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Banking sector in India – need for reforms

Banks should be encouraged to use technology and other innovative measures to tap the lower income and rural markets.

By PPFI Team

January 15, 2009

After liberalisation of the economy in 1991, the Indian banking sector witnessed tremendous growth and it now enjoys a global footprint. Apart from the growth the sector in the last decade and a half, the regulatory bodies like Reserve Bank of India also established a vibrant regulatory framework which is at par with the best economies in the world.

However, the recent economic crisis has exposed the vulnerability of the financial systems across the globe. It has at the same time established the importance of the banking sector in fuelling sustainable growth of the country. Though the Indian banks have performed well on the parameters of asset quality and profitability, there are several notable limitations which hamper the growth of the sector. The first and foremost is the low penetration of the Indian banking system. Other than that, outdated labour laws, restriction on capital availability, weak corporate governance and fragmented nature of the banking industry are the other major impediments.

There are several other challenges and issues that the banking industry face in the changing global scenario. Apart from their traditional banking functions, Indian banks have now started offering several value added product and services both in the wholesale as well as retail banking segments. Hence there is an increased demand for quality manpower for marketing and sales operations.

Though, at present, the interest rates are low due to the efforts of the government to tame the current economic crisis, in normal circumstances Indian banks face stiff competition from global banks. The levels of services rendered by the Indian banks still leave a lot more to be desired. Only those banks which are able to meet the enhanced expectations of the costumers will be able to survive in the churning that the sector is undergoing currently. The banking institutions on their parts should find out new ways and means in terms of mergers & acquisitions and developing new business models to tap new markets.

To meet these challenges and sustain the growth in the banking sector, several measures will have to be undertaken by policy makers – The Reserve Bank of India, the Finance Ministry and other regulatory bodies. The government and other regulatory bodies will have to constantly keep a tab on the banking sector scenario and ensure constant policy and regulatory interventions. The government should ensure that a better industry structure evolves with greater consolidation of the banking industry.

It should not only provide regulatory coverage to the banks but also give them more freedom to deploy their resources in a profitable manner. The labour laws too need to be evolved in sync with the changing times. While promoting the sector, the government should also maintain a focus on its social sector obligations and give proper guarantees and market subsidies to the banking organisations in this regard. Banks should be encouraged to use technology and other innovative measures to tap the lower income and rural markets.

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