Banking Sector & Its Challenges

Banks are the lifeline of an economy and play a catalytic role in activating and sustaining the 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, the Indian banking industry is in 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 loans that 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 wilful 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, the 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 the 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 experiences to their 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’s scheme was a success. The numbers speak for themselves. More than 14.5 crore accounts were opened. However, for making this success a masterstroke 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 prizes 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 that 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 to provide financial services. The increasing popularity of FinTech companies like Paytm is 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