The changing era of banking

Written by Mahalakshmi Hariharan | Updated: Dec 31 2008, 06:20am hrs
You would no longer see bank account holders in India waiting in long queues at the bank teller counter to get a draft or to withdraw their own money. Gone are the days when a bank would take days to transfer cash from one branch to another. Today, things are as simple as typing an SMS or dialing for a piping hot pizza.

For the Indian banking system, change has been quite constant for the last two decades to achieve efficiency and customer friendliness amidst rising competition. Today, banks no longer restrict themselves to traditional banking activities, but are explore newer avenues to increase business and capture new markets.

Either as a part of reforms process, which, in a larger context is linked to the ongoing economic reforms, or in an efforts to adopt the best international banking practices, the banking industry has seen radical transformation in the areas of business portfolio restructuring, hiring strategies, domestic and overseas expansion plans, treasury portfolios and creation of a technological platform. With a strong regulatory regime pushed forward by the RBI, the new initiatives include strengthening the prudential norms in line with the international best practices, improving credit delivery, planning sophisticated products, strengthening corporate governance practices and promoting financial inclusion, strengthening the urban co-operative banking sector while improving overall customer service.

To start with, while strengthening the prudential norms, a great deal of attention was paid to tackling the huge non-performing loans that had burdened the banking system. As banks started tackling the sticky assets, their asset quality began to improve helping them to expand their credit portfolio. Notable features like the introduction to Basel II requirements and the possibility of larger freedom for foreign banks in the country have opened the way for newer ideas and innovation.

Two major concerns related to corporate governance practices followed by banks. These related to concentrated ownership and quality of management that controlled the banks. Corporate governance practices were, therefore, strengthened.

The other major achievement, was the sharp increase in the flow of credit to the agriculture and SME sector. In a bid to bring about a vast section of the population into the banking system, the RBI launched a financial inclusion programme and banks were asked to introduce no frills accounts. According to RBI data, about 13 million no frills accounts were opened in a short span of two years.

The aim is to no longer confine the banking services to just metropolitans or semi-urban areas in India. The reach has now been widened to cover the remotest regions of the country.

The confidence in the urban co-operative banking segment was eroded in the early 2000s following a run on a multi-state co-operative bank. In order to restore the confidence and overcome the problem of dual control over urban co-operative banks, a mechanism of the TAFCUBs (a state-level taskforce on urban co-operative banks) was put in place.

The use of technology combined with some other initiatives helped improve the customer services by banks. Branch expansion, installation and use of ATMs also helped banks expand their reach. The banking system has made efforts to be more customer-friendly by facilitating doorstep banking. With the entry of new generation private sector banks and foreign banks into the country, existing banks have introduced services such as phone banking, mobile banking and net banking.

An interesting development was the setting up of credit information bureaus to obtain and share data on borrowers in a systematic manner for sound credit decisions by the banks. With a view to strengthening the legal mechanism and help credit information bureaus to collect, process and share information on borrowers, the Credit Information Act was enacted in May 2005.

Along with heavy investment in technology and in manpower also quite a chunk is being invested on the advertising and branding fronts. Banks like Union Bank of India, Canara Bank, State Bank of India and Bank of Baroda have taken the lead in this new trend. Banks have started approaching B-schools for student placements and even public sector banks are trying to benchmark their compensation structure against market trends.

A big change in the Indian banking space in the last decade is that banking services in the country have become accessible to the customers. Alternate banking channels have gained immense popularity in the last 10 years, says Chanda Kochhar, MD & CEO, ICICI Bank. She adds that the easy availability of retail as well as the corporate loans at competitive rates has fuelled the growth of Indian banking sector. I foresee that cellular phone technology will play a very important role in lowering the cost of banking transactions in the next decade. The penetration of banking services to all parts of the country is expected to gain momentum through the usage of mobile phones, she said. Her views are echoed by Partho Mukherjee, president (credit), Axis Bank. He says, Parameters such as technological support and system enablement for better customer relationship management have changed the face of the Indian banking sector in the last 10 years.

During the decade, banks have adopted a cash management approach rather than merely serving the credit needs of the consumers. Bankers also see a major change taking place in the payment mode.

Public sector banks praise the RBI for making this happen. From a regime of regulated rates, banks have moved to an era full of freedom, thanks to a number of prudential norms put in place by the RBI. Liberalisation has strengthened the banking system to a great extent. More and more information technology-based systems have been put in place by the state-owned banks. These banks are capitalised more to face the challenges posed by foreign and private sector banks, said Renu Challu, managing director, State Bank of Hyderabad.

From non-mechanised and manual operations to core banking, the banking industry has come a long way, said KR Kamath, chairman & managing director, Allahabad Bank. The new prudential norms have helped banks manage their operations efficiently. With the global financial crisis challenging the way banks in developed countries have practiced risk management norms, Indian banks are expecting many more changes to strengthen the domestic financial system.

With inputs from Kumud Das and Hemang Palan