Essays24.com - Term Papers and Free Essays
Search

Indian Banking Industry

Essay by   •  January 3, 2011  •  1,924 Words (8 Pages)  •  2,467 Views

Essay Preview: Indian Banking Industry

Report this essay
Page 1 of 8

INTRODUCTION

The banking industry is the backbone of any monetized economy. The stage of development of this industry is a good reflection of the development of the economy.

The banking industry in India is governed by Banking Regulation Act of India, 1949. Since 1949, this sector has undergone phenomenal reforms due to the efforts and the vision of the policymakers. The first phase of reform began with nationalization of the 14 banks in 1969. At this stage, priority sectors were identified and banking support was given to them. The second phase was the nationalization of 6 more banks in 1980. However, what can be considered as a breakthrough in banking services was the entry to private sector banks which was initiated in 1993. Eight new banks entered the market at this stage with state - of - art technology and a brought with them a new wave of professionalism. It was at this time that India was introduced to the concept of Debit and Credit cards, e-transfer of funds, ATM and mobile banking. It was at this time that competition was truly introduced in this sector.

At present, the industry is in the makeover mode. The Public Sector Banks (PSBs) are in the midst of rejuvenation process with exercises like downsizing the units, reducing the volume of Non Performing Assets (NPAs). They are gearing themselves for the fierce competition that is posed by the private banks.

Private banks, on the other hand, are in the consolidation mode. Big banks are getting bigger. Small banks are being taken over by the bigger ones. Mid - sized banks are expanding.

The sector is in the growth stage with many new products and services offered and a wide market base tapped. Quality of assets has improved and the confidence in the system is building up due to the increased transparency norms. Government interference is also gradually reducing.

 

STRUCTURE OF THE INDUSTRY

The Banking sector in India can be broadly classified into Nationalized Banks, Private sector Banks and Specialized banking institutions. The Reserve Bank of India is at the apex of the banking structure of the country. It is a centralized body which supervises the workings of all the banks in the country. It is also a policymaking authority for this sector. There are a sum total of 88 scheduled commercial banks operating in India out of which 28 are in the public sector, 29 are in the private sector and 31 are foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs.

The banking is highly fragmented with major share concentrated in hands of a select few. 30 banking units contribute to 50% of the deposits and 60% of the advances.

The Steering Committee established in February, 2005, has issued draft guidelines for the adoption of BASEL II norms. These guidelines establish the capital adequacy requirements for the banks, the supervisory review process by the national regulators and the disclosure norms for the banks as regards their assessed risk exposures and capital positions.

 

APPLYING PORTER'S FIVE - FORCES MODEL TO THE BANKING INDUSTRY

 

1. INTER - FIRM RIVALRY

[The banking industry is highly competitive. The financial services industry has been around for hundreds of years, and just about everyone who needs banking services already has them. Because of this, banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates, and investment services. The banking sector is in a race to see who can offer the better and faster services, but this also causes banks to experience a lower ROA. They then have an incentive to take- on high risk projects. In the long run, we're likely to see more consolidation in the banking industry. Larger banks would prefer to takeover or merge with another bank rather than spend the money to market and advertise to people.]

a. Number of Banks

Number of banks in India is very high. Commercial Banking system in India consists of 272 scheduled banks and 4 non-scheduled banks as per 2007 data. Of these, 224 are in the public sector and account for nearly 82% of the commercial banking system. Out of these 224 banks, 196 are Regional Rural Banks (RRBs) and 28 are regular commercial banks.

There are over 80,000 branches of all these banks taken together. Then there are 31 foreign banks and a few more are expected to arrive by 2009. There are 29 private sector banks. These banks are expected to consolidate in the years to come in order to gain scale of operations, a wider customer base and to deal with competition from foreign banks.

b. Flourishing Markets

There is huge scope for further expansion for the banking industry. We are an economy growing at double digit. The income levels and standard of living of the masses is on a continual increase and so is their demand from the service sector. This is the chance for the banks to devise new products and services catering to the rural sector as well as the HNIs, to create crиme de la crиme support infrastructure like that of Asset Reconciliation companies, to improve corporate governance and corporate social responsibility and to enhance labor reforms and policies. Every existing bank in the country can reach new heights on this very aspect and enhance its competitive position.

c. Innovative Products

Back in 1990, technology was the differentiating factor in terms of innovation. Later it was internet and mobile banking. Now that almost all the banks have caught up with this trend, there is a need to innovate the products. Banks no longer restrict themselves to traditional functions of lending and borrowing. Banks need to come up with investing packages of diversified risks and returns and other such banking products. This is where the concentration of all the banks is going to be.

d. Entry of Foreign Banks

Entry of foreign banks is going to get more favorable in the years to come. RBI has shown a benign policy for foreign banks thus far. The priority lending requirements for them are low (thereby increasing profitability), capital adequacy norms are almost the same and there is no restriction on number of subsidiaries

...

...

Download as:   txt (12.2 Kb)   pdf (148.1 Kb)   docx (14.4 Kb)  
Continue for 7 more pages »
Only available on Essays24.com