Owing to the diversified operations and credit profiles of merging banks, consolidation is likely to serve as a risk-mitigation exercise as much as a growth engine. Though there is no confirmation yet, speculative signals arising from the market point to the prospect of consolidation involving banks such as Union Bank of India, bank of India, bank of Baroda, dena bank, state bank of Patiala, and Punjab and Sind Bank. Further, the case for merger between stronger banks has also gained ground — a clear deviation from the past when only weak banks were thrust on stronger banks. There is a case being made for mergers between banks with a distinct geographical presence coming together to leverage their respective strengths. Role Of Technology: There is an imperative need for not mere technology upgradation but also its integration with the general way of functioning of banks to give them an edge in respect of services provided to their constituents, better housekeeping, optimizing the use of funds. Technology has demonstrated potential to change methods of marketing, advertising, designing, pricing and distributing financial products and services and cost savings in the form of an electronic, self-service product delivery channel.
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The banks with proper risk management systems would not only gain competitive advantage by way of lower regulatory capital charge, but would also add value to the shareholders and other stakeholders by properly pricing their services, adequate provisioning and maintaining a robust financial structure. Consolidation, consolidation, which paper has been on the counter over the last year or so, is likely to gather momentum in the coming years. When the restrictions on operations of foreign banks will go, the banking landscape is expected to change dramatically. Foreign banks, which currently account for 5 of total deposits and 8 of total advances, are devising new business models to capture the Indian market. Their full-fledged entry is expected to transform the business of banking in many ways, which would be reflected in terms of greater breadth of products, depth in delivery channels and efficiency in operations. Thus Indian banks have less than three years to consolidate their position. Despite the stiff resistance from certain segments, consolidation holds the key to future growth. This view is underpinned by the following:. Owing to greater scale and size, consolidation can help save costs and improve operational efficiency. Banks will also have to explore different avenues for raising capital to meet norms under Basel-ii.
Challenges Ahead, while we have made a significant progress, let me highlight a few issues that I believe would need significant attention in the near term. Risk management And Basel. The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution. Although capital serves the purpose of meeting unexpected losses, capital is not a substitute for inadequate decontrol or risk management systems. Coming years will witness banks striving to paperwork create sound internal control or risk management processes. With the focus on regulation and risk management in the basel ii framework gaining prominence, the post-Basel ii era will belong to the banks that manage their risks effectively.
The accounting and auditing of intermediaries has improved. The technological infrastructure has developed in tandem with modern-day requirements in information technology and communications networking. On the asset quality front, notwithstanding the gradual tightening of prudential norms, non-performing loans (NPL) to total loans of commercial banks which was at a high.7 per cent at end-March 1997 declined.3 per cent at end-March 2009. Net npls also witnessed a significant decline and stood.2 per cent of net advances at end-March 2009, driven by the improvements in loan loss provisioning, which comprises over half of the total provisions and contingencies. Operating expenses of banks in India are also much more aligned to those prevailing internationally, hovering around.1 per cent during 2004-06. These numbers are comparable to those obtaining for leading developed countries which were range-bound between.4-3.3 per cent in 2005. Bank profitability levels in India have also trended upwards and gross profits stood.0 per cent during 2005-06 (2.2 per cent during 2004-05) and net profits trending at around 1 per cent of assets. Available information suggests that for developed countries, at end-2005, gross profit ratios were of the order.1 per cent for the us and.6 per cent for France. The extent of penetration of our banking from system in our country as measured by the proportion of bank assets to gdp has increased from 50 per cent in the second half of nineties to over 80 per cent a decade later.
Prudential regulation and supervision has improved; the combination of regulation, supervision and safety nets has limited the impact of unforeseen shocks on the financial system. The dismantling of the erstwhile administered interest rate structure has permitted financial intermediaries to pursue lending and deposit taking based on commercial considerations and their asset-liability profiles. The financial liberalisation process has also enabled to reduce the overhang of non-performing loans. Financial entities have become increasingly conscious about risk management practices and have instituted risk management models based on their product profiles, business philosophy and customer orientation. Additionally, access to credit has improved, through newly established domestic banks, foreign banks and bank-like intermediaries. Government debt markets have developed, enabling greater operational independence in monetary policy making. The growth of government debt markets has also provided a benchmark for private debt markets to develop. There have also been significant improvements in the information infrastructure.
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More recently, the securitisation Act was enacted in 2003 to enhance protection of creditor rights. To combat the abuse of financial system for crime-related activities, the Prevention of Money laundering Act was enacted in 2003 to provide the enabling legal framework. The negotiable Instruments (Amendments and Miscellaneous Provisions) Act 2002 expands the erstwhile definition of cheque' by introducing the concept of electronic money' and cheque truncation'. The Credit Information Companies (Regulation) Act 2005 has been enacted by the parliament which is expected to enhance the quality of credit decisions and facilitate faster credit delivery. Processes Of Reform, what are the unique features of our reform resume process?
First, financial sector reform was undertaken early in the reform cycle in India. Second, the banking sector reforms were not driven by any immediate crisis as has often been the case in several emerging economies. Third, the design and detail of the reform were evolved by domestic expertise, while taking on board the international experience in this regard. Fourth, enough space was created for the growth and healthy competition among public and private sectors as well as foreign and domestic sectors. How useful has been the financial liberalization process in India towards improving the functioning of institutions and markets?
As a part of the reforms programme, initially there was infusion of capital by government in public sector banks, which was subsequently followed by expanding the capital base with equity participation by private investors up to a limit of 49 per cent. The share of the public sector banks in total banking assets has come down from 90 per cent in 1991 to around 75 per cent in 2008: a decline of little less than one percentage point every year over a seventeen-year period. Diversification of ownership, while retaining public sector character of these banks has led to greater market accountability and improved efficiency without loss of public confidence and safety. Another major objective of banking sector reforms has been to enhance efficiency and productivity through increased competition. Establishment of new banks was allowed in the private sector and foreign banks were also permitted more liberal entry. Nine new private banks are in operation at present, accounting for around 10-12 per cent of commercial banking assets.
Yet another step towards enhancing competition was allowing foreign direct investment in private sector banks up to 74 per cent from all sources. Beginning 2009, foreign banks have been allowed banking presence in India either through establishment of subsidiaries incorporated in India or through branches. Impressive institutional reforms have also helped in reshaping the financial marketplace. A high-powered board for Financial Supervision (bfs constituted in 1994, exercise the powers of supervision and inspection in relation to the banking companies, financial institutions and non-banking companies, creating an arms-length relationship between regulation and supervision. The system has also progressed with the transparency and disclosure standards as prescribed under international best practices in a phased manner. Disclosure requirements on capital adequacy, profitability ratios and details of provisions and contingencies have been expanded to include several areas such as foreign currency assets and liabilities, movements in non performing loans (NPLs) and lending to sensitive sectors. The range of disclosures has gradually been increased. The legal environment for conducting banking business has also been strengthened. Debt recovery tribunals were part of the early reforms process for adjudication of delinquent loans.
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Reforms In The banking Sector,. Financial sector reforms encompassed broadly institutions especially banking, development of resume financial markets, monetary fiscal and external brief sector management and legal and institutional infrastructure. Reform measures in India were sequenced to create an enabling environment for banks to overcome the external constraints and operate with greater flexibility. Such measures related to dismantling of administered structure of interest rates, removal of several preemptions in the form of reserve requirements and credit allocation to certain sectors. Interest rate deregulation was in stages and allowed build up of sufficient flexibility in the system. This is an important component of the reform process which has imparted greater efficiency in resource allocation. Parallel strengthening of prudential regulation, improved market behaviour and gradual financial opening helped the liberalisation process to run smooth. The interest rates have now been largely deregulated except for certain specific classes, these are: savings deposit accounts, non-resident Indian (NRI) deposits, small loans up.2 lakh and export credit. Without the dismantling of the administered interest rate structure, the rest of the financial sector reforms could not have meant much.
bank balance sheets as also greater focus on corporate governance. India has been a witness to a sea change in the way banking has been done in the past more than two decades. Since 1991, the reserve bank of India (RBI) took steps to reform the Indian banking system at a measured pace so that growth could be achieved without exposure to any systemic risks. Some of these initiatives were deregulation of interest rates, dilution of the government stake in public sector banks (PSBs guidelines being issued for risk management, asset classification, and provisioning. Technology has made tremendous impact in banking. Anywhere banking' and Anytime banking' have become a reality. The financial sector now operates in a more competitive environment than before. Now the biggest challenge before the regulators is of avoiding instability in the financial system.
The paper has not been divided into separate chapters but has been written in essay form to preserve the continuity of ideas. However, the issue has been covered through sub-headings, so that all aspects are clearly and logically covered. Introduction, financial Sector reforms initiated in the country as a part of the economic reforms since the year 1991, has brought about revolution in the structure of banking environment. While deregulation has opened up new opportunities for banks, liberalization has intensified competition in the banking industry by opening the market to new foreign and private sector banks. Declining interest rates and reduced teresa lending margins have thrown up new challenges to banks, particularly public sector banks. While the financial sector reforms helped strengthening institutions, developing markets and promoting greater integration with the rest of the world, the recent growth phase suggests that if the present growth rates are to be sustained, the financial sector will have to intermediate larger and increasing. It must acquire further sophistication to address the new dimensions of risks. Post-wto, competition will only get intensified, as large global players emerge on the scene. Increasing competition is squeezing profitability and forcing banks to work efficiently on shrinking spreads.
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Reference this, declaration, the text reported bill in the project is the outcome of my own efforts and no part of this report has been copied in any unauthorized manner and no part in it has been incorporated without due acknowledgment. Statement Of Problem, this project undertakes to study the reforms brought about in the banking sector and its impact. Further, the project endeavours to highlight the challenges to be met by the Indian banks in the growing competitive scenario. Objectives: to study the reforms in the banking sector. To study the impact of the reforms. To visualize the challenges ahead for the Indian banking. Data collection: Internet sources - articles, newspaper - articles, Editorial c) Method Of Writing, a combination of descriptive and analytical styles of writing has been used in this term paper.