Challenges to the Banking Sector

• The annual report on “Trend and Progress of Banking in India’’ is w.r.t the terms of the Banking Regulation Act 1949. The report is an authentic account of the developments in the financial sector.
• Banks dominate the financial sector, accounting for over half of the financial flows in the economy.

The principal challenges facing banks:

• The domestic economy is slowing down while at the global level there is only a modest recovery. Regulatory initiatives over the past year sought to enhance the quality of risk-based supervision, better oversight over financial conglomerates and improved coordination among regulators. Banks are being equipped to face the challenges of financial inclusion.
• More specifically, banks need to address certain key issues. Reduction in the level of NPAs (non-performing assets) is a primary task. Simultaneously loan recovery methods have to be improved upon and strengthened. Financial inclusion should be implemented in a sustainable way. For this suitable business and delivery models will have to be developed. The asset quality of banks has decreased significantly. Credit appraisal and post-loan monitoring are other crucial steps which need to be improved upon.
• Competition among banks and with the rest of the financial sector will increase. New banks are proposed to be licensed shortly. There is a need for decisive changes in the banking structure to enable it to grow in size, resources efficiency and inclusivity. Two important recent developments here are the licensing of new private banks and announcing clear guidelines for foreign banks to set up shop in India or expand their footprint in India. Though awarding licences to corporate houses (among others) remains a highly controversial idea.
• Another area which will engage policy makers to a greater extent than now is strengthening the role of banks in inclusive development. Access to bank finance is still poor for many categories. They include the poor, rural and small and medium industries. Although recently a very large number of bank accounts have been opened, the actual number of transactions per account is still small, suggesting inadequacies on both demand and supply sides.
• Financial literacy will create awareness of bank schemes and thereby enhance the access to the financial system. Increased use of technology would help in achieving the goal of financial inclusion.