Results of a survey of top banks by CARE Ratings

The main challenges faced by banks encompass both the prevailing economic and business environment as well as evolving developments of this industry. This is according to a survey of banks taken up by CARE Ratings. The survey results have been summarised below:

(a) Deceleration in economic growth impacting banking sector growth. Quite clearly this is one factor which affects the growth and prospects of this sector. The fact that the Indian economy has slowed down in the last three years is significant here.

(b) Maintaining asset quality in the face of growing NPAs and restructuring of advances. There is a clear link with the overall state of the economy.

(c) Augmenting capital and maintaining prudential capital adequacy in view of the implementation of Basel III.

(d) Preserve and augment profitability of banks in a stressed environment. Banks are witnessing pressure on margins on account of capital requirement, provisioning, regulation, liquidity, volatile interest rates etc.

(e) Achieving desired credit growth in a weak economy.

(f) Implementation of Financial Inclusion & DBT (Direct Benefit Transfer). As the RBI has been reiterating the need for focusing on financial inclusion this factor has become a challenge as it has to be addressed while keeping an eye on capital, quality of assets and profitability.

(g) Increased competition from both within the banking sector with various banks becoming aggressive in the existing space as well as potential competition from new entrants.

(h) Adopting and adapting to technological changes/ innovation to meet regulatory requirements as well as to tap alternative channels in banking

(i) Dealing with technology related frauds and improving risk management systems of banks

(j) Improving quality of human resources for efficient working of banks in view of the latest technological developments.

Banks do expect to see a series of reforms and measures to be implemented by the RBI in the next one year encompassing regulation, financial inclusion, technological focus etc. These have been elaborated upon below:

(a) Stringent norms pertaining to NPAs and restructured assets. The level of NPAs has gone up sharply this year which becomes more worrisome when the restructured assets are also factored in.

(b) Target Consolidation/mergers and entry of new players. This would involve:

- Continuous bank licensing (as has already been voiced by the RBI),

- Conversion of some urban co-operative banks into full-fledged commercial banks,

- Separate licenses for niche/specific banking operations/functions such as wealth management, investment banking, wholesale banking or retail banking. This has been spoken about in some detail by a special Committee set up by RBI on financial inclusion.

(c) Reforms in Corporate debt market, Government Debt Market & Money Market.

(d)  Focus on asset – liability management for banks.

(e)  Increased Usage of Technology in Banking. Leveraging of technical developments on various banking activities

(f)  Focus on Financial Inclusion/Deepening

(g) Introduce measures for the removal of structural bottlenecks on credit delivery and free pricing of financial assets

(h) Bring about transparency and improvement in clearing and settlement practices

(i)  Reforms aimed at creating liquidity and depth for efficient price discovery of all banking products

If these expected reforms come into being, bankers expect them to have wide ranging impact. Some of the expected results are:

(a) Norms on NPAs would improve quality of assets & recovery, liquidity and the overall balance sheets of banks.

(b) Consolidation of banks and new players would result in competition and consequently in innovation and efficiency/productivity of banks. It would also bring about economies of scale and economics of scope for banks.

(c) Conversion of some urban cooperative banks into full-fledged commercial banks will help Banks to participate in main stream line of business on lower risk.

(d) Increased usage of technology could lead to technological upgradation and more e-products would be designed. Technology will help sustain and scale business.

(e) Financial deepening would make banking more inclusive, improve geographical coverage, reduce regional imbalances and credit to the unorganized sector would see an increase.