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ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
Challenges and Opportunities in Banking Sector, 1. Dr. Neeraj Karari, Government
P.G. College, Sanawad, 2. Dr. Pushpendra Chourey, P.M.B.Guj. Comm. College, Indore
1.
Introduction
Banking sector plays a vital role in the development of Indian economy. Banking industry in India
has also achieved a new height with the changing times. The use of technology has brought a
revolution in the working style of banks. The core aspects of banking i.e. trust and the confidence of
the people on institution remain the same. The majority of the banks are still successful to keep
confidence of the shareholder as well as other stakeholder. However, with the changing dynamics of
banking business brings new kind of risk exposure. In this conceptual paper an attempt has been
made to identify the general opinion, challenges and opportunities for the Indian banking industry
and is useful for bankers, strategist, policy maker and researcher.
2.
Historical Back ground
1. Phase I- Pre-Nationalization Phase (prior to 1955)
2. Phase II- Era of Nationalization and Consolidation (1955-1990)
3. Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial
Liberalization (1990-2004)
4. Phase IV- Period of Increased Liberalization (2004 onwards)
The word bank originates from Greek word ‗bench‘. The people are doing the banking activities
sitting on the bench. Initially banking activity is operated in the unorganized manner by Sahukar,
Mahajan and lender.
Bank of Hindustan was set up in 1870; it was the earliest Indian bank. Later, three presidency bank
under the presidency act 1876 i.e. bank of Bombay and Bank of Calcutta was set up. Which laid
down the foundation of banking sector in 1921, all presidency were amalgamated to form the
imperial Bank of India. Imperial bank carried out limited number of central banking function prior
to establishment of RBI. It engaged in all type of commercial banking business except
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ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
dealing g in foreign exchange. Reserve bank of India act was passed in 1949 & reserve bank of
India [RBI] was constituted as an apex body without major government ownership. Banking
regulation Act was passed in 1949. This act was brought by RBI under government control. The act
also vested licensing power & the authority to conduct inspections in RBI. In the 1955, RBI
acquired control of imperial Bank of India, which was renamed as state Bank of India. It was 1960,
When RBI was empowered to force compulsory merger of weak banks with the strong ones. It
significantly reduced the total number of bank from 566 in 1951 to 85 in 1969. In July 1969,
government Nationalized 14 having deposits of Rs. 50 crore & above. In 1980, government acquired
6 more banks with deposits more than Rs. 200 crores. Nationalized of banks was to make them play
the role of catalytic agents for economic growth.
3.
Banking Scenario in India
The general banking scenario in India has become very dynamic now-a-days. Before pre
liberalization era, the picture of Indian Banking was completely different as the government of India
initiated measures to play an active role in the economic life of the nation, and the industrial policy
resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into
greater involvement of the state in different segments of the economy including banking and
finance. The reserve bank of India was nationalized on January 1, 1949 under the terms of reserve
bank of India (transfers to public ownership) Act 1948. The government of India issued ordinance
and nationalized 14 largest commercial banks with effect from July 19. 1969. A second phase of
nationalization took place in 1980. The overall control of government in banking sector was 91% of
banking business. Later on, in year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between National banks and resulted in the reduction of the
number of nationalization of bank from 20 to 19.
5.
Structure of Indian Banking Industry
5.1. Current Structure
The Indian Banking system is dividing into two main categories. The entire organized banking system
comprises of scheduled and non-scheduled banks. Largely, this segment comprises of the
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ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
scheduled banks, with the unscheduled ones forming a very small component. Banking needs of the
financially excluded population is catered to by other unorganized entities distinct from banks, such
as, moneylenders, pawnbrokers and indigenous bankers.
4.2
Scheduled Banks
A scheduled bank is a bank that is listed under the second schedule of the RBI Act, 1934. In order
to be included under this schedule of the RBI Act, banks have to fulfill certain conditions such as
having a paid up capital and reserves of at least 0.5 million and satisfying the Reserve Bank that
its affairs are not being conducted in a manner prejudicial to the interests of its depositors.
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ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
4.3. Regional Rural Bank (RRBs)
Regional Rural Banks (RRBs) were set up in September 1975 in order to develop the rural economy
by providing banking services in such areas by combining the cooperative specialty of local
orientation and the sound resource base which is the characteristic of commercial banks. RRBs have
a unique structure, in the sense that their equity holding is jointly held by the central government,
the concerned state government and the sponsor bank (in the ratio 50:15:35), which is responsible
for assisting the RRB by providing financial, managerial and training aid and also subscribing to its
share capital.
4.4.
Scheduled Cooperative Banks
Scheduled cooperative banks in India can be broadly classified into urban credit cooperative
institutions and rural cooperative credit institutions. Rural cooperative banks undertake long term as
well as short term lending. Credit cooperatives in most states have a three tier structure (primary,
district and state level).
4.5.
Non-Scheduled Banks
A Non scheduled bank that is not listed under the second schedule of the RBI Act, 1934, Nonscheduled banks also function in the Indian banking space, in the form of Local Area Banks (LAB).
As at end-March 2009 there were only 4 LABs operating in India. Local area banks are banks that
are set up under the scheme announced by the government of India in 1996, for the establishment of
new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts.
5. Challenges and Opportunities
After passing decades the India banking system has not reached in the hand of the common man.
The huge number of people does not have access to banking services due to scattered and
fragmented location. Developing countries like India, has a huge number of people who don’t have
access to banking services due to scattered and fragmented locations. But if we talk about
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those people who are availing banking services, their expectations are raising as the level of services
ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
are increasing due to the emergence of Information Technology and immense competition between
the services and products provided by different banks. Since, foreign banks are playing in Indian
market, the number of services has increased and banks have laid emphasis on meeting the customer
expectations. Foreign banks are also entering in the Indian market, now the existing situation has
created various challenges and opportunity for Indian commercial banks. The main problem of
Indian banking system is the problem of structure. We have a relatively large number of banks,
some of which are sub-optimal in size and scale of operations. On the regulatory front, alignment
with global developments in banking supervision is a focus area for both regulators and banks. The
new international capital norms require a high level of sophistication in risk management,
information systems, and technology which would pose a challenge for many participants in the
Indian banking sector.
On other hand we have immense opportunities is available for new businesses and new markets, to
develop new ways of working, to improve efficiency, and to deliver higher levels of customer
service. The process of change and restructuring that must be undergone to capitalize on these
opportunities poses a challenge for many banks. We are facing multiple and concurrent challenges
such as increased competition, rising customer expectations, and diminishing customer loyalty. The
banking industry is also changing at a phenomenal speed. While at the one end, we have millions of
savers and investors who still do not use a bank, another segment continues to bank with a physical
branch and at the other end of the spectrum, the customers are becoming familiar with ATMs, ebanking, and cashless economy.
As banks develop their strategies for giving customers access to their accounts through various
advanced services like e- banking, mobile banking and net banking, they should also regard this
emerging platform as a potential catalyst for generating operational efficiencies and as a vehicle
for new revenue sources. Opportunities includes in banking industry.
1. A growing economy
2. Increased Client Borrowing
3. Banking Regulation
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4. An Increase in the money supply
ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
5. An increae in the number of banks


5.1.
Indian Consumer
We have market of one hundred twenty five crore people. It is second largest market after China in
term of population. The Indian consumer is the biggest opportunity for Indian Banking system. The
Indian consumer now seeks to fulfill his lifestyle aspirations at a younger age with an optimal
combination of equity and debt to finance consumption and asset creation. This is leading to a
growing demand for competitive, sophisticated retail banking services. The consumer represents a
market for a wide range of products and services. he needs a mortgage to finance his house, car
loan, a credit card for on-going purchases, a bank account, a long-term investment plan to finance
his Child’s higher education; a pension plan for his retirement, a life insurance policy and other
endless opportunities.
5.2.
Revolution of Information Technology
Technology brought major challenge in the Indian market. Technology is playing vital role for the
Indian banking sector. Technology is the key to servicing all customer segments – offering
convenience to the retail customer and operating efficiencies to clients. Early adopters of technology
acquire significant competitive advantage. Managing technology is, therefore, a key challenge for
the Indian banking sector. Wide disparities exist between various banks as far as technology
capabilities are concerned; the sector as a whole needs to make significant progress on this front.
Banks may have to go for mobile banking services for a cluster of villages. Alternatively,
technological institutions have to come out with low-cost, self-service solutions/ ATMs. The
government. Here, it is worthwhile to mention that the adaptability of the Indian rural population to
high-tech devices is one of the fastest in the world. The application of IT and e-banking is becoming
the order of the day with the banking system heading towards virtual banking.
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5.3.
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
Industrial Development
Industrial development is also affected by information Technology. Indian economy is the
growing. Increasing of GDP, Consumer demand, industrial growth, establishment Industry Park
is the symbol of the rapid growth of Indian economy. The banking sector is also moving parallel
with the growth of industrial development, As the GDP is increasing year by year .The
developments in Indian industry and government integration of India with the global markets also
offer innumerable opportunities to the banking sector. Companies and governments are increasingly
seeking high-quality banking services to improve their own operating efficiency. Companies seek to
offer better customer service and maximize shareholder returns and governments seek to improve
the quality of public services. The internationalization of India offers banks the opportunity to
service cross-border needs of Indian companies and India-linked needs of multinationals.
5.4.
Intense Competition
The banking sector is become competitive after privatization of bank. There is competition
with the private and foreign bank. The RBI and Government of India kept banking industry
open for the participants of private sector banks and foreign banks. The foreign banks were
also permitted to set up shop on India either as branches or as subsidiaries. Due to this lowered
entry barriers many new players have entered. For survival and growth in highly competitive
environment banks have to follow the prompt and efficient customer service, which calls for
appropriate customer centric policies and customer friendly procedures.
5.5
Employees’ Retention
Technology updation brought drastic change in the banking sector. Number of employee either
learning computer or learning computer. The banking industry has transformed rapidly in the last ten
years, shifting from transactional and customer service-oriented to an increasingly aggressive
environment, where competition for revenue is on top priority. Long-time banking employees are
becoming disenchanted with the industry and are often resistant to perform up to new expectations.
The diminishing employee morale results in decreased revenue. Due to the
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intrinsically close ties between staff and clients, losing those employees completely can mean the
loss of valuable customer relationships.
ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
5.6. Financial inclusion
Financial inclusion has become a necessity in today’s business environment. Whatever is produced
by business houses that have to be under the check from various perspectives like environmental
concerns, corporate governance, social and ethical issues? Apart from it to bridge the gap between
rich and poor, the poor people of the country should be given proper attention to improve their
economic condition. In India, RBI has initiated several measures to achieve greater financial
inclusion, such as facilitating no-frills accounts and GCCs for small deposits and credit.
5.7.
High Transaction Costs
The per transaction cost is very high that‘s why banks motivated for E- transaction instead of
physical dealing. A major concern before the banking industry is the high transaction cost of
carrying non- performing assets in their books. The growth led to strains in the operational
efficiency of banks and the accumulation of non-performing assets (NPAs) in their loan portfolios.
5.8.
Social and Ethical Aspects
The social and ethical aspect is major issue before bank for government sector bank. There are
some banks, which proactively undertake the responsibility to bear the social and ethical aspects of
banking. This is a challenge for commercial banks to consider these aspects in their working. Apart
from profit maximization, commercial banks are supposed to support those organizations, which
have some social concerns.
5.9.
Global banking
The global scenario is changing in term of banking business. This changing scenario is major
challenge for Indian banking sector. The impact of globalization becomes challenges for the
domestic enterprises as they are bound to compete with global players. About 36% foreign
banks are operating in India.
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ELITE INTERNATIONAL
Journal of Social Science,
Business Administration and Commerce
ISSN No: 2455-2763
Vol. 1(1),25 Oct.2015
6. Conclusion
The Banking sector has passed pre and post liberalization period. The bank faced various ups and
down during this period. Many challenges came before bank on other hand new opportunities are
available for the bank. This research paper discusses the various challenges and opportunities like
High transaction costs, IT revolution, timely technological up-gradation, intense competition,
privacy & safety, global banking, financial inclusion. Banks are striving to combat the competition.
The competition from global banks and technological innovation has compelled the banks to rethink
their policies and strategies. Different products provided by foreign banks to Indian customers have
forced the Indian banks to diversity and upgrade themselves so as to compete and survive in the
market.
The biggest challenge for banking industry is to serve the mass and huge market of India. Another
aspect to encounter the challenges is product differentiation. Apart from traditional banking
services, Indian banks must adopt some product innovation so that they can compete in gamut of
competition. Technology up gradation is an inevitable aspect to face challenges. The level of
consumer awareness is significantly higher as compared to previous years. The bank must
concentrate on the E- services like internet banking, mobile banking and ATM services.
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