Contemporary Issues and challenges in Indian Banking Sector
ABSTRACT
The banking sector is one of the crucial sectors, and the smooth working of this sector is imperative for a well-functioning economy. However, there are certain challenges and issues faced by the present banking sector that act as hindrances to the smooth functioning of this sector. In India, the emerging technological inclusions in the financial industry as well as the different regulatory and other cyber security issues that pertain to the banking sector pose challenges to the functioning of the economy. In this research article, the author(s) will be talking about some of the challenges that the Indian banking sector is currently facing along with suggestions for solving or addressing such challenges.
INTRODUCTION
In the words of the great scholar R.P. Kent, a bank can be defined as an organisation that temporarily gathers idle public funds and loans them to others in need. It serves to encourage people to invest money, with a view to bringing solvency in them. Furthermore, the process of banking entails the amalgamation of various financial institutions, that provide various monetary services to the individuals, including businesses and government bodies.[1]
IMPORTANCE
With various legislations like the RBI Act, 1934, Banking Regulation Act, 1949, in place, the importance of banking has been steadily increasing over the years.[2] Therefore, the relevance of banking system in an economy can be explained in a threefold-manner:
- Firstly, it helps in ensuring economic stability in the country by ensuring sufficient money supply is available in the market.
- Secondly, banking stimulates the propensity of saving among the citizens
- Thirdly, it aims to control exchange rates as a central bank. This ultimately affects the investments made by various businesses as well schemes ad policies rolled by the government.
CHALLENGES
With the advent of tech and rising political and economic concerns, following are certain major issues being faced by the banking sector:
NON-BANKING FINANCIAL COMPANIES
As per sec 45 of the RBI act[3], Nonbank financial businesses (NBFCs) are organisations that offer financial services similar to those of banks but are unregulated and lack a banking licence.
As stated by the executive director of RBI, Lakshmi Kanth Rao, the interconnection of NBFCs with banks have started to pose systematic risks as the former heavily relies on the latter for funding, instead of prioritising expansion. Further, even though NBFCs have been viewed as the bridge between traditional and modern banking techniques, owing to its wide fundamental uses, it is increasingly being used over the traditional banking mechanisms.
Fintechs ie integration of tech with financial service providers have been another rising competitor for the banks. It was argued that the price difference between employing physical branches and providing consumers with digital accounts was as much as 90%[4]. Hence, in order to achieve the goal of a cashless economy, the first step was to reduce the excess cost, which the fintech companies could provide support to.[5]
To add on to the merit list, the major advantage the fintech have over banks is that they are consumer-centric and directly cater to the financial needs of the consumers ie they empower clients by emphasising 24/7. In such a scenario, it was only natural for the role of banks to reduce, as a more efficient and consumer-friendly mechanism was emerging.
NON- PERFORMING ASSETS
One of the challenges that India has been facing in its banking sector for a very long time is the problem of non-performing assets. Non-performing assets are “loans or interests that no longer provide income or profit to the lender”. These are the loans or advances which are in default. As per the secondary data that is available for the year 2022, India’s non-performing assets “have crossed Rs 10 lakh crores”. Among this Rs 10 lakh crores, 70 % of the NPA’s comes from the corporate sector. [6]
The rise in Non- performing assets can pose major issues for the banking sector. Such a rise can lead to eroding of the capital base that is available with the banks. It can also lead to a reduction in the profitability of the banks and these hindrances are directly connected to the decrease in the economic growth.[7] The RBI has implemented several steps such as the Asset Quality Review, to improve the condition of Non-performing assets in India. Even though these steps have significantly helped in reducing the effect of the non-performing assets, the challenge persists.[8]
FRAUD
With the world advancing at a fast pace, technology has crept into all sectors of an economy. This advancement, however, has come at the cost of cases of fraud to be on the rise. Instances of phishing, cheque fraud, money laundering and much more are some of the common cases occurring frequently across the globe. Instances wherein the bank employees fraudulently disbursed loans, like the V.K. Sharma case[9] or necessitated illegal transaction through online banking[10] have been on the rise, that severely undermines the credibility of banks in issuing financially sound transactions.
It has been observed that many consumers avoid UPI payments as they are concerned about their privacy and believe that the banks would fail to protect their sensitive data and financial information may be shared with third parties[11]. Furthermore, while there exists legislations like the IT act to prevent and punish hackers in cases of fraud, but yet the country has failed in managing its technology and make use it to competitive advantage[12].
OTHER CHALLENGES
There are various other challenges that India faces in its banking sector such as the problem of liquidity management, regulatory compliance, capital management etc. the solving which can directly or indirectly help in the increase in the economic growth of the country[13].
The Basel III [14]“is an internationally agreed set of measures” which have been developed by the Basel Committee on Banking Supervision. These norms were developed with the aim of “strengthening the regulation, supervision and risk management of banks”. As per these norms, India is supposed to maintain a higher capital requirement. However, having a higher capital requirement can inversely affect the resources that India is having currently.[15]
To ensure compliance with the regulations that are passed by the RBI and other financial bodies, the banks will need significant resources and time. However, such a need for significant resources at a time of crisis can pose a great challenge to the banking sector. The challenge of liquid management can also pose a significant challenge to the banking sector, especially at times when the economic consequences and conditions are uncertain.[16]
Other than the above listed issues, there can be more challenges that are faced by the Indian banking sector including political meddling, corrupt practices etc., which can significantly affect the economic growth and the economic conditions of the country directly or indirectly.[17]
SUGGESTIONS
The contemporary challenges that are faced by the Indian banking sector can result in a significant economic slowdown. Thus to make sure that such a slowdown is not faced; there is a need to address these challenges with the latest available solutions and methods.
As mentioned in the above section, cyber security is one of the key issues that can cause serious repercussions to the banking sector. Thus adapting to more advanced technological security methods such as threat detectors and authentication systems, can help to a great extent in reducing the cyber security risks that the Indian banking sector is facing currently.
Another viable solution that can be implemented in addressing the contemporary challenges includes implementing different new and advanced data analytics methods to understand the nature of the non-performing assets by identifying the market conditions, the behaviour of the customers and the risks that exist in the market. Adapting to such approaches can help in managing the Non- non-performing assets to a great extent. [18]
To meet customer expectations and to stay vigilant and active in competitive times, adapting to and investing in the latest technologies can help a great deal in staying relevant at the time of technological advancements. However, such adoption of emerging technologies should be very well accompanied by appropriate risk management measures as well to make sure that further advanced cyber threats do not emerge. [19]
These are some of the suggestions that can be implemented in helping the Indian banking sector to adapt, face and overcome the contemporary challenges that they are facing.[20]
CONCLUSION
Banking, the most crucial process that is necessary to ensure the survival and growth of any economy, has definitely being experiencing the heat of the shifting trust of consumers from the traditional to the more modern approach in terms of managements of their finances. However, every innovation brings with itself certain hurdles that can’t be easily avoided. The very fundamental of banking is protection of the financial transactions undertaken by customers. Therefore, there is always scope for improvement and collaboration to ensure that national interest is not harmed.
Author: TARINI RAZDAN, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing
[1] Dr. K. Ratna Manikyam, Indian Banking Sector – Challenges and Opportunities, IOSR Journal of Business and Management (IOSR-JBM), Volume 16, Issue 2. Ver. I (Feb. 2014), PP 52-61.
[2] Reddy, Y. V. “Banking sector reforms in India: an overview.” Bank for International Settlements, http://www. bis. org/review/r050519b. pdf (2005).
[3] The Reserve Bank of India, 1934, § 45, No. 2, Acts of Parliament, 1934 ( India).
[4] mckinsey.com/mgi/overview/in-the-news/the-promise-of-digital-finance visited this page on 12/5/21
[5] Malini, A., and Dileep G. Menon. “Technological innovations in the banking sector in India: An analysis.” 2017 International Conference on Technological Advancements in Power and Energy (TAP Energy). IEEE, 2017.
[6] Ajay Garg, The Economic Times, Resurgence and challenges: Indian Banks 2024 Outlook, Jan 14, 2024, https://bfsi.economictimes.indiatimes.com/blog/resurgence-and-challenges-indian-banks-2024-outlook/106817271.
[7] Kamath, K. V., Kohli, S. S., Shenoy, P. S., Kumar, R., Nayak, R. M., Kuppuswamy, P. T., & Ravichandran, N. (2003). Indian Banking Sector: Challenges and Opportunities. Vikalpa, 28(3), 83-100. https://doi.org/10.1177/0256090920030308.
[8] Hero Vired, Indian Banking Sector Explained: Challenges, opportunities and its future, https://herovired.com/learning-hub/blogs/indian-banking-sector-explained-challenges-opportunities-and-its-future/.
[9] Central Bureau of Investigation v. V.K. Sharma, (2018) 1 SCC 224.
[10] Bank of Baroda v. Harshit Jain, 2020 SCC OnLine Del 333.
[11] Monisha, Electronic Banking in India: Innovations, Challenges and Opportunities, available at https://www.ijert.org/research, last visited on 12.03.2023.
[12] Madhura Gore, E-Banking: Challenges in India, 5 INDIAN J.L. & LEGAL RSCH. 1 (2023)
[13] Rao, P. Hanumantha, and Subhendu Dutta. “Fundamental analysis of the banking sector in India.” (2014).
[14] Basel Committee on Banking Supervision, Basel III: International regulatory framework for banks, available at https://www.bis.org/bcbs/basel3.htm.
[15] Indian Brand Equity Foundation, Navigating reforms and NPA challenges, Jun 25, 2024, https://www.ibef.org/blogs/indian-banking-sector-navigating-reforms-and-npa-challenges.
[16] Deolalkar, G. H. “The Indian Banking Sector.” Study commissioned by ADB for RETA 5770 (1998).
[17] McKinsery & Company, Mastering the new realities of India’s banking sector, June 9, 2017, https://www.mckinsey.com/featured-insights/india/mastering-the-new-realities-of-indias-banking-sector.
[18] Bhattacharya, Prabir C., and M. N. Sivasubramanian. “Aspects of banking sector reforms in India.” Economic and Political Weekly (2001): 4151-4156.
[19] Kalyan, Nalla Bala. “Banking sector reforms in India.” International Journal of Management and Humanities 4.4 (2017): 13-18.
[20] Srinjoy Mitra, Contemporary Issues and Challenges in Indian Banking Sector, 6 INT’l J.L. MGMT. & HUMAN. 977 (2023).
