Banks are the lifeline of an economy and play a catalytic role in activating and sustaining
economic development of the nation. A strong banking sector is one of the essential
prerequisites in the quest for growth . However, at the present juncture, Indian banking industry
is under turmoil and is dragging down the Indian economy. Following are some challenges
faced by the Indian banks which require immediate public and government attention:
- Worsening Asset quality:
The biggest nightmare of India’s banks is the rise in Non-Performing Assets. NPAs are the loans
which are not repaid back by the borrower. Thus, a loss for the bank. According to IMF, 36.9%
of the total debt in India is at risk while, Indian banks have the capacity to absorb only 7.9%
loss. So, if these debts turn bad, banks may land into a major liquidity crunch. Hence, it is
imperative that the banks must adopt a prudent approach. They must start acknowledging
stressful accounts beforehand, make a certain provision for them and reverse it when the
account becomes satisfactory and starts paying. Staying in denial mode does not help,
especially in today’s interconnected world where regulation making has become global and so
has the public scrutiny. Equally important is that the Banks should assess the borrowers
thoroughly before granting loans and should act strictly against willful defaulters. - Capital Inadequacy:
Capital Adequacy Ratio is an important indicator of the financial position of banks. It measures
how much capital a bank has. Higher the CAR, better it is, because it enables the banks to
improve their shock absorbing capacity, governance and risk management. However, the
money kept aside as capital cannot be used for any other purposes including lending. In the last
few years, CAR has declined steadily for Indian banks, especially for public-sector banks. With
the ever-increasing NPAs, the fund-raising power of the banks has deteriorated. If banks do not
shore up their capital soon, some could fail to meet the minimum capital requirement set by the
RBI. In such a case, they could face severe issues. - Unhedged forex exchange:
Unhedged foreign exchange leaves the investors at the risk of currency fluctuation. The volatile
fluctuations in the forex market have the potential to depress the books of Indian companies
who have heavily borrowed abroad. This stress can affect their ability to pay back debt to Indian
banks. As a result, the RBI wants banks to ensure that the companies they lend to do not
expose themselves to unnecessary debt in dollars. - Balance sheet management:
In an apparent attempt to post higher net profits, banks often try to avoid provisioning.
However, the first step towards resolving a problem is to acknowledge its existence. The
problems which are swept under the carpet are never countered but are made complicated with
time. While lower profits will make a headline for a day or two, in the long run higher provisions
would add strength to the balance sheet, and credibility to the bank’s financial statements. Also,
investors are wise enough to understand that the Management is sincere about repairing the
balance sheet which would help in the long-term. The objective of optimal utilization of capital
has to be necessarily kept in mind while evolving balance sheet management
strategies.
- Employees and technology:
Today, youngsters are replacing the elder, more-experienced employees in banks at the lower
level whereas the higher posts still continue to be held by the elder and more experienced
officers. This is generating a virtual vacuum at the middle level. This eventually has an adverse
impact on banks’ decision-making process as middle management plays a critical role in
translating the top management’s strategy into a workable action plan. Hence, a proper balance
needs to be maintained.
Moreover, the need of the hour is that the banks – especially PSUs- need to embrace
technology to offer better products and experience to its customers. Businesses are slowly
moving online and e-commerce is the preferred choice of the gen-next customer. With this,
challenges like cybercrime need to be dealt with strongly. With the growing penetration of
computers and smartphones, the challenge before the PSBs is to upscale their
capabilities, train their employees on the new technologies to benefit from the possibilities that
adoption of technology can open up. - PMJDY and beyond :
PM Jan Dhan Yojana scheme was a success. The numbers speak for themselves. More than
14.5 crore accounts were opened. However, for making this success a master stroke for the
Indian economy, all of us have to ensure that the window of opportunity that has been
presented by the opening of such a large number of accounts, is not put to waste by not
allowing the accounts to turn inactive. The entire financial inclusion banking ecosystem must
progressively develop, if the momentum gathered under the PMJDY exercise has to be
sustained for the all-round benefit of all stakeholders. - KYC norms —
The instances of fake e-mails directing the receipt to make payments to certain bank accounts
as a precondition to receiving prize or lottery from abroad, have become quite rampant. It is
surprising that even well-educated individuals are falling prey to such unscrupulous offers. Most
of this
money is being transferred through banking channels and obviously, there is a deficiency in
KYC compliance. Money muling is another common occurrence which highlights deficiencies
in risk categorization of customers and monitoring of transactions. Therefore, consistent
monitoring of transactions, and effective KYC Compliance along with financial literacy is
necessary to curb such instances. - Increasing competition from financial technology companies :Financial technology (FinTech) companies are usually start-up companies based on software toprovide financial services. The increasing popularity of FinTech companies like Paytm are disrupting the way traditional banking is performed. This creates a big challenge for traditional banks because they are not able to adjust quickly to the changes — not just in terms of technology, but also in operations, culture, and other facets of the industry. These are challenging times for the banking sector. It is obvious that the Indian banks should double their pace to re-establish themselves. The aim of becoming a Five trillion economy by 2025 can be attained only if the banking sector starts leveraging the opportunities quickly and smartly. The Indian banking sector stands in dire need of reforms.
By Anjali Lalchandani
The Commerce Society, SRCC 