Indian Banking Industry : Emerging Trends

Fierce competition, innovative strategies and competitive spirit have satiated banks with palpating activities. Banks are adopting different strategies in an environment of increased competitive pressure. Active strategies with focus on new fields of business and defensive strategy concentrating on cost cutting are embraced together. Flawless service delivery is the target with diffused liabilities and multiple choices available to customers.

Technology has completely changed the nature and pace of delivery of banking services world over. The speed has considerably improved alongwith the quality of the services. Various delivery channels are available with banks for customers. Broadly, the levels of banking services offered through internet can be categorized in to three types namely—Basic Level Service, Simple Transactional Websites and Fully Transactional Websites.

Indian banking was provided an opportunity by the liberalization in 1990s to extend its working para-meters beyond geographical borders. The banking reform has indeed helped to restore semblance of efficiency and stability. Our banking industry enjoys greater autonomy, operational flexibility and liberalized norms allowing it to be more com-petitive.

Technology Driven Indian Banking System

The growing universalisation and internationalisation of banking operations have altered the face of banks from one of mere inter-mediator to one of provider of quick, efficient and consumer centric ser-vices. There has been massive use of technology across many areas of banking business in India, both from the asset and the liability side of a bank’s balance sheet.

Banks pass through phases namely the inception phase, where the technology behind the application is in its infancy and a substantial amount of investment is required so as to make the application widely available commercially; the growth phase, where the application is increasingly available to the custo-mers and the technology behind the application is widely available; and the maturity phase, wherein the application is in widespread use and institutions not offering such applica-tions are likely to be at a competitive disadvantage.

The introduction of MICR based cheque processing—a first for the region, during the years 1986-88 was one of the earliest steps in Indian banking on the march of technology.

1. Technological Changes in Indian Banking System

Core Banking Systems—The introduction of Core Banking Systems (CBS) which was at its nascent stages has become full blown and all banks are at varying stages of implementation of Core Banking Systems in their branches. There are 5 ingredients that form part of the Core Banking system viz. General Ledger Customer, Information System, Deposit System, Loan System and Management Information System.

INFINET—INFINET (Indian Financial Network), is used by a large number of banks for funds and non-funds-based message transfers, and is made available by the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad. INFINET is perhaps among the few networks in the world which uses the latest in technology and security called Public Key Infrastructure—PKI, which is not only state-of-the-art and robust but also well within the legal requirements of the Information Technology Act, 2000.

National Electronic Funds Transfer System—RBI introduced an electronic funds transfer system to facilitate an efficient, secure, econo-mical, reliable and expeditious system of funds transfer and clearing in the banking sector throughout India, and to relieve the stress on the existing paper-based funds transfer and clearing system called National Electronic Funds Transfer System (NEFT System).

The parties to a funds transfer under this NEFT System are the sending bank, the sending Service Centre, the NEFT Clearing Centre, the receiving Service Centre and the beneficiary branch. The EFT scheme enables transfer of funds within and across cities and between branches of a bank and across banks.

National Electronic Clearing Services—The objective of National Electronic Clearing Services (NECS) is to facilitate centralised processing for repetitive and bulk payment instructions. Sponsor banks shall submit NECS data at a single centre viz. at Mumbai. While NECS (Credit) shall facilitate multiple credits to beneficiary accounts at destination branch against a single debit of the account of a User with the sponsor bank, the NECS (Debit) shall facilitate multiple debits to destination account holders against single credit to user account.

Centralized Funds Management System—The Centralized Funds Management System (CFMS), is a system to enable operations on current accounts maintained at various offices of the Bank, through standard message formats in a secure manner. It is set up, operated and maintained by the Reserve Bank of India.

Mobile Banking Services—Mobile payments is defined as infor-mation exchange between a bank and its customers for financial transactions through the use of mobile phones. Mobile payment involves debit/credit to a customer’s account’s on the basis of funds transfer instruc-tion received over the mobile phones.

Only Indian Rupee-based dome-stic services shall be provided. Use of mobile banking services for cross border inward and outward transfers is strictly prohibited. Only banks which have implemented core bank-ing solutions would be permitted to provide mobile banking services. Banks shall file Suspicious Trans-action Report (STR) to Financial Intelligence Unit–India (FIU-IND) for mobile banking transactions as in the case of normal banking transactions. To ensure inter-operability between banks, and between their mobile banking service providers, banks shall adopt the message formats like ISO 8583, with suitable modification to address specific needs. Hence, banks offering mobile banking should notify the customers the timeframe and the circumstances in which any stop-payment instructions could be accepted.

2. Current Position of Technological Banking Services

Drift Towards Innovative Banking

1. Presence of Women on Boards

Banking in the West has tradi-tionally been a male bastion and continues to be so. Study titled “Women on Corporate Boards in India 2010” ranked the companies listed in the Bombay Stock Exchange (BSE-100) in terms of the gender diversity of their boards, with those with the highest percentage of women on their boards appearing at the top. The BSE-100 comprises 26 industry classifications with the banking industry making up the largest group of companies.

Indian banks, with better gender equality on board than their western counterparts, scraped though the economic slowdown unscathed.

Kalpana Morparia heads the Indian arm of global financial leviathan J. P. Morgan Chase & Co; Meera Sanyal is the country executive for Royal Bank of Scotland and; Manisha Girotra is the managing director of Union Bank of Switzer-land’s India operations. K. J. Udeshi is the Chairman of Governing Council of BCSBI.

2. Mobile Branches

Domestic scheduled commercial banks (other than RRBs) were granted general permission by RBI, to opera-tionalise Mobile branches in Tier 3 to Tier 6 centres (with population upto 49,999 as per Census 2001) and in rural, semi urban and urban centres in the North Eastern States and Sikkim, subject to reporting.

The mobile branch should be stationed in each village/location for a reasonable time on specified days and specified hours, so that its services could be utilized properly by customers. The business transacted at the mobile branch shall be recorded in the books of the base branch/data centre. The bank may give wide publicity about the mobile branch in the village, including details of ‘specified days and working hours’ at various locations so as to avoid any confusion to local customers; and any change in this regard should also be publicized.

3. Social Responsibility, Sustain-able Development and Non-Financial Reporting

Government infused into bank-ing sector the ‘socialist’ constituent through nationalization of major banks.

CSR entails the integration of social and environmental concerns by companies in their business opera-tions as also in interactions with their stakeholders. SD essentially refers to the process of maintenance of the quality of environmental and social systems in the pursuit of economic development. NFR is basically a system of reporting by organizations on their activities in this context, especially as regards the triple bottom line, that is, the environmental, social and economic accounting.

RBI circular (dated December 20, 2007) on Role of Banks in Cor-porate Social Responsibility, Sustain-able Development and Non-Financial Reporting is appreciable. Stressing the need for Corporate Social Res-ponsibility (CSR), RBI pointed out that these initiatives by the banks are vital for sustainable development. Banks have been directed to start; non-financial reporting will help to audit their initiatives towards the corporate social responsibility (CSR). Such a reporting will cover the work done by the banks towards the social, economic and environmental better-ment of society.

4. Universal Banking

Universal Banking refers to those services offered by banks beyond traditional banking service such as saving accounts and loans and includes Pension Funds Manage-ment, undertaking equipment leas-ing, hire purchase business and factoring services, Primary Dealer-ship (PD) business, insurance busi-ness and mutual fund business.

The issue of universal banking came to limelight in 2000, when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an univer-sal bank.

Later on RBI asked financial institutions which are interested to convert them into a universal bank, to submit their plans for transition to a universal bank for consideration and further discussions. FIs need to for-mulate a road map for the transition path and strategy for smooth con-version into an universal bank over a specified time frame. The plan should specifically provide for full com-pliance with prudential norms as applicable to banks over the pro-posed period. Though the DFIs would continue to have a special role in the Indian financial System, until the debt market demonstrates substantial improvements in terms of liquidity and depth, any DFI, which wishes to do so, should have the option to transform into bank (which it can exercise), provided the prudential norms as applicable to banks are fully satisfied. To this end, a DFI would need to prepare a transition path in order to fully comply with the regula-tory requirement of a bank. The DFI concerned may consult RBI for such transition arrangements. Reserve Bank will consider such requests on a case by case basis.

Thus, Indian financial structure is slowly evolving towards a conti-nuum of institutions rather than discrete specialization.

Conclusion

The applicability of various existing laws and banking practices to e-banking is not tested and is still evolving, both in India and abroad. With rapid changes in technology and innovation in the field of e-banking, there is a need for constant review of different laws relating to banking and commerce. A re-orientation of strategy is required in order to accommodate the changes and challenges of the present globa-lised scenario.

Technological developments may become threat but still enable banks to access the global market through the electronic networks. IT usage by banks would continue to exist in substantial scales. Indian Banking is trying to embrace latest technology upgrading its services. Clientele are reveling sophisticated services specific needs, preferences and conveniences by the banks.

Financial Literacy in India

The Essence of Money

We all acknowledge the fact that money is essential for sheer existence and survival yet tend to escape from learning how to manage money. Managing money means the ability to judiciously save and multiply the money earned, through an informed understanding of the financial pro-ducts and services available. It is also the question of avoiding risks and being protected from falling prey to unscrupulous elements. In my opinion the single most critical factor in effective money management is to stay away from greed. Greed for making quick money often restricts the power to think and take appro-priate decisions. Greed and lust for easy money overpowers application of mind and the capacity to think sanely. We ignore the fact that money invested legally and ethically can hardly ever give returns which are disproportionate with respect to pre-vailing market conditions. Yet regu-larly we hear of people losing their hard earned money by succumbing to fraudulent schemes which promise attractive returns or trusting someone who tempts them with windfall gains.

We must always remember that money does not grow on trees and investments/savings can fetch only normal returns which are in con-formity with market norms. Our indulgence in fancy schemes and faith in promoters whose credentials are not verified arises due to lack of adequate knowledge and the ability to think rationally. Money lost is difficult to retrieve; though checks and balances are there it is only the well informed who can pursue his case by approaching the respective authorities for redressal. We need to respect money for its value and its significance for sheer survival. Financial literacy is therefore crucial for the well being of an individual from any section of society.

What is Financial Literacy ?

It is not logical to assume that all educated individuals are financially literate and the less educated are weak. In fact the converse could be true. What then is financial literacy? Simply expressed it is the ability to manage one’s personal finance judiciously by making best/optimum use of one’s resources. There are different financial products and ser-vices available which cater to differ-ent needs and requirements. Under-standing these products and services and choosing according to the wants is what constitutes the right approach. These wants differ from individual to individual and even during the life span of a person the wants keep changing. The requirements are linked to the risk taking capacity as the element of safety is crucial in an individual’s life.

Be it savings through bank/post office schemes, investing in stock markets or mutual funds, buying life cover and general insurance, raising loans or use of credit cards it is essen-tial to know the products thoroughly to make a well thought out decision. A prudent man generally relies on his personal judgement rather than dubious relationship managers/un-solicited help as trust and integrity in financial matters are an absolute necessity. It is better to stay away from complex products and services if the knowledge levels are low as safeguarding of money is more impor-tant than taking unwanted risks. With the spread of technology and opening of the economy it has become even more important to select the appro-priate product after due diligence. Though technology has made ser-vices swifter and efficient it has also introduced many hazards. A thorough understanding of the safe-guards in the technology process is all the more essential to avoid being a victim of fraudulent transactions.

To appreciate the significance and relevance of financial literacy for sound money management it may be worthwhile to capture a few illustra-tions.

(1) Taking the simple example of payment of interest on savings bank accounts not many still know that interest is now paid on the daily balance in the account. Rather than withdrawing money which may not be immediately required for a week at least it would be profitable if the same amount remains with the bank as it would continue to earn interest for the account holder. Better still the surplus funds in a savings account could be transferred to a fixed deposit account which would give higher interest.

(2) Those seeking loans from banks often do not read the terms and conditions of the bank and blindly sign the documents thereby agreeing to the terms of the document. At times these papers are signed in blank without even bothering to understand the significance of the loan contract. Loan means having to fulfil many obligations by the bor-rower till it is cleared and pleading ignorance later does not help. In case of default the assets can be seized by the lender and the borrower has no scope to protect the asset without clearing the dues.

(3) Most loan documents require one or more guarantors to sign along with the borrower. This strengthens the lender in case the borrower defaults. How many really know that the guarantor is liable to pay if the borrower does not repay the dues. There are many instances where the guarantors regretted signing the documents and protested when they were asked to clear the loan. Such protests citing ignorance or lack of knowledge are of no use later.

(4) Most credit card holders do not realize that interest on roll over dues are charged abnormally high interest rates and interest gets com-pounded every month if the balance remains unpaid. Moreover service tax is also levied on the interest amount. Higher the interest amount higher the service tax becomes payable.

(5) Non-banking finance com-panies and corporates invite deposits from the public with offer of higher interest rates than most banks. It is quite logical for certain persons to be tempted to invest their funds in these schemes for the additional interest amount. What is of prime importance is to study thoroughly the back-ground and strength of the company before investing as the repayment of the deposit on maturity is not guaran-teed. There are so many examples where the companies have not retur-ned the money on maturity for various reasons. Some have even disappeared from the market after mobilizing substantial money. Ima-gine the poor person of meager means having to suffer the loss of money as he deposited in good faith but without full knowledge.

(6) RBI regularly releases reports of forged or counterfeit currency notes in circulation and the need to be cautious. How many of us really bother to understand the security features of currency notes to identify forged notes and take preventive action. The desired know how can stop the fraudulent use of illegal money and prevent undesirable con-sequences. RBI’s campaign ‘Paisa Bolta Hai’ is an excellent audiovisual presentation on the measures to check the authenticity of a currency note.

(7) For the sake of credit and debit card holders there are regular warnings to avoid sharing their PIN and card numbers with any third person. Despite the constant educa-tion it is often seen that card users are asking total strangers at ATM centres and elsewhere how to operate their cards. The fact that they are inviting trouble is overlooked for the sake of momentary help. Little do we realize that knowledge can prevent many untoward happenings ?

(8) Insurance policies are pur-chased as tax savings schemes rather than the main objective of insuring life. The type of policy is also not properly understood as to the type of risk cover it is providing. Unfor-tunately the insurance agent is at times not fully educated himself or avoids suggesting the right policy for making higher commission payouts.

(9) Insurance policies carry a 15 days or in some cases one month free look period during which time the buyer can reconsider his decision to purchase the life cover. This enables the buyer to study carefully the features of the policy and compare it with his actual need. Very few really know about this facility which again demonstrates the need to be aware and vigilant.

(10) Retail investors enter the stock market hoping to make quick gains. Very few make their own independent studies but merely rely on hearsay. The results are obvious as a few lucky ones may make some money without adequate knowledge but the large majority suffer loses. There is also the ‘ASBA’ facility for subscribing to new issues without blocking one’s funds but very few take advantage of it. SEBI has tried to popularize this facility in many ways through advertisement campaigns and it is for the investor to gain from it. Once again the informed person only benefits.

(11) Investing in mutual funds has also become fashionable because of the coverage the sector gets. Yet it is a matter of debate as to how many can differentiate between equity or debt funds or even hybrid varieties. The investment is not linked to the risk taking capacity of the investor and his financial priorities. Often the investor is not aware whether his holdings in the fund belong to the growth or dividend option.

The above examples relate to very basic transactions but convey the significance of possessing sound knowledge for prudent decision making. Absence of financial literacy can truly damage substantially the interests of the persons concerned. It is difficult to escape for any age group as money is needed by all.

The Spread of Financial Literacy

It is better to start early with the process of financial education as discipline in money matters is an important characteristic of an indivi-dual. Children should be taught the benefits of saving and introducing the age old concepts of having a piggy bank can be a welcome start. Schools need to inculcate these habits in students and gradually introduce them to the basics of personal finance. A beginning has already been made by introducing subjects on basic finance in the school curriculum at certain centres. Reserve Bank of India is promoting this early education of children by adopting a friendly and entertaining way through the medium of comics. They are also encouraging the young to participate in contests, the winners of which are awarded scholarships. It is the vulnerable sections of society like women, senior citizens, the rural and urban poor who need to be adequately educated and equipped. The Financial Literacy programme of RBI is tackling all these issues through different means. Their website is a store house of knowledge provided there is an urge to learn. The individual has to be proactive and be eager to grasp the necessary knowledge to safeguard himself and thereby his money. RBI is making extra efforts to be as trans-parent as possible in the larger interest of the common citizen by reaching out to them through their out reach programmes. These pro-grammes which were held during the 75th year of RBI in 2010 in far corners of the country were primarily to educate the masses about the activi-ties of RBI and how to utilize the available banking services for their betterment.

Most banks also have their finan-cial literacy departments and credit counseling centres where personal problems are addressed. How much of these centres are successes is deba-table because a very small percentage of people know about these facilities and even if they know there is an inherent hesitation to seek their help. The websites of banks and financial institutions also have all the details about their products and services. In case of doubts it is advisable to refer to these portals to avoid making any wrong or improper decision. The concern is that incomplete or half baked knowledge is not used to take decisions which are repented later.

BCSBI or Banking Codes and Standards Board of India has been set up by RBI as an apex body to improve the working of banks and introduce systemic changes wherever necessary for better treatment of customers. While their primary focus remains on customer service they are also par-ticipating in disseminating informa-tion on different aspects of banking. For an effective literacy campaign it is important that information asym-metry between service provider and customer is reduced. In this connec-tion banks have unilaterally under-taken to comply with a Code of Commitment to Customers detailing the nature of services provided by banks, the normal time taken for rendering these services and the various obligations of banks who have signed these codes. Only when there is awareness can the customers use the code to their benefit. It is for the individual to take advantage of the provisions provided there is will-ingness to learn. BCSBI also publishes a quarterly newsletter which is both informative and educative.

The importance of promoting financial literacy and the enormity of the task is being gradually under-stood. This has made many organi-zations enter this field to make their presence felt. Innovative ways have been adopted to keep the literacy efforts simple and user friendly for maximum benefit. Websites, print media and audio visual communi-cations relating to financial education are easily accessible for the average individual to improve his under-standing of the financial market, its products and services.

National dailies, banks, financial institutions, private organisations are individually contributing through easy to understand pamphlets, comic strips, newsletters etc. to reach the consumer covering fundamental issues. Seminars, conferences, inter-active sessions are often arranged to address issues of common concern and dissemination of information.

Spreading of information and awareness is critical for an emerging economy like India. If the vast popu-lation of deprived people is brought into the mainstream it would be of immense benefit both as a social necessity as well as an economic push. The call for financial inclusion in the country has therefore become an immediate priority and is engag-ing the attention of policy makers for effective execution. It would reap dividends only when the targeted people are financial literate. Only then would they be able to make the most appropriate choice of the pro-ducts and services which would improve their position. The vast majority of our people are extremely vulnerable as they depend upon informal sources of finance for meet-ing their needs. Only by empowering them with the adequate knowledge can we hope to improve their lot and that of the economy as a whole. The penetration of banking and insurance services is extremely poor in India and if the coverage is extended by simultaneous spreading of financial literacy it would be a huge progress for overall growth. The formal channels of money transmission has to be introduced for all round benefit as for far too long the poor, gullible people have suffered at the hands of the money lender and his brethren.

The international body Orga-nisation for Economic Development OECD is putting its weight behind RBI in promoting financial literacy in India. There is no running away from this hard fact for which the financial service providers are also being trained to encourage the dissemi-nation of information in as compre-hensive a way as possible. However it is the individual as the consumer who needs to grasp and absorb the knowledge for his betterment and safety.

Money creation through the legi-timate way is hard and painstaking but can be lost in no time if there is improper financial planning. Finan-cial awareness is a critical component in the process of protecting and enlarging the corpus of funds that an individual may have.

Economic Survey to have special chapter on financing of climate change

The Finance Ministry will include a special chapter on financing of climate change in the Economic Survey, the Chief Economic Advisor, Mr Kaushik Basu, has said.

“This year we have decided to devote a special chapter on the topic of financing of climate change in the Economic Survey,” Mr Basu said while addressing a UNDP event.

Speaking at the event, the Economic Affairs Secretary, Mr R. Gopalan, said that the climate change issue is posing a challenge for the world.

“The challenges are both environmental and developmental.

Addressing climate change is a challenge for all humanity and it is in our interest that the world community address the issue effectively,” Mr Gopalan said.

He said there is a need to change the way we use natural resources and device new technology to meet the challenges.

As per the 2010-11 Economic Survey, India’s total carbon-di-oxide emissions were about 4 per cent of the global emissions. The survey also showed that it cost India 2.84 per cent of its GDP to adapt to climate change.

Studies show that even with 8-9 per cent GDP growth every year for the next decade, India’s per-capita emissions will be well below developed countries average.

Bankrolling the banks

The Reserve Bank of India's (RBI) recently released draft guidelines on the proposed implementation of international norms of capital adequacy (Basel–III) would require Indian banks to mobilise huge sums of capital during the next five years. Under the existing Basel-II norms, the Indian banking industry has to maintain total capital — drawn from a combination of equity and preference shares plus long-term debt, both accorded lower priority to monies belonging to depositors — amounting to 9 per cent of their assets calibrated suitably for riskiness (‘risk-weighted assets' or RWA). While the overall ratio has been retained under the proposed new norms, a minor reshuffle has been attempted between equity/preference stock holders and long-term bond holders in the event of a bank failure, with the former having to contribute an additional one percentage point capital to their existing 6 per cent of the total 9 per cent. Further, equity/preference share holders have to come up with an additional 2.5 percentage points in capital as a buffer for any unforeseen contingencies. That takes the aggregate capital adequacy ratio (CAR) to 11.5 per cent, of which common equity alone would make up 8 per cent. The emphasis is clearly not just on meeting a broadly defined overall CAR of 8 per cent (as it was two decades ago), but also on improving the transparency and quality of the capital base. The implementation period for all these is from January 1, 2013 to March 31, 2017.

The rationale behind fashioning a tighter capital (especially core equity) regulatory regime for banks stems largely from the banking crises that followed the global recession of 2008 and also the ongoing European sovereign debt troubles. These have created renewed concerns over the banking sector's ability to withstand financial shocks and minimise risks of spill-over to the real economy. But implementation will be a huge challenge, with the estimates of fresh capital needed to be raised by all Indian banks ranging anywhere from Rs 1.4 lakh to Rs 3 lakh crore. Given the dominance of public sector banks, it would necessitate large government infusion of funds. Where this money is going to come from, if the Centre would not even be prepared to dilute its stake below 51 per cent, is a huge question mark. This issue came to the fore not too long back, when Moody's downgraded the State Bank of India's credit rating, after its Tier-1 CAR fell below the Government's own 8 per cent prescription.

Related to this is the more immediate problem of rising non-performing assets (NPA) on account of loans to a host of troubled sectors from telecom and airlines to power. As these mount – under pressure from high interest rates and the general economic slowdown – banks would have to find resources to maintain even existing capital adequacy levels. The RBI, under the circumstances, cannot be totally oblivious to concerns over the proposed implementation schedule for Basel-III, which is seen to be rather frontloaded.