Page 38 - BANKING FINANCE November 2015 ONLINE

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excessive risk taking and shield systemically important etc. Systemic issues arising out of interconnectedness
financial services from idiosyncratic shocks impacting other among banks and between banks and Non Banking Finan-
activities. It is important to recognize that the regulatory cial Companies (NBFCs).
changes happening elsewhere need to be appropriately
understood by Indian banks as well, as they need to interact Given the competitive environment, ability of the
with their global counterparts. bank to forsee the following changes and their
flexibility in adapting to changing condtions will
The ability of the bank to sustain competitive forces give them an edge.
depends on their operational efficiency, product innovation,
technology support, cost of services, service quality and Rebuilding New Customer New
human resources skill. Human Needs Players
(Increased
The Indian banking sector, needs to match up to the Resources (Utilizing New Competition)
requirements of a fast growing economy including the likely (Change in Skills) Opportunities)
acceleration in the Credit to GDP ratio. Added to this is the
demographic dividend with its myriad challenges and Change in New
opportunities. There is thus a huge responsibility , and Mindset Regulation
opportunity for, the Indian banking sector to go ahead. (Increased (New Rules)
Marketing)
Presently,state-dominated banking sector fraught with
problems such as the accumulation of Non-Performing New Services Knowledgeable New
Assets (NPA) will ultimately be unable to keep pace with (Shift in Customer Technology
demands for capital investments in public or private (Change in (Change in
projects, and Public-Private Partnerships (PPP). Structure) Efficiency)
Customer Loyalty)
This discrepancy is especially problematic for infrastructure
projects and other long-term development initiatives. Rising 1. New Players
bad loans have meant that banks need more capital to set
aside as provisions, in addition to the higher capital a) Issue of new bank licenses to further improve
requirements under advanced Basel-III norms. The competition and enhance access to banking services
government is struggling to meet these capital
requirements for state-owned banks, in which it is the
majority owner.

In the case of public sector banks, the RBI committee
suggests that a Bank InvestmentCompany (BIC) be set up
to hold equity stakes in banks which are presently held by
government. It also proposed that the ownership ceiling for
promoter investors be raised to 25%. Presently the
promoters are required to bring down their stake over time
to a maximum of 5%.

Some of the challenges ahead include Capital Account
management, management of systemic
interconnectedness, strengthening prudential framework,
initiatives for improving the financial market infrastructure,

38 | 2015 | NOVEMBER | BANKING FINANCE

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