Achievements of the Indian Banking System
- The IBA-FICCI-BCG Report (August 2011), says that India's Gross Domestic Product (GDP) growth will make the Indian banking industry the third largest in asset size in the world by 2025'. This report gives a very hopeful picture of the Indian Banking Sector in times ahead. However, being largest is not enough – being efficient is what Indian Banking Industry has to strive for.
- The Indian economy has been growing fast and the GDP growth rate had averaged 8.8 per cent in the last 5 years preceding the crisis. Despite a subsequent slowdown, India's GDP is still growing at a reasonably fast pace. The Indian banking sector will, as such, need to match up to the requirements of a fast growing economy including the likely acceleration in the Credit to GDP ratio.
- The benefits of demographic dividend can be also added to it with its myriad challenges and opportunities. There is thus a huge responsibility on, and opportunity for, the Indian banking sector going ahead.
- The Indian Banks have to be not only responsible but also have a viable commercial profit. The major challnege for Indian Banking system is to balance the interest of all stakeholders, included and yet to be included. There is no future of Casino Banking.
- The Indian Economy has been appreciated for weathering the financial crisis relatively unscathed. Much of it hinged on the sound and resilient banking system in the country. The foundation for the banking sector resilience was laid with the introduction of the financial sector reforms in 1991 with focus on prudential regulation and increased competition.
- These reforms resulted in a comprehensive transformation of the banking sector. The reforms had a major impact on the overall efficiency and stability of the banking system. The outreach of banks increased in terms of branch/ATM presence. The balance sheets and overall banking business also grew in size.
- The financial performance and efficiency of Indian banks improved with increased competition, as reflected in their profitability, net interest margins, return on assets (ROA) and return on equities (ROE).
- The capital position improved significantly, and banks were able to bring down their non-performing assets sharply. This reform phase also witnessed increased use of technology which in turn, helped improve customer service.
RBI & Financial Stability
- While financial stability is not an explicitly stated objective under the Reserve Bank's statute (RBI Act, 1934), various measures were undertaken from time to time to strengthen financial stability in the system which covered a wide arena.
- The approach has evolved from past experiences and a constant interaction between the micro level supervisory processes and macroeconomic assessments. In the Indian context, the multiple indicator approach to monetary policy as well as prudent financial sector management together with a synergetic approach through close co-ordination between the Reserve Bank and other financial sector regulators has ensured financial stability.
- Some of the other policy measures include Capital Account management, management of systemic interconnectedness, strengthening prudential framework, initiatives for improving the financial market infrastructure, etc. Systemic issues arising out of interconnectedness among banks and between banks and Non Banking Financial Companies (NBFCs – our shadow banks) and from common exposures were addressed by, among other measures, putting prudential limits on aggregate interbank liabilities as a proportion of banks' Net Worth, restricting access to uncollateralised funding market to banks and Primary Dealers with caps on both borrowing and lending, increasingly subjecting NBFCs to more stringent prudential regulations as also restricting banks' exposure to NBFCs to contain regulatory arbitrage.
- The other noticeable aspect regarding policy measures has been the innovative use of countercyclical policies to address the pro-cyclicality issues. The countercyclical policies were introduced as early as 2004 by using time varying sectoral risk weights and provisioning, though RBI had used them sporadically even earlier.
- These unconventional measures taken in response to emerging risks are now widely acknowledged to have played a signifi cant role in protecting the Indian financial system from key vulnerabilities.
- India has much to be satisfied about, as she has come a long way since the 1991 reforms. Even as we rejoice in our achievements and success, we must have the humility to acknowledge that much more needs to be achieved in our pursuit of excellence.