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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 26 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 27 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. 28 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 29 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 30 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. 31 ELITE INTERNATIONAL 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 32 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. 33 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. References [1] [2] [3] [4] [5] [6] [7] Bartel, A. P. (2004). Human Resource Management and Organizational Performance: Evidence from Retail Banking Industrial and Labour Relations Review, 57(2): 181-203. Clark, M. (1997) .Modeling the Impact of Customer-Employee Relationships on Customer Retention Rates in a Major UK Retail Bank. Management Decision, 35(4): 293-301. Dev, S. M., Financial Inclusion: Issues and Challenges. Economic & Political Weekly Gupta V, (2004). Risks of E - banking in India in E-Banking, Hyderabad: The ICFAI University Press. Goyal, K. A. and Joshi, V. (2012). A Study of Social and Ethical Issues in Major Announcements in the Union Budget 2012–13 for the Banking Sector. National Bank for Agriculture and Rural Development (NABARD), www.nabard.org Reserve Bank of India, www.rbi.org.in 34