, Corporate Governance will guide the way Banks are to be run. Good
Corporate Governance is not a straight jacketed formula or process; there are
 many ways of achieving it as international comparisons demonstrate, provided
the following three basic principles are followed:-

a) Management should be free to drive the enterprise forward with the

minimum interference and maximum motivation.

b) Management should be accountable for the effective and efficient use of this
freedom. There are two levels of accountability – of management to the
Board and of the Board to the Shareholders. The main task is to ensure the
continued competence of management, for without adequate and effective
drive, any business is doomed to decline. As stated by J.Wolfensohn,
President, World Bank – “Corporate governance is about promoting
corporate fairness, transparency and accountability”.

c) In order to enlist the confidence of the global investors and international

market players, the banks will have to adopt the best global practices of
financial accounting and reporting. This would essentially involve adoption
of judgmental factors in the classification of assets, based on Banks’
estimation of the future cash flows and existing environmental factors,
besides strengthening the capital base accordingly.

When we talk about adoption of International accounting practices and reporting

formats it is relevant to look at where we stand and the way ahead. Accounting
practices being followed in India are as per Accounting Standards set by the
Institute of Chartered Accountants of India (ICAI). Companies are required to
follow disclosure norms set under the Companies Act and SEBI guidelines relating
to listed entities. Both in respect of Accounting Practices and disclosures, banks in
India are guided by the Reserve bank of India guidelines issued from time to time.
Now these are, by and large, in line with the Accounting Standards of ICAI and
other regulatory bodies. It is pertinent to note that Accounting Standards of ICAI
are based on International Accounting Standards (IAS) being followed in a large
number of countries. Considering that US forms 40% of the financial markets in
the world compliance with USGAAP has assumed greater importance in recent
times. Many Indian banks desirous of raising resources in the US market have
adopted accounting practices under USGAAP and we expect more and more
Indian Financial entities to move in this direction in the coming years.

There are certain areas of differences in the approach under the two main
international accounting standards being followed globally. Of late, there have
been moves for convergence of accounting standards under IAS and USGAAP and
this requires the standard setters to agree on a single, high-quality answer.
Discussions in the accounting circles indicate that convergence of various
international accounting standards into a single global standard would take place
by 2007.

In the Indian context, one issue which is likely to be discussed in the coming years
is the need for a common accounting standard for financial entities. While a
separate standard is available for financial entities under IAS, ICAI has not so far
come out with an Indian version in view of the fact that banks, etc. are governed by
RBI guidelines. It is understood that ICAI is seized of the matter. It is expected
that banks would migrate to global accounting standards smoothly in the light of
these developments, although it would mean greater disclosure and tighter norms.
HUMAN RESOURCE MANAGEMENT
The key to the success of any organization lies in how efficiently the organization
manages its’ human resources. The principle applies equally and perhaps more
aptly to service institutions like banks. The issue is all the more relevant to the
public sector banks who are striving hard to keep pace with the technological
changes and meet the challenges of globalization.

In order to meet the global standards and to remain competitive, banks will have
to recruit specialists in various fields such as Treasury Management, Credit, Risk
Management, IT related services, HRM, etc. in keeping with the segmentation and
product innovation. As a complementary measure, fast track merit and
performance based promotion from within would have to be institutionalized to
inject dynamism and youthfulness in the workforce.
To institutionalize talent management, the first priority for the banking industry
would be to spot, recognize and nurture the talent from within. Secondly, the
industry has to attract the best talent from the market to maintain the required
competitive edge vis-a-vis global players. However, the issue of critical
importance is how talent is integrated and sustained in the banks. Therefore, a
proper system of talent management has to be put in place by all the banks.

As the entire Indian banking industry is witnessing a paradigm shift in systems,

processes, strategies, it would warrant creation of new competencies and
capabilities on an on-going basis for which an environment of continuous learning
would have to be created so as to enhance knowledge and skills.

Another important ingredient of HR management is reward and compensation

which at present do not have any linkage to skills and performance. A system of
reward and compensation that attracts, recognizes and retains the talent, and
which is commensurate with performance is an urgent need of the industry.

An equally important issue relevant to HRM is to create a conducive working

environment in which the bankers can take commercial decisions judiciously and,
at the same time, without fear. This calls for a re-look into the vigilance system
as it exists today, and perhaps there is a need to keep the banking industry out of
the CVC. The Banks’ Boards may be allowed to have their own system of
appropriate checks and balances as well as accountability.
Potential Scenarios

In an interesting futuristic study, McKinsey uncovers “three potential

scenarios” that could emerge in the banking sector by 2010(after the entry of
a large number of foreign players), based on the interplay between policy
and regulatory interventions and management strategies. The first is a “high
performing” scenario, where policy makers intervene only to the extent
required to ensure system stability and protection of consumers interest, and
bank management step up the drive for far-reaching change.

In the second, “evolving” scenario policy makers adopt a pro-market stance

but are cautious on pushing reform. The share of the banking sector value
added would be 4.7 per cent GDP. And in the third scenario—stagnating—
policy makers intervene to set restrictive conditions and management is
unable to execute changes to deliver value to shareholders or customers.
Here, the share of the banking sector value added would be only 3.3 per cent
of GDP.

The evidence from many emerging market economies, particularly Latin

America, shows that a greater reliance on banking FDI has given rise to
conditions of: stalled overall growth in credit with domestic banks also
reducing loan exposures; far greater financial instability during episodes of
shock to the domestic economy; and uncertainty and slow economic growth
due to foreign banks acting as conduits for transmission of contagion and
strategic decision from parent banks onto developing markets. ”It is to be
noted that these consequences are but an expression of the laws of economic
sovereignty. We can choose to ignore these lessons only at our own peril,”
states the independent commission of bank officers.
Road ahead

Indian banking system will have to deal with huge paradigm shifts in a very
dynamic and complex international arena. The key macroeconomic factors
that will write the future of banking are

• Changing demographic profile-as sixty percent of Indian population

will be below the age of forty by 2015.
• More than sixty percent of the contribution to GDP will be coming
from service sector.
• Booming capital market and increased employment opportunities.
• Decoupling of the emerging economies will change the world order.
• The credit flows from the banking system is expected to grow at more
than 20 percent.
• Aspiration of the many banks to operate in the global arena.
• Incremental capital requirements of subsidiaries, particularly,
insurance subsidiaries.
• Implementation of basal II reforms will increase the capital
requirement.
• In case of large public sector banks provisioning for retrial benefits
that include gratuity and pension.

Indian Banking Association estimates that the collective capital requirement

of the public sector alone would be around 1.5 lakhs over the next five
years. The requirement of capital may result into over crowing in the capital
market. This way effect the small banks but may be the single most critical
driver for the consolidation of the Indian banking. Equity instrument may be
the preferred root for the banking system and we can take cue from the
Chinese, where they were able to raise $.37 billion of capital for the last 2
 years. Success of Indian banking in raising capital from the global markets
may be driven by the growth story of the Indian banking and required
structural changes in the share holding pattern.

Case Study

IBM’s strategic research unit, the Institute for Business Value, recently
released a study called Banking 2015: Defining the Future of Banking.
Worldwide, total financial services revenue is predicted to experience
compound annual growth of 7.1 percent between 2000 and 2015, from $2
trillion to $5.6 trillion. In the Asia-Pacific region, IBM predicts a growth
rate of about 7.6 percent.

The study forecasts trends in banking for a unique insight into the
competitive forces that bankers will face in the next 10 years. It
highlights the emerging business and technology innovations and societal
trends that will propel and shape the industry’s transformation.

According to the survey, the five key trends that will determine market
success in 2015 are customers taking control, niche competitors, a new
workforce, regulated transparency and sharp focus on technology.

Sanjay Sharma, Corporate Head, Technology, IDBI Bank believes that

business, whether banking or otherwise, has to be customer-centric.

Agrees Sharad Bishnoi, Assistant Vice-president, Head, Business Process

Re-engineering Group, HDFC Bank, “Banking services require a high
level of customer engagement and understanding of the requirements for
a quality value proposition. These factors can be sustained long-term by
adopting a customer-centric business strategy.”

Similarly, transparency and accountability from regulation and

compliance are also growing. Sharma points out that banks dealing with
the US customers need to comply with international regulations such as
Sarbanes-Oxley, and the Indian ones from RBI and Clause 49.

The survey goes on to predict that market changes will pose growing
challenges for conventional banks. Sunny Banerjea, Global Banking
Leader for the IBM Institute for Business Value says, “By 2015, we will
live in an intensely customer-centric market dominated by global mega
banks and densely populated by specialist financial services providers.
Technology will also drive fundamental changes in workforce
disposition, which will have substantial follow-on effects for
productivity, efficiency and profitability. These trends are already evident
but as they become entrenched, there will be profound changes in the
competitive drivers of global banking.”
Sharma feels that over time banks will focus on specialising in key
segments. The survey suggests that banks must identify target business
areas. It will be essential to maximise operational efficiency and counter
nimble new market entrants by partnering with specialist providers.
Keeping with the future trends, the study identifies a number of value-
added options for products and market innovation. These are mortgages,
RFID, service packaging and customer integration.

Says Bishnoi, “Service packaging and customer integration have started

already and I believe will only increase in future. Basic products in
banking being limited in number, added flavours and value additions are
gradually coming to the forefront. Two of the most critical aspects will
be: packaging more customised products to suit a customer need and
customer integration leading to better portfolio management—at a more
granular level.”

However, Sharma feels that it is the mortgage and RFID segments which
are more promising. “Though mortgages have operational complexities
they are innovative products for customers. For instance, customers can
avail of different cash-back offers. Similarly, RFID also has great
potential to leverage business. Banks can utilise this technology to
understand customers’ needs and for issues such as customer
authentication.”

According to Swarup Choudhury, Director, FSS, IBM, each bank must

decide on a strategy that fits its customers’ needs. “Banks will need
special strategies to cater to a far more discerning and controlling
customer,” he says.

He predicts, “Banking customers will demand more advocacy, personal

security and control in their banking relationships. Banks will source
products and services from many specialised and best-in-class service
providers, including independents and other banks providing white-label
products and services. They will partner actively with providers to
improve their capabilities without locking up their own capital and their
ability to address changing demand cycles.”

By and large, banks in India lack people with the right skills and attitudes, as
outlined earlier (‘Shaping the future of banking’, February 25), and
mismatches of managerial responsibilities and competencies are common.
Banks suffer grievously from lack of skills on all performance parameters,
dragging down the entire financial sector with it. This is something a fast-
emerging economy simply cannot afford.

Beyond that, though, lack of training also has a larger significance in the
overall context of the function of India’s financial sector and its relevance to
the achievement of national goals. It is unfortunate that financial inclusion
remains a distant dream today. There is a basic lack of understanding of the
direct link between absence of financial skills and the poor outcomes of the
country’s poverty alleviation programmes. Weak managements tend to
encourage vertical programmes. This fosters a lack of confidence, which suits
them only too well, and discourages decentralisation, programme integration,
local participation and initiative. The problem is not in the macro conception
of our schemes, but in their micro-level delivery.

It all comes down to human resource development and training, which is

imperative in underpinning the values of social equity, responsibility and
participation. Since financial inclusion is so important, banks are integral
partners in attaining the objectives of sustained economic growth with full
employment. The lack of success in attaining full financial and related social
inclusion and the inability to tap household savings effectively stems in part
from the lack of trained people to deliver bank services.

The big question we have to ponder is whether these stable conditions marked
by all round improvement in banks' performance can continue into 2005
onward in the light of potentially dramatic changes that include, among
others, a sliding dollar, rising interest rates, introduction of Basel II accord
and international accounting standards, and the possible flattening of
consumer lending boom. Hopefully, the banking industry in tandem with the
regulatory authorities will rise to the occasion, and collectively face the
challenges and opportunities that lie ahead.
Conclusion

Despite the benefits of scale to the banking business, especially with the
increasing role of marketing and technology based systems, the banking
sector in India is highly fragmented, with 53 domestic banks accounting for
about 93% of the systems assets. Risk management is still largely a work in
progress, although significant improvements occured in the past decades.
With strong credit growth and weak risk management systems, especially in
small banks, the potential for an under statement of problem assets
increases. The weaknesses could under mine the potential growth of the
Indian banking system if a strategy is framed and implemented. As far as
the future of Indian banking is concerned, a number of issues such as the
credit to small and medium enterprises, customers interest and financial
inclusion, reducing procedural formalities, listing of the public sector banks
in the stock exchange and related market discipline are of paramount
importance.

The Reserve Bank of India acts as a centralized body monitoring any

discrepancies and short coming in the system. The Reserve Bank of India in
its “road map” for the banking industries as indicated that the Indian market
will be opened for international banks by 2009. It is expected that may
foreign banks would gain entry in the Indian markets to tap the vast potential
that exists today. These banks with the help advanced technology, adequate
capital for investment, and their customer centric approach will be able to
attract the profitable customers from the existing banks.

A fierce competition between the existing banks and the new entrants is
likely to provide impetus for business growth. To effectively meet the
competitive challenge from such banks, the Indian banking industry will
have to gear up and adopt the global best practices, which would make them
stronger and comparable with the international banks. The face of banking
is changing rapidly. Competition is going to be tough and with financial
liberalization under the WTO, banks in India will have to benchmark
themselves against the best in the world. For strong and resilient banking
and financial system, therefore, banks need to go beyond peripheral issues
and tackle significant issues like improvements in profitability, efficiency
and technology while achieving economies of scale through consolidation
and exploring available cost effective solutions.
Bibliography

Future Scenario of Indian Banking - by R.K.Uppal

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