The last two-and-a-half decades have been truly eventful for the Indian banking industry. The level of competition and price discovery that we see today has its roots in 1994, when six banks in the private sector were licensed to operate: they are the major competitors of state-run banks today. Further, the Narasimham Committee of 1991 and 1998 and subsequent reform measures have changed the landscape of Indian banking.

Some of these reforms include the lowering of the CRR and the SLR; framing of prudential norms for income recognition and asset classification; introduction of capital adequacy norms; deregulation of interest rates; strengthening of legal and institutional framework for speeding the process of recovery of debts; fostering competition by giving licences to new banks in the private sector; access to capital markets for banks; structural reorganisation in the banking sector; strengthening banking supervision; and regulatory oversight of banks.

The Indian financial sector is dominated by banks. For a growing economy like India, there is a huge requirement of credit in almost all the sectors. To meet the financing needs of the economy, Indian banking needs to be healthy and robust. The continuous disintermediation effort by the government has boosted the growth of non-bank channels (including corporate bond market and capital markets) to meet the partial funding requirement of corporates.

Credit penetration (Credit-GDP ratio) of the banking sector has substantially increased to 51.42 per cent in 2017-18 from only 20.20 per cent in 1992-93. Similarly, deposit penetration by the banking sector (Deposit-GDP) has grown from 35.7 per cent in 1992-93 to 68.12 per cent in 2017-18. These statistics clearly portray the importance of the banking sector to the Indian economy.

Vulnerabilities

In the absence of any credible term lending institution, banks have taken up the onus of providing short-term as well as long-term funding to projects and industries. However, excessive reliance of the economy on the banking sector for long-term funding requirements has made it vulnerable to economic and geopolitical contagion. However, owing to tight regulatory and prudent measures, Indian banking proved resilient to the sub-prime crisis of 2007-08, but a prolonged economic slowdown and weak corporate balance sheets have clouded the Indian banking sector in the past few years.

The introduction of niche banking and the entry of non-bank fintech and big-tech companies in the banking domain have further intensified competition in the sector. In the technological advancement process, Indian banking has worked to optimise customer experience. As a favourable demography will reshape the future of Indian banking, banks are already in the process of understanding the mindset of new millennial and Generation-Z customers who are less loyal and demand omni channel seamless service.

The emergence of newer capabilities such as data analytics, cloud computing, blockchain technology, artificial intelligence, cyber security, robotics, automation, NLP and language support, humanoids, holographic banking and robo-advisory, voice and chatbot are the new reality. To meet the banking and non-banking requirements of these young customers, SBI has launched the country's first integrated lifestyle and banking digital platform ‘YONO’. Other banks are also working on enhancing customer experience and customers’ life cycle requirements are getting integrated with CRM applications.

Challenges, opportunities

On the other hand, India is home to 11 per cent of globally unbanked adults. (According to the World Bank’s, Global Findex Database 2017, among the 1.7 billion unbanked adults globally, 187 million are from India.) The role of Indian banking in driving the financial inclusion agenda of the government has been lauded in international forums. As on January 2, 2019, about 33.73 crore PMJDY accounts have been opened, and the JAM (Jan Dhan, Aadhaar, and Mobile) initiative of the government has been able to bring the mass unbanked into the financial services net. These newly boarded customers have opened up a plethora of opportunities for banks to expand their profitable retail business as these new customers deserve numerous other services from banks apart from opening bank accounts. To meet the requirements of this vast customer base, Indian banks need to equip themselves with the latest technology to serve the needs of those unbanked as well as under-banked segments.

The consolidation of state-run banks has been one of the most discussed topics in the past two-and-a-half decades. Consolidation, by its very nature, is challenging. In the past, not all mergers and consolidations have been successful. Some of the important challenges in human resources, technology and regulatory fronts need to be properly evaluated in advance to avoid any pitfall for a successful consolidation going forward. The government has identified and is stabilising some of the weak state-run banks by resolving their bad-loans issue and adequately recapitalising them before embarking on a consolidation plan.

The Indian banking regulator has been vigilant in maintaining the health of the sector. However, a prolonged economic slowdown has led to the twin balance-sheet problem as banking is no more an isolated sector. The banking sector has to constantly upgrade and re-orient itself to tide over the balance-sheet mismatch crisis. The introduction of the long-awaited Insolvency and Bankruptcy Code (IBC) 2016 has facilitated faster resolution by offering a time-bound resolution through the NCLT. Going forward, prudent management and economic recovery are likely to bring cheer to the system.

In these years, many positive developments have happened in relation to governance aspects of Indian banks. Effective corporate governance, so critical to the functioning of the banking sector and the economy as a whole, has shown remarkable and sustainable coming of age. We are entering an exciting and challenging phase of banking in India, and fortunately the major players and various stakeholders appear eminently ready for the challenge.

The author is SBI Chairman

Related Topics