Developments in Banking Sector in India

8/7/2019 Developments in Banking Sector in India

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SATYAJI T SAHOO

DM-04-100


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Earlier Later

Export and import of currency:-

Any person resident in India maytake outside India or having gone

out of India on a temporary visit,may bring into India (excludingto and from Nepal and Bhutan)currency notes of Government ofIndia and Reserve Bank of Indianotes up to an amount notexceeding Rs.5,000 per person.

Accordingly, any person residentin Indiamay take outside India or having

gone outof India on a temporary visit,may bring into India (excludingto and from Nepal and Bhutan)currency notes of Government ofIndia and Reserve Bank of Indianotes up to an amount notexceeding Rs.7500 per person.


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As per the extant ECB procedures, any changes in the terms and conditionsof the ECB after obtaining the Loan Registration Number (LRN) from theDepartment of Statistics and Information Management (DSIM), ReserveBank, require the prior approval of the Reserve Bank. As a measure ofsimplification of the existing procedures, it was decided to delegate

powers to the designated AD category-I banks to approve the followingrequests from the ECB borrowers, subject to specified conditions:

a) Changes / modifications in the drawdown / repayment schedule -subject to the conditions that the average maturity period, as declaredwhile obtaining the LRN, is maintained and subject to fulfillment of thereporting requirement.

b) Changes in the currency of borrowing the proposed currency ofborrowing is freely convertible.

c) Change of the AD bank - subject to No- Objection Certificate (NOC)from the existing designated AD bank and after due diligence.

d) Changes in the name of the Borrower Company - subject to productionof supporting documents evidencing the change in the name from theRegistrar of Companies.


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September 2009 marked the first anniversary of the global financial crisis. Itwas September 2008 when Americas one of the biggest investment bank,

Lehman Brothers, collapsed and triggered a chain reaction of economic,

financial and psychological crisis which very soon engulfed the entire globe.

The year 2008-09 turned out to be a year when hard-hit by the global

financial crisis, the worldwide banking industrys future development has

been sharply drawn into focus.

Recognizing that repairing the financial system remains a key priority, the

rescue measures were undertaken globally. These have contributed to an

avoidance of worst case scenarios, in particular by reducing the default

risk of major banks. From a period of volatility, the international financial

markets are normalizing in Q2 of 2009. However, the global banking sector

outlook remains difficult on both the sides of the Atlantic.

Due to proactive and swift action of central banks and Governments and

regulatory and supervisory policy initiatives, the adverse impact of the crisis

remained under control. The global economy is slated to recover during

2010, which may facilitate revival of the global banking system.


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Commercial BankingTechnology in Indian Banking 2007 10

Electronic

Banking

ATMs

Head Office

BranchBanking

Branch 1

Branch 2Branch 3

Branch 4

Branch 5

Branch 6

Branch n


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Technology Changes in Indian Banking

1. Advanced Ledger PostingMachine(ALPM)

2. Banknet and E-commerce

3. ATMs

4. Implementation of CRM technologies

5. Use of data base management system

6. Shared payment network service


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ALPM Advanced Ledger Posting Machine Micro processor basedelectronic device used for maintenance of primary ledgers, workingout products and interests at periodical intervals, preparation ofaccount statements and listing of standing instructions to beexecuted in the accounts.

Banknet:-A communication software to provide message and file

transfer between branches of banks and across banks. E-Commerce is conducting business communications and transactions

viz computers over networks. It is the buying and selling of goods andservices through digital communication.

ATMs:- It provides the facility to withdraw money anywhere in Indiaat any time.

CRM:- Customer Relationship Management is an information

technology industry term for methodologies, strategies, software,and other web-based capabilities that help an enterprise organizeand manage customer relationships.

Shared Payment Network Services:- Shared Network Service (SPNS)offering countrywide access to banking operations at more than17,000 ATMs in and around 64 cities.


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Introduction of MICR based cheque clearing and its proliferation to 39 centres as on date,

which has resulted in reduced time for realisation of cheques.

Implementation of safe, secure and quick modes of electronic funds movement for both

corporate and retail segments, in the form of Electronic Clearing Service (ECS-Credit and

Debit Clearing) and Electronic Funds Transfer (EFT), and the Special Electronic Funds

Transfer (SEFT), all of which now cover about 10,000 branches of banks spread across

about 200 cities and towns of the country;

The introduction of the Negotiated Dealing System for screen based trading in Government

Securities by RBI regulated institutions;

The introduction of the Real Time Gross Settlement (RTGS) System for online settlement of

inter-bank funds transfers on a transaction-by-transaction basis has been a significantachievement. This has resulted in risk free credit mode of funds settlement. The RTGS

system witnesses inter bank transactions amounting to an average of Rs. 5000 crore on a

normal working day in Mumbai;

Introduction of the Online Tax Accounting System (OLTAS), which has facilitated electronic

transmission of tax related information from banks to the Tax Information Network (TIN) of

the Income Tax Department


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All these have been aimed at exploiting thebenefits of IT to provide products andinformation conduits to banks that would enablethem in turn to offer better service to theircustomers.


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As per Mckinsey report one of the following three scenarioswill play out by 2010 for the development of Indianbanking sector.

1. High Performance2. Evolution

3. Stagnation


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High performance:

In this scenario, policy makers intervene only to the extent required to ensuresystem stability and protection of consumer interests, leaving managementsfree to drive far-reaching changes. Changes in regulations and bank capabilitiesreduce intermediation costs leading to increased growth, innovation andproductivity. Banking becomes an even greater driver of GDP growth andemployment and large sections of the population gain access to quality bankingproducts. Management is able to overhaul bank organizational structures, focuson industry consolidation and transform the banks into industry shapers.

Some M&A activity also begins to take place between private and publicsector banks. As a result, foreign and new private banks grow at rates of 50per cent, while PSBs improve their growth rate to 15 per cent. The share of

the private sector banks (including through mergers with PSBs) increases to35 per cent and that of foreign banks increases to 20 per cent of totalsector assets. The share of banking sector value add in GDP increases toover 7.7 per cent, from current levels of 2.5 percent. Funding thisdramatic growth will require as much as Rs. 600 billion in capital over thenext few years.


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Evolution: Policy makers adopt a pro-market stance but are cautious in liberalizing the

industry. As a result of this, some constraints still exist. Processes to create highlyefficient organizations have been initiated but most banks are still not best-in-class

operators.

Thus, while the sector emerges as an important driver of the economy and wealthin 2010, it has still not come of age in comparison to developed markets.

Significant changes are still required in policy and regulation and in capability-building measures, especially by public sector and old private sector banks.

In this scenario, M&A activity is driven primarily by new private banks, which takeover some old private banks and also merge among themselves. As a result, growthof these banks increases to 35 per cent.

Foreign banks also grow faster at 30 per cent due to a relaxation of someregulations.

The share of private sector banks increases to 30 per cent of total sector assets,from current levels of 18 per cent, while that of foreign banks increases to over 12per cent of total assets. The share of bankingsector value add to GDP increases toover 4.7 per cent.


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Stagnation:

In this scenario, policy makers intervene to set restrictive conditions and

management is unable to execute the changes needed to enhance returns to

shareholders and provide quality products and services to customers. As a result,growth and productivity levels are low and the banking sector is unable to support

a fast-growing economy.

New private sector banks continue on their growth trajectory of 25 per cent.There is a slowdown in PSB and old private sector bank growth.

The share of foreign banks remains at 7 percent of total assets. Banking sector

value add, meanwhile, is only 3.3 per cent of GDP.


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The policy and regulatory interventions and managementstrategies will determine the performance of Indian bankingover the next few years.

Legislative actions will shape the regulatory stance throughsix key elements: industry structure and sector consolidation;freedom to deploy capital; regulatory coverage; corporategovernance; labour reforms and human capital development;and support for creating industry utilities and servicebureaus.

Management success will be determined on three fronts:fundamentally upgrading organizational capability to stay intune with the changing market; adopting value-creating M&Aas an avenue for growth; and continually innovating todevelop new business models to access untappedopportunities.


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Specifically, at one extreme, the sector could account for over7.7 per cent of GDP with over Rs.. 7,500 billion in market cap,while at the other it could account for just 3.3 per cent of GDPwith a market cap of Rs. 2,400 billion. Banking sectorintermediation, as measured by total loans as a percentage of

GDP, could grow marginally from its current levels of ~30 per centto ~45 per cent or grow significantly to over 100 per cent of GDP.In all of this, the sector could generate employment to the tuneof 1.5 million compared to 0.9 million today.

Availability of capital would be a key factor the banking sectorwill require as much as Rs. 600 billion (US$ 14 billion) in capitalto fund growth in advances, non-performing loan (NPL) write offsand investments in IT and human capital upgradation to reachthe high-performing scenario.

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Developments in Banking Sector in India

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