Future of the Banking Industry
The financial system is the lifeline of the economy. Changes in the economy get mirrored in the performance of the financial system, more so of the banking industry. In 2013, its vision is of an integrated banking and finance system catering to all financial intermediation requirements of customers. Strong market players will have to strive for discovering new markets and provide all financial services, combining innovation, quality, personal touch and flexibility in delivery. The growing expectations of the customers are the catalyst for future banking. The customer would continue to be the cynosure of our banking strategies. In short if you lose touch with the customer, you lose everything. Customer connect and customer retention is a major challenge.
In the wake of Financial Sector Reforms set in motion in 1991, the banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by Liberalization, Privatization and Globalization (LPG) have resulted in changes in the intermediation role of banks.
Financial sector has been opened up for greater international competition under WTO. Banks have to gear up to meet stringent prudential capital adequacy norms and risk management under Basel II and III. In addition to WTO and Basel norms, the Free Trade Agreements (FTAS) with various countries have unleashed an impact on the shape of the banking industry.
Four trends have changed the banking industry the world over; these are: (a) Consolidation of players through mergers and acquisitions, (b) Globalization of operations, (c) Development of new technology and (d) Universalization of banking. With technology acting as a catalyst, great changes are foreseeable in the banking industry in the coming years. The conventional definition of banking has undergone a sea-change. Banking is no longer merely deposits, advances, remittances, clearing and collection of cheques. It is a sum total of all and Sunday financial activities.
The competitive environment in the banking sector has resulted in individual players working out differentiated strategies based on their strengths and market niches. For example, some players have emerged as specialists in mortgage products, credit cards etc. whereas some have chosen to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on Small and Medium Enterprises (SME) segments or high net worth individuals by providing specially tailored services beyond traditional banking products to satisfy the needs of customers they understand better than a more generalist competitor. Mutual Funds, Insurance, Bid Bonds, Foreign Trade, Investments, Infrastructure financing and many more have become normal banking functions now.
International trade is an area where India’s presence is expected to show appreciable increase. The long-term projections for growth in international trade is placed at an average of 6% per annum worldwide while in India an average growth of 160% in merchandise exports and 252% in merchandise imports have been envisaged in Twelfth Five Year Plan. With the growth in IT sector and other IT enabled services, there is tremendous potential for business opportunities. Keeping in view the GDP growth and the present current account deficit, Indian exports can be expected to grow at a sustainable rate of well above 20% per annum in the period ending with 2014. Increasing inflow and outflow of foreign exchange and high volume of transactions in capital markets and in real economy would require a highly efficient banking sector. This again will offer enormous scope to Banks in India to increase their forex business and international presence. Globalization would provide opportunities for Indian corporate entities to expand their business in other countries. Banks in India wanting to increase their international presence could naturally be expected to follow these corporates and other trade flows in and out of India.
Retail lending has received greater focus. Banks are competing with one another to provide full range of financial services to this segment. Banks use multiple delivery channels to suit the requirements and tastes of customers. While some customers might value relationship banking (conventional branch banking), others might prefer convenience banking (e-banking).
As a natural corollary to globalization and increased competition, commercial banks have been found to be over enthusiastic in hunting, chasing and grabbing business from one another. This has resulted in dilution of credit norms which in turn has resulted in burgeoning bag of non-performing assets.
With the latest decision of the government and the RBI for opening of many more private banks the structure and ownership pattern would undergo drastic changes. There would be greater presence of international players in the Indian Financial System. Similarly, some of the Indian banks would become global players. However, the indications are that their Public Sector Banks (PSB) character may still be retained through timely capital infusion which was Rs. 12,500 crore in 2012-13 and will be Rs. 14,000 crore in 2013-14.
Mergers and acquisitions would gather momentum as managements will strive to meet the expectations of stakeholders. This could see the emergence of 4-5 world class Indian banks. As Banks seek niche areas, we could see emergence of some national banks of global scale and a number of regional players.
