THE CHANGING FACE OF INDIAN BANKING

THE CHANGING FACE OF INDIAN BANKING The Changing Decade :- Indian banking is passing through a phase of rapid transition which was initiated with the reforms of the financial sector that was initiated by the Central Government since 1991 when India faced its worst Balance of Payments Crisis in its System. The face of Indian Banking has changed beyond recognition through the years what with Aggressive Regulation, Tremendous Technological Advancement, Ever Increasing Expectations of Customers and the Process of Consolidation of the Sector. With the rapidly growing Banking Sector & ever increasing products, the Reserve Bank of India has been monitoring the developments in the sector with a hawk’s eye and has been ably steering the Banking Sector towards new frontiers. There is growing competition between Banks which has become quite intense in the last decade. Adoption of new technology has opened; new vistas of business are opened for the Banks. Adoption of not only the New Technology but also its successful implementation is the key for the Banks to remain in the race. With the advent of CBS (Core Banking Solution), Internet Banking and Mobile Banking have become feasible which has enabled Banks to reach to the doorstep of the customers. With fierce competition among the Banks for the slice of the market pie, customer has become the King. He now has much wider choice, not only in terms of products but also in terms of Banks. The government policy being more Pro-Customer, banks have been vying with each other to bring in new products and cut the cost. There has been lot of talk of consolidation in Banking Sector in India. None of the Indian Banks figure in the top 50 banks in the World while 10 Chinese Banks appear in the top 50 list. Apart from this, the reach of the Indian Banks is not commensurate with the size of the Country and spread of its rural population. ( This is the reason the Central Govt. launched a massive A/c Opening Program in Aug. 2014 directed at better Financial Inclusion ). Still almost 60% of its Indian Population does not enjoy basic Banking facilities. Obviously there is mounting need for consolidation in the Banking sector. There are more than 29 Banks in the Public Sector where the Indian Government has majority stake. The smaller Banks need to be merged with the larger ones to create conglomerates, to face competition from Private Banks & Foreign Banks and provide better services to the Customers in every nook and corner of the Country. Indian Banking has changed quite a bit over the years. Not very long ago, the customer had to visit the branch of a bank for any of his transactions, be it deposit of money /cheque or for a loan. In even major cities or towns, there would only be one branch of a Bank and the customer would have to traverse through the city, sometimes from one corner to another corner of the city, to access the banking facility. Even after reaching the Bank, the customer would have to wait for a long time for his turn to come. It was time consuming. Not only that, cheques / DDs deposited in the account would need at least 4 days to get credited and in case of outstation instruments, the wait for getting the amount credited to the account could be a month or more. Further there were not many products the Bank would offer. It would offer only the basic banking facilities like accepting deposits and making advances. Not any more. Even in smaller towns and cities, one can find a Branch of a Bank at every other corner. ATMs are quite conspicuous by their presence. In larger towns and cities, every Bank has established a network of branches and ATMs in that town or city. Not only this, due to technological advancement, now banking has reached the doorstep of the customer. Net Banking or Mobile Banking has become the buzzword. Due to CBS, a customer of a Bank can carry out his transactions at any branch of the Bank in any corner of the Country. Due to ATM Network, a customer of a Bank can deposit or withdraw cash at any ATM, whether belonging to his Bank or any other Bank in the Network at a small fee. He can also pay his bills through Net Banking at a fraction of the time he would need for the same transaction in earlier days. In days to come, the ATMs would not only accept or dispense cash but would carry out many other functions for the customer. Due to RTGS ( Real Time Gross Settlement System ) or NEFT ( National Electronic Fund Transfer ), funds from one account to another and from one Bank to another are transferred in no time across the country or overseas. All this has led to huge time and cost saving for the customer. In turn, it has helped Banks not only to increase their turnover manifolds but also earn substantial fees income. Now Banks are dispensing many other financial products like Insurance Products, Credit / Debit Cards, sale of Gold Coins, Demat Services, Payment of Taxes online, etc. through their branches.

PROACTIVE ROLE OF RBI :- All this has become possible due not only to technological advances but also proactive regulation by RBI whereby in certain cases, the Banks were forced to adopt new technology, like for example, adoption of CBS Platform. On the other hand, RBI Regulation is playing a pivotal role in increasing branch network by Banks so as to ensure that Banking Services reach the commonest of common people in the Country. With a view to achieving greater financial inclusion and fair competition, RBI not only has made Branch Licensing free of prior RBI permission for financially sound Banks but has also issued new Bank Licenses in the Private Sector. Now RBI has announced plans to issue fresh licenses to Smaller Banks, Payment Banks, Local Area Banks, Universal Banks, etc. in the Private Sector to cater to the banking needs of the small merchants, farmers, people in the unorganized sectors, unserved and under served areas. However, these Banks will have to undertake to open at least 25% of their branches in unbanked areas. Even the existing Banks in Public Sector or Private Sector will have to open at least 25% of their new branches in underserved or unserved areas. This is being done to ensure greater Financial Inclusion.

THE ROLE OF TECHNOLOGY :- Technology has a major role to play in the changing dynamics. Increasing use of technology and rapid advancement in technology has both positive and negative impact on Indian Banking, as in any other Industry. While transaction costs have gone down substantially and movement of funds has become faster and cheap, easy availability of information has made analysis and comparisons quite effective. For Banks, it has become easy to assess creditworthiness of borrowers due to access to credit scores with agencies like Credit Information Bureau of India Ltd. (CIBIL). On the other hand, it has become very easy for the customers to compare the products offered by different Banks, their features and the pricing. As such, the customer is better informed today than ever before. While in earlier days, the customer would stick to one Bank through his Life and would not like to change his Bank so easily, not any more. Now, depending on his changing requirements and his perception of the Bank he is banking with, he may switch the Bank or may start banking with other Banks which fit his requirements. Multiple banking has become the inthing. Increasing use of Net Banking and Mobile Banking has become possible due to technological advancement, making it easy for the customer to save on time & energy and of course, costs. The customer now hardly has to go to the Bank physically. This is giving rise to faceless banking. In the past, personal customer relationship was the backbone of banking for information sharing and knowing customer preferences. This has changed dramatically. Now the Banks have to depend more on online sources for knowing customer preferences and their credibility. This has led to stringent disclosure requirements. Increasing use of Computers, Net Banking and Mobile Banking has given rise the number of frauds and the amounts involved in frauds has gone up multifold. In past, a news about fraud was a rare occasion. However, now-a-days, no day passes without reporting on some fraud or other. If the rules of using technology are not followed strictly, the fallout could be fast and disastrous. Even a small carelessness like revealing ATM or Net banking password to somebody or not having antivirus software installed on the PC could lead to heavy losses as many customers are now realizing.

CHANGING CUSTOMER PREFERENCES :- The customer preferences have changed very fast over the years. Earlier it was a “Sellers’ Market” for Banks. Now, however, it is a “Buyers’ Market “ and the customer dictates the trends in banking. Earlier Banks were more interested in dealing with the large corporate customers who were their primary source of business & profits. However, now the days are of Retail Banking. Every Bank worth its’ name is trying to capture more share of the retail market and for that purpose there is competition among Banks to introduce newer products to appeal to the customer taste and suit their requirements. Now Banks must offer all conceivable banking products and other financial products under one roof or be ready to lose the customer which nobody can afford in these days of fierce competition. This has given rise to the concept of Universal Banking where Banks are offering, apart from Banking Products, other Financial Products like Mutual Funds, Pension Products, Depository Products, Insurance Products, Credit / Debit Cards, PAN Card Services, Investment Products, Payment of Taxes, Advisory Services, etc.

OPPORTUNITIES LIE IN RURAL INDIA :- The next big opportunity for Banks is said to lie in the Rural India. The penetration of Banking is said to be very low in India and there is huge untapped potential there. The dependence of rural populace on the moneylenders has gone down substantially over the years due to tighter regulation and increasing awareness and education. Still a large Indian population is still away from the benefits of regular banking. However, catering to rural population, though is an opportunity, it’s a challenge too. Gestation period for turning a rural branch to profit making status is long. Then there is severe dearth of people/staff who understand the rural requirements. Further, it is not easy to coax the rural people to come to Banks and undertake transactions there. Lot of education needs to be imparted. Diversionary tactics of vested interests need to be foiled. All this needs people with commitment who are not easily available and the staff from urban areas are not ready to go to the rural areas and put in efforts there. To obviate this situation, RBI has given push to the concept of “Banking Correspondents “ who are freelance professionals working in rural areas who are appointed by Banks to work on their behalf in the rural areas. This concept is yet to take roots but can offer good employment opportunity to rural youth and at the same time making banking products available to the rural population. Banks will have to use extensive use of technology to penetrate the rural markets. RBI is making steady efforts to spread banking in rural areas. The Circular allowing Banks to appoint Business Correspondents / Business Facilitators is a case in point whereby Banks would be able to reach customers through entities located beyond their premises and conduct micro finance business.

CHANGING OWNERSHIP PATTERN :- The ownership pattern of Indian Banks has also undergone change. While the Public Sector Banks have seen the Govt. ownership go down substantially to almost 51% from highs of 80 to 90% in some cases, in some of the best known Indian Banks in Private Sector like HDFC Bank & ICICI Bank, the majority stake is mainly with foreign investors. There is substantial change in working styles of even the Public Sector Banks which were quite bureaucratic in their functioning not very long ago, are now becoming quite market savvy. State Bank of India is a case in point. The Banking behemoth having one of the largest network of branches in the world, of almost 18000 branches and was used to be termed as “ A Sleeping Elephant “ has hastened the process of change within and is aiming to be the “Cheetah of the Banking ’. The Govt. & the RBI are keen to see the sector consolidate. Already the process of merging various subsidiaries of the State Bank of India like State Bank of Bikaner & Jaipur, State Bank of Indore, State Bank of Hyderabad, etc. with State Bank of India is on and is expected to be completed by 2020. There is occasional talk of Union Bank of India merging with Bank of Baroda. With the advent of Basel III norms, Indian Banks would need Capital Infusion of about Rs. 4.95 trillion or roughly Rs. 4.95 Lac Crore. It would be difficult for smaller Banks to manage funds to cope with Basel III requirements. As a result, consolidation process is likely to get momentum. Further, there would be 4 considerations to drive mergers :

1. Economies of Scale,

2. Economies of Scope,

3. Potential for Risk Diversification,

4. Incentives for Management and Public Policy.

There is urgent need for consolidation of 27 Public Sector Banks who have not only to face increasing competition from the Private Sector Banks but are also vulnerable before the large Corporates who have acquired Global Scale of Operations like say, Reliance Industries, Tata Motors, Tata Steel or Vedanta Resources and have to compromise on pricing to retain the customers. Consolidation would also ensure elimination of overlapping operations which in turn would bring about reduction in overall costs. Unfortunately, the process is quite slow and has been marred by stringent protest by employees unions and other considerations.

EMERGENCE OF CO-OP. BANKS :- Rise of the Co-operative Sector is one more noticeable feature of the changing banking landscape. Though Co-op. Banks were around for more than a century, they came into prominence since 1991 and over the last 20 years or so, some of the Co-op. Banks like Saraswat Bank have become National players. In the early years, say upto the year 2002, these Banks were loosely monitored by the RBI. However, after the Madhavpura Fiasco, RBI has been regulating these Banks quite stringently and are now being treated at par with other players in the system. The role of Co-op. Banks in the direction of total financial inclusion cannot be under estimated. And they have the potential to reach mammoth proportions like in the West. However, there are some spoilsport in the system like Co-op. Patsansthas and Multi State Societies who are not well regulated but are active players in the Banking field. Appropriate regulation and monitoring is required to control their activities to ensure customer protection.

KYC NORMS & CUSTOMER PROTECTION :- In the last few years, to with a view to strengthen anti money laundering and terrorist funding measures, RBI has been tightening Know Your Customer ( KYC ) Norms. Gone are the days when one can open an account with as many Banks as he wanted without being questioned much about his antecedents and without submitting many documents that can establish his identity. Stringent regulation is in place and the Banks which had flouted the KYC Norms have been penalized very heavily thereby giving a clear message to the Banking Sector that RBI is very serious about KYC Norms and establishing customer identity. At the same time, RBI has issued many Circulars with a view to Customer Protection, e.g. recently, RBI issued circular to Banks advising them not to charge prepayment penalty in case of pre payment of loan installments in case of floating rate loans as the customer has a right to pre pay a loan if he has surplus funds. RBI even penalized certain Banks which used high handed and questionable methods for recovery of bad loans. RBI has issued number of instructions to Banks as regards the quality of services being provided, cost that is being recovered from the customer for services provided, disclosure of charges being levied upfront, etc. Even complaint resolution mechanism has also been laid down which needs to be followed by Banks meticulously.

EMERGING SCENARIO :- So far, the Indian Banking space has been dominated by presence of number of Public Sector Banks. These Banks have excess manpower which is not fully geared to handle the challenges posed by the advent of Digital Economy, large physical branch network and comparatively poor and inadequate IT Infrastructure. Therefore, there is going to be a heightened pace of mergers and acquisitions in Public Sector Banks. As such, in time to come, there are likely to be a few large Banks in the Public Sector which would be globally competitive while there would be a number of Banks in the Private Sector. Banking would be driven by technology more and more. Importance of Physical Banking is already waning. Now Banks depend on surveys and analysis of customer responses to these surveys and analysis of behavioral pattern to decide on their product strategies. In days to come, Electronic Currency may emerge as a medium of exchange in the virtual space. Already Bitcoins have emerged as virtual currency. However, it does not have legal sanctity. However, Govts. world over cannot overlook the importance of virtual currency and may have to come out with some Policy Measures in this regard. As and when that is done, it would revolutionize the way we transact our affairs or business. Already mobiles have become a rage amongst users of Banking services. The mobile technology has advanced by leaps and bounds and mobile handsets have acquired great new features. Further, the features get outdated very fast and new advanced and cost effective features take their place in no time. Already mobiles are replacing PCs and Laptops to undertake various transactions on the Internet. Time is not very far when the PCs and Laptops are totally replaced by Mobile Handsets for banking transactions. This would lead to increased volume of transactions. At the same time, regulation and monitoring would become more challenging. ATM Network is taking Banking forward much faster. In most major cities and towns, ATMs have replaced branches as major Cash Dispensers. Many more features would get added to the ATM technology whereby there would be no need to open new branches and ATMs would undertake all the functions of the branches without any human intervention. Even otherwise, the RBI is contemplating making electronic payment ( RTGS / NEFT ) mandatory above a certain threshold. As such, quantum of cash transactions would go down. The traditional functions like accepting deposits and making advances would not be major functions of the Banks. The Banks will have to innovate new products to make decent profits and stay in competition. Already they are undertaking functions like selling Gold Coins, Insurance Products, Pension Products, Mutual Fund Units, Demat, etc. Some Banks are also providing Investment Advisory Services, albeit through other entities. With more and more disposable incomes in the hands of the common public and increasing number of millionaires, Banks will have to be proactive and fast in their responses to changing customer preferences while facing increasing monitoring and tighter regulation. Due to increasing use of Internet, cross border transactions would become a normal banking feature. Overall, Banks would emerge as Financial Conglomerates in days to come. Further, Indian Banks have a major role to play in the development of banking in various under developed and developing countries such as Nepal, Bangladesh, Afghanistan, Egypt, Iraq, Pakistan, Iran, Russia, etc. With the advent of Modi Govt. at the Center which is keen to develop strategic relationship with neighbors, Indian Banks will have a major role to play in these countries and with strong back up of IT Sector at home, it may be able to expand rapidly beyond borders. Already some of the Indian Banks like State Bank of India, Bank of Baroda, etc. have acquired sizable presence overseas. In all, we may be witness to a rapid globalization of Indian Banks.

All this will have a major effect on professions like Chartered Accountancy and MBAs who are already great in demand in the Private Sector Banks. The scope and opportunities for these professionals in the Banking Sector would grow by leaps and bounds in years to come.

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By :- CA GOKUL B. RATHI, PUNE C/o. G. B. Rathi & Co. Chartered Accountants, 5, Durga Punyai, Near Mahesh Bank, Karve Road, Pune - 411004 M – 98500 41311 gokulrathi007@yahoo.co.in