PROJECT ON

TOP 5 CHALLENGES FACED BY THE BANKING SECTOR

IN INDIA IN MAKING CRDIT POLICY

SUBMITTED TO: - SUBMITTED BY:

MR. R.K ANAND MEHAK

(18BSP1729)
BANKING SECTOR IN INDIA
Indian banks are increasingly focusing on adopting integrated approach to risk
management. The NPAs (Non-Performing Assets) of commercial banks has
recorded a recovery of Rs 400,000 crore (US$ 57.23 billion) in FY2019, which is
highest in last four years. Banks have already embraced the international banking
supervision accord of Basel II, and majority of the banks already meet capital
requirements of Basel III, which has a deadline of March 31, 2019.As per Union
Budget 2019-20, investment-driven growth requires access to low cost capital
which an requires investments of Rs 20 lakh crore (US$ 286.16 billion) every year.
Reserve Bank of India (RBI) has decided to set up Public Credit Registry (PCR) an
extensive database of credit information which is accessible to all stakeholders.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2017 Bill has been
passed and is expected to strengthen the banking sector. In June 2019, RBI sets
average base rate of 9.18 per cent for non-banking financial companies and micro
finance institutions borrowers for quarter beginning of July.

Deposits under Pradhan Mantri Jan Dhan Yojana (PMJDY) increased to Rs 98,320
crore (US$ 14.07 billion) and 355.4 million accounts were opened in India (as of
May 29, 2019). In May 2018, the Government of India provided Rs 6 lakh crore
(US$ 93.1 billion) loans to 120 million beneficiaries under Mudra scheme. Under
Pradhan Mantri Jan Dhan Yojana (PMJDY), more than Rs 1 lakh crore (US$ 14.30
billion) have been deposited till July 2019. In May 2018, the total number of
subscribers was 11 million, under Atal Pension Yojna.

Rising incomes are expected to enhance the need for banking services in rural
areas and therefore drive the growth of the sector. As of September 2018,
Department of Financial Services (DFS), Ministry of Finance and National
Informatics Centre (NIC) launched Jan Dhan Darshak as a part of financial
inclusion initiative. It is a mobile app to help people locate financial services in
India.
The digital payments revolution will trigger massive changes in the way credit is
disbursed in India. Debit cards have radically replaced credit cards as the preferred
payment mode in India, after demonetization. Debit cards garnered a share of
87.14 per cent of the total card spending (as of September 2018).
TOP CHALLENGES FACED BY THE BANKING
SECTOR IN INDIA
Macroeconomic risk

Macroeconomic risk was the top concern for all survey respondents despite the fact
that many economies have now returned to positive growth. For bankers,
uncertainties in the macroeconomic environment together with persistent and high
levels of debt across sovereign, corporate, and consumer sectors lay the
groundwork for asset bubbles to burst in the event of significant instability.

Technology risk

Of all the most urgent concerns, outdated core IT systems were a significant
concern for global bankers. Failure to invest appropriately in secure, agile systems
that can enhance digital and mobile banking can result in significant loss while
compounding the risk for cyber-attacks. Additionally, banks face serious
competition from a host of disruptive innovators who are able to provide customers
with seamless and more affordable experiences across a variety of channels.

Non-Performing Assets:

The commercial banks at present do not have any machinery to ensure that their
loans and advances are, in fact, going into productive use in the larger public interest.
Due to a high proportion of non-performing assets or outstanding due to banks from
borrowers they are incurring huge losses. Most of them are also unable to maintain
capital adequacy ratio.

Political Pressures:
The smooth working of nationalized banks has also been hampered by growing
political pressures from the Centre and the States. Nationalized banks often face lots
of difficulties due to various political pressures. Such pressures are created in the
selection of personnel and grant of loans to particular parties without considering
their creditworthiness.

Capital adequacy:
One way a bank tries to ensure it is protected from bad loans is by setting aside
money as a 'provision'. This money cannot be used for any other purposes including
lending. As a result, banks have lower capital available to use for its various
operations. The Capital Adequacy Ratio measures how much capital a bank has.
When this fall, the bank has to borrow money or use depositors' money to lend. This
money, however, is riskier and costlier than the bank's own capital. For example, a
depositor can withdraw his/her money any time they want. So, a fall in CAR (often
called as CRAR or Capital to Risk Assets Ratio) is worrisome. In the last few years,
CRAR has declined steadily for Indian banks, especially for public-sector banks.
Moreover, banks are not able to raise money easily, especially public-sector banks
which have higher number of bad loans. If banks do not shore up their capital soon,
some could fail to meet the minimum capital requirement set by the RBI. In such a
case, they could face severe issues.
Asset quality:

The biggest risk to India's banks is the rise in bad loans. The slowdown in the
economy in the last few years led to a rise in bad loans or non-performing assets
(NPAs). These are loans which are not repaid back by the borrower. They are, thus,
a loss for the bank. Net NPAs amount to only 2.36% of the total loans in the banking
system. This may not seem like an alarming figure. However, it does not take into
restructured assets - when a borrower is unable to pay back and the bank makes the
loan more flexible to be paid back over a longer period of time. Restructured assets
too put pressure on a bank's profitability. Together, such stressed assets account for
10.9% of the total loans in the system. And these are just loans which are identified
as stressed assets. 36.9% of the total debt in India is at risk, according to an IMF
report. Yet, banks have capacity to absorb only 7.9% loss. So, if these debts turn bad
too, banks will face major losses.
Advance to Priority Sector:
As far as advances to the priority sectors are concerned, the progress has been slow.
This is partly attributable to the fact that the bank officials from top to bottom could
not accept nationalization gracefully, viz., diversion of a certain portion of resources
to the top priority and hitherto neglected sectors. This is also attributable to the poor
and unsatisfactory loan recovery rates from the agricultural and small sectors.
Suggestions: -

 Easy payment options increase the frequency of transactions and extend a

bank’s audience internationally. Mobile technology in financial services is the
best way to hold and satisfy the customer. With advanced security like
biometric authentication and new customer needs, the payment system is
improving mobile services and online products by leveraging AI, big data,
IoT, and blockchain.

 Integrating chatbots into the customer service systems are to increase clients’
loyalty, reduce the processing time, and cut administrative costs. The bot
helps to find transactions, send and receive money, lock and unlock debit card
and much more.

 Look for banks to make strategic maneuvers to ward off competition from
FinTech, such as building competitive products in-house or acquiring these
companies to add to their portfolio of offerings.

 Another security challenge solution is cloud computing. Reliable data storage

and the ability to access it are also of great importance both for the speed of
the entire system and for interaction with the client. Cloud services offer
convenient storage conditions and guarantee protection that not every bank
can provide.

The banking industry has only begun to scratch the surface with regard to
the potential of AI, machine learning, chatbots, and advanced technology. At
the foundation of all of these advances is the ability to collect insights and
apply advanced analytics to benefit the consumer and solve challenges
facing banks in 2019.