AN ANALYTICAL STUDY AND CHALLENGES IN PERFORMANCE OF BANKING SYSTEM IN INDIA
Dr. Satyapal Singh
Associate Professor, Department of Commerce, Govt. College, Hisar
Abstract - The banking industry in India has a long history that includes traditional banking practices from the time of the British, reforms, nationalization, privatization, and the growing presence of foreign banks in India. As a result, banking in India has endured a lengthy journey. With the passage of time, the banking industry in India has also reached new heights. The way banks work has changed dramatically as a result of technology. However, the fundamental aspects of banking, such as people's trust and confidence in the institution, remain unchanged. The majority of banks continue to operate successfully, earning the trust of shareholders and other stakeholders. However, a new kind of risk exposure is brought about by the shifting dynamics of banking business.
Keywords: Risk Management, the Rural Market.
1. INTRODUCTION
The World Economy has recently experienced a number of complex conditions, including the bankruptcy of banking and financial institutions, the debt crisis in major economies around the world, and the crisis in the Eurozone. Major economies like the United States and Europe are experiencing recession as a result of this highly uncertain scenario.
This raises serious concerns regarding the survival, expansion, and upkeep of sustainable development.
India's banking sector, on the other hand, has been one of the few to remain resilient in the midst of this chaos. Over the past ten years, the Indian banking industry has grown at a
remarkable rate. Indian banking is vibrant and strong because of the higher rate of credit expansion, expanding profitability and productivity comparable to that of banks in developed markets, lower incidence of non-performing assets, and emphasis on financial inclusion. Indian banks have begun to rethink their growth strategy and the opportunities available to sustain the economy.
The Indian banking industry is likely to face a number of challenges, which are reviewed in this paper.
2. HISTORICAL BACKGROUND In 1870, the Bank of Hindustan was founded; It was India's first bank. Later, the Presidency Bank
Act of 1876 established three presidency banks—the Bank of Calcutta, the Bank of Bombay, and the Bank of Madras—which laid the groundwork for Indian banking today. The Imperial Bank of India was established in 1921 when all presidency banks merged into one entity. Prior to the establishment of the RBI, the Imperial Bank only performed a small number of central banking functions. With the exception of dealing in foreign exchange, it carried out all facets of commercial banking.
The 1934 Reserve Bank of India Act established the Reserve Bank of India (RBI) as an executive body devoid of major government ownership. In 1949, the Banking Regulations Act was passed. The RBI was brought under government control by this regulation. The act granted the RBI extensive authority to oversee and direct banks. The Act also gave RBI the authority to issue licenses and conduct inspections.
The Imperial Bank of India, which later changed its name to State Bank of India, came under RBI control in 1955. SBI made eight private banks that had been started in the former princely states its 100% subsidiary in 1959.
The RBI was given the authority to force weak banks to merge with strong ones in 1960.
The total number of banks decreased significantly, from 566
in 1951 to 85 in 1969. 14 banks with deposits of Rs. 14 were nationalized by the government in July 1969. 50 crores and up. Six additional banks with deposits of more than Rs. 200 crores were acquired by the government in 1980. The goal of nationalizing banks was to make them into catalysts for economic expansion.
In 1992, the Narasimha Committee report recommended extensive banking sector reforms with the goal of establishing internationally accepted banking practices. New private sector banks entered the market after the Banking Regulation Act was amended in 1993.
3. GENERAL BANKING SCENARIO IN INDIA
In general, the banking environment in India is now very dynamic. The picture of Indian banking before preliberalization was completely different because the government of India took steps to actively participate in the nation's economic life and the industrial policy resolution it adopted in 1948 predicted a mixed economy. As a result, the state became more involved in banking and finance, among other parts of the economy.
The Reserve Bank of India (Transfer to Public Ownership) Act of 1948 stipulated the nationalization of the bank on January 1, 1949. The Banking
Regulation Act of 1949 gave the Reserve Bank of India (RBI) the authority "to regulate, control, and inspect the banks in India." This act was passed in 1949. In addition, the Banking Regulation Act stipulated that no two banks could have the same directors and that neither a new bank nor a branch of an existing bank could open without obtaining a license from the RBI.
By the 1960s, the Indian banking sector had established itself as a significant instrument for speeding up the Indian economy's development. With effect from midnight on July 19, 1969, the 14 largest commercial banks were nationalized by an ordinance issued by the Indian government. In 1980, another round of nationalization of six more commercial banks occurred.
The government was said to want more control over credit delivery as a result of the nationalization.
Around 91 percent of India's banking industry was under the government's control after the second round of nationalization.
The government eventually combined Punjab National Bank and New Bank of India in 1993. It was the only merger of nationalized banks, and the number of nationalized banks decreased from 20 to 19. The nationalized banks continued to expand at a rate closer to the
Indian economy's average growth rate until the 1990s.
4. STRUCTURE OF INDIAN BANKING INDUSTRY
The Indian banking industry operates under the protection of the Reserve Bank of India, the regulatory central bank. The banking industry consists primarily of:
Cooperative Banks
Commercial Banks
In India, the commercial banking structure consists of:
Unscheduled Bank vs. Scheduled Commercial Bank The banks that are listed in the Reserve Bank of India (RBI) Act of 1934's Second Schedule are known as "scheduled commercial banks."
In turn, only banks that meet the requirements outlined in section 42(60) of the Act are included in this schedule by the RBI. Although not all co-operative banks are scheduled commercial banks, some are. The bank gains access to accommodation from the RBI during times of liquidity constraints as a result of its inclusion in the second schedule.
However, this status also places the bank under certain conditions and requires compliance with RBI reserve regulations.
The Reserve Bank of India classifies banks as public sector banks, existing private sector banks, new private sector banks,
and foreign banks for performance evaluation purposes.
5. CHALLENGES FACED BY INDIAN BANKING INDUSTRY Due to dispersed and fragmented locations, a large number of people in developing nations like India do not have access to banking services. But when we talk about people who use banking services, their expectations are going up as the level of service goes up because of competition and information technology. The number of services offered has increased and banks have placed an emphasis on meeting customer expectations as a result of foreign banks entering the Indian market.
Indian Commercial Banks now face a number of challenges and opportunities as a result of the current circumstance.
Understanding India's banking industry's challenges and opportunities is necessary for understanding the banking industry as a whole.
5.1 Rural Market
Although reaching rural India remains a challenge for the private sector and foreign banks, banking in India is generally fairly mature in terms of supply, product range, and reach. In comparison to other banks operating in economies that are comparable to India's own, Indian banks are regarded as possessing balance sheets that are
clear, robust, and free of any ambiguity in terms of asset quality and capital sufficiency.
As a result, some nationalized and private sector banks in India have used an inorganic growth strategy to deal with upcoming challenges in the banking industry. For instance, ICICI Bank Ltd. recently merged with Bank of Rajasthan Ltd. to significantly expand its reach in the rural market and increase its market share. The largest public sector bank in India, State Bank of India (SBI), has employed the same strategy to maintain its position. It is currently completing the acquisition of its associates. In 2010, SBI and State Bank of Indore merged.
5.2 Management of Risks
Banks' levels of competitiveness rise as a result of increased competition. However, the current state of global banking poses serious threats to the Indian banking industry. Some foreign banks have already declared bankruptcy.
Changes in risk and capital are positively correlated, as stated by Shrieves (1992). The findings of a study that looked at a large number of banks show that regulation was partially effective during the time period covered. In addition, it was determined that changes in bank capital over the
investigated time period were risk- based [1].
Wolgast (2001) looked at financial firms' merger and acquisition activity. The author placed bank supervisors in the context of merger success, risk management, stability of the financial system, and market liquidity. The study came to the conclusion that large institutions are better able to manage risk [2].
Al-Tamimi and Al-Mazrooei (2007) investigated the methods and practices of risk management for dealing with various kinds of risks. In addition, they evaluated the risk management policies of the two sets of banks. Commercial banks' foreign exchange risk, followed by credit risk and operating risk, were identified as the three most significant types of risk [3].
Sensarma and Jayadev (2009) attempted to assess banks' overall risk management capability by utilizing selected accounting ratios as risk management variables. These accounting ratios were summarized using multivariate statistical methods.
Regression analysis was also used in the paper to look at how these risk management scores affected stock returns. Indian banks' risk management capabilities have improved over time, according to researchers. It appeared that banks' risk management capabilities affected stock returns.
According to the study, banks will need to concentrate on successfully managing various risks if they want to increase shareholder wealth [4].
5.3 Growth of Banking
Zhao, Casu, and Ferrari (2008) made use of a Data Envelopment Analysis (DEA)-based Malmquist Total Factor Productivity (TFP) index and a balanced panel data set that covered the years 1992 to 2004. According to the empirical study, the Indian banking industry experienced sustained productivity growth, primarily driven by technological advancement, following an initial phase of adjustment. In terms of TFP growth, it does not appear that the ownership structure of banks matters as much as increased competition. When competition increased, foreign banks appear to have acted as technological innovators, which increased the banking market's competitive pressure. Last but not least, our findings also point to an increase in risk-taking behavior throughout the deregulation process [5].
According to Goyal and Joshi's study (2011a), small and local banks struggle to cope with the global economy's effects, necessitating support, which is one of the reasons for merger. Mergers were used strategically by some private banks to broaden their horizons. The major banks in India
have not yet explored the vast potential of rural markets. As a result, ICICI Bank Ltd. has expanded into the rural market through mergers. Their efforts to establish themselves in rural India are fruitful. It expands their customer base and increases their market share across borders [6].
5.4 Market Discipline and Transparency
Fernando (2011) says that in the new environment, transparency and disclosure standards are becoming more important as part of internationally accepted corporate governance practices.
Investors expect banks to be more responsive and accountable. The maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, capital, provisions, shareholdings of the government, value of investment in India and abroad, operating and profitability indicators, total investments made in the equity share, units of mutual funds, bonds, debentures, aggregate advances against shares, and so on are all information that banks are required to disclose in their balance sheets [7].
5.5 Customer Retention
In the retail banking industry, Levesque and McDougall (1996) looked into the main factors that influence customer satisfaction and future intentions. They
identified the determinants, which include service problems, service recovery, products utilized, service quality dimensions (such as getting it right the first time), service features (such as competitive interest rates), and more. Customer satisfaction and intent to switch were found to be significantly impacted by service issues and the bank's service recovery capacity [14].
In a major UK retail bank, Clark (1997) investigated how customer-employee relationships affected retention rates. He demonstrated that employee and customer perceptions of service quality are related to both customer retention rates and employee and customer perceptions of service quality [15].
In a specific service setting, Clark (2002) investigated the connection between employee perceptions of organizational climate and customer retention. a major retail bank in the UK. A case study approach was used to investigate employees' perceptions of customer service practices and procedures at their branch.
Employee perceptions of the organizational climate and customer retention are linked, according to the findings at the micro organizational level. He suggested that the climate of an organization can be broken down into five climate themes, each of which contains a number of
dimensions that are essential to customer retention [16].
Hansemark and Albinsson (2004) looked into how a company's employees feel about the ideas of keeping customers happy and retaining them. Using phenomenology, they were able to discover the informants' own interpretations. There were three points of view on satisfaction:
definition of the idea, methods for determining when a customer is satisfied, and strategies for increasing customer satisfaction.
Seven ways to define, recognize, or increase satisfaction were discovered among the informants' experiences with these three categories. They included: service, emotion, chemistry, intimacy, self- assurance, dialogue, complaints, and retention. The fact that all but the first two of these categories of experience were found to improve retention suggests that the informants have discovered a similarity between strategies for improving satisfaction and retention [17]. Relationship and confidence were found to have the strongest correlation between retention and satisfaction strategies.
5.6 Environmental Concerns The Copenhagen Climate Council (CCC), which just came into existence, makes it abundantly clear that environmental awareness is desperately needed in
every nation on the planet. The Thought Leadership Series on Climate Change, which was published by CCC, is a collection of climate change-related essays from some of the most well-known thinkers and business leaders in the world. The essays are motivational, brief, and clearly argued. The pieces are meant to spread the word that it's time to act and raise public and political awareness of the actions that could have a significant impact on global emissions growth. The purpose of the Thought Leadership Series was to educate the public about the most important aspects of the business and policy responses to the climate crisis. The thought behind the Thought Leadership Series was to shift people's focus.
6. CONCLUSION
Over the course of time, it has come to be recognized that drops in growth and clouds of trepidation are two significant market phenomena that frequently shift in response to a variety of conditions.
Both before and after liberalization saw a variety of environmental shifts that have a direct impact on the aforementioned phenomena. It is evident that India's post- liberalization growth has taken on new hues, but it has also presented some challenges.
The rural market, transparency, customer
expectations, risk management, growth in the banking sector, human factor, global banking, environmental concerns, social, ethical issues, and employee and customer retention are just a few of the issues and opportunities discussed in this article. Banks are working hard to keep up with the competition. The banks have been forced to reevaluate their policies and strategies as a result of global bank competition and technological advancement.
7. SUGGESTIONS
According to the above discussion, the banking industry's greatest challenge is serving India's mass market. Customers now take precedence over products for businesses. We will be more successful in satisfying their requirements if we have a deeper comprehension of our clients.
Indian banks must lower the prices they charge for their services in order to overcome the obstacles listed above. Product differentiation is yet another aspect that presents difficulties.
Indian banks must adopt product innovation in addition to traditional banking services in order to compete with a variety of competitors. Modernization of technology is a necessary component of overcoming obstacles.
When compared to previous years, consumer awareness is
significantly higher. They require services like internet banking, mobile banking, and ATMs these days.
Another strategy for combating rivals is to increase the size of branches in order to gain market share. As a result, Indian private and nationalized banks must expand into international markets, as some have already done. In the Indian market, Indian banks are reliable brands.
Consequently, these banks must make use of their brand equity because it is a valuable asset.
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