Challenges before Indian commercial banks

Indian banks functionally diverse and geographically widespread have played a crucial role in the socio-economic progress of the country after independence. Growth of large number of medium and big industries and entrepreneurs in diverse fields were the direct results of the expansion of activities of banks. The rapid growth, forever lead to strains in the operational efficiency of the banks and the accumulation of non-performing assets (NPAs) in their loans portfolio. The uncomfortably high level of NPAs of banks however is a cause for worry and it should be brought down to international acceptable levels for creating a vibrant and competitive financial system. NPAs are serious strains on the profitability of the banks as they cannot book income on such accounts and their funding cost provision requirement is a charge on their profit. Although S & P cited as a reasons for mounting of NPAs priority sector lending, outdated legal system which not only encourages the incidence of NPAs but also prolongs their existence by placing a premium on default and delay in finalization of rehabilitation packages by the Board for Industrial and Financial Reconstruction are some of the major causes for the rising of NPAs. Major challenges, which Indian Commercial Banks are today facing and which are likely to be more poignant in the ensuing years in view of the irreversible process of the reform and resultant verisimilitude of many more players entering the banking sector, are, as outline below: Problem of Pressure on Profitability The greatest challenge which PSBs are facing in recent years arises out of pressure on their profitability. With continuous expansion of branches and manpower, thrust on social and rural banking, directed priority sector lending, maintenance of higher reserve ratios etc. had their telling impact on the profitability of the banks. In order to improve financial health of commercial banks the government provided a dose of hybrid capital and in return these banks were made to sign a memorandum of understanding with RBI. The crux of the MOU was on toning up productivity, efficiency, cost reduction, higher recovery. Further, accent of banks operations shifted to non-fund based business with an eye on capital adequacy unremunerative services, the bank have to offer. Problem of Low Productivity Another challenge, which Indian commercial banks are facing, is low productivity. The low productivity has been due to huge surplus manpower, absence of good work culture, inflexible and inefficient labour force in PSBs and absence of employees commitment to the organisation. Problem of Non-Performing Assets A serious threat to the survival and success of Indian banking system is uncomfortably high level of non-performing assets. Although NPAs (both Gross and Net) of commercial banks in India have substantially declined in recent year, still it is 6% of the total advance. Strengthening non-performing assets are hurting banks profitability and even the basic inability of the banking system by way of both nonrecognition of interest income and loan loss provisioning. Problem of Resource crunch

There are indication that the household savings comprising financial savings and physical assets are moving away from bank deposits to more sophisticated form of financial assets such as mutual funds, stock and derivatives or life insurance and pension contributions. Problem of Assets-liability mismatch With more and more bank credit going for infrastructure lending and commercial real estate financing while the liability structure of the banks is getting shorter and shorter, banks are facing serious problem of assets-liability mismatch. Problem from Customer With fast changing life styles and values of customer who are now better informed and more sophisticated and who have a wide choice to choose from various banking and non-banking intermediaries have become more demanding. Their expectations in term of product, delivery and price are increasing. The PSBs lacking in customers orientation are finding it difficult to even retain their highly valued customers. Private sector banks have embarked upon customer. These banks by dint of information technology are offering speedier service and new and complex products. The telebanking, anywhere banking, internet banking, are some of the product innovated by the new players. Competition from New Players The commercial banks in India, which enjoyed monoploly position until recently, are facing perilous challenges particularly on quality, cost and flexibility fronts from the newly emerging players. Private sector banks by dint of their invigorating ambience and work culture supported by pragmatic leadership, committed, courteous, affable and trained staff and modern ultra gadgets are offering excellent customer services. Challenges due to Globalization Globalisation and integration of Indian financial market with world and the consequent entry of foreign players in domestic market has infused, in its wake, brutal competitive pressure on the Indian commercial banks. Foreign players endowed with robust capital adequacy, high quality assets, world-wide connectivity, benefits of economics of scale and stupendous risk management skills are posing serious threats to the existing business of the Indian banks. Cross-border flows and entry of new products, particularly derivative instruments, have impact significantly on the domestic banking sector. These are forcing banks in India to adjust the product mix, as also to effect rapid changes in their processes and operations in order to remain competitive in the globalisation environment. Indian banks are therefore, in greater pressure to gear themselves to offer not only wide menu of services but also provide these in an increasingly efficient manner in term of cost, time and convenience. Problem of Managing Duality of Ownership Indian banking is in a peculiar problem of managing conflicting interest of the Government of India and RBI on the one hand and the private shareholders, on the other. Problem of Managing Customer of Diverse Strata

Another very important challenges, which PSBs are facing, is managing two ends of spectrum of banking services. PSBs, have two faces: a commercial side and noncommercial side, each having various strata. Apart from the above, following deficiencies were noticed in the managing Credit Risk: i. The absence of written policies. ii. The absence of portfolio concentration limits. iii. Excessive centralization or decentralization of lending authorities. iv. Cursory financial analysis of borrower. v. Infrequent customer contact. vi. Inadequate checks and balances in credit process. vii. The absence of loan supervision viii. A failure to improve collateral position as a credit deteriorate ix. Excessive overdraft lending. x. Incomplete credit filesThe absence of the assets classification and loan-loss provisioning standards. xi. A failure to control and audit the credit process effectively.