CHALLENGES FACING THE INDIAN BANKING INDUSTRY

Indian Banking sector has emerged almost unscathed from the recent global financial crises. The regulatory system in India has stood the test of time, as many renowned global banks have fallen from grace. The nemesis of the global financial system lay in their high-risk lending and ambitious derivative plays. In fact, the financial soundness of India's banking system means the sector "approaches the current financial turmoil from a position of strength," said Goldman Sachs economist Tushar Poddar. Comparing the subprime lending debacle that originated in the US to the "activities of a casino," Prime Minister Manmohan Singh said this month he wanted reform of the global financial system to tackle the "economically damaging role of excessive speculative activity".

The current crisis will not have a big impact on the health of India's banking system simply because the country did not have the exotic derivative instruments or permit the unsupervised mortgage lending that triggered the meltdown. Bureaucratic and regulatory controls that frustrated many international investors proved to be a good firewall for India's banking system against the credit virus from the West.

The major challenges facing the Banking industry are:

• Development of new skills in Sales and Marketing: The growth is being driven by new products and services such as smart cards, e-banking, consumer finance and wealth management services in retail segment, and investment banking in the wholesale banking segment. All these activities require a high level of skill development amongst employees.
• Windfall treasury income: The volatility of interest rates will ensure that the banks are no longer able to generate enough profits through treasury gains. With net interest margins already under pressure, weaker banks will suffer an erosion in profitability.
• Competition from foreign banks: In the past few years the share of foreign banks in India has been declining, due to the restrictions on their expansion. With the implementation of the Basel II norms and the liberalization of branch licensing policy, foreign banks will emerge as a formidable force in the years to come.
• Enhanced service quality: With the demographic shift in the profile of customers, the demands for higher level of customer centric approach are becoming evident. Banks will have to constantly upgrade their service platform to provide quick and efficient customer service. The redressal of customer grievances will also play a greater role in the choice of banks by customers.