CHALLENGES FACED BY INDIAN BANKING INDUSTRYDeveloping countries like India, still has a huge number of people who do not have access tobanking services due to scattered and fragmented locations. But if we talk about those peoplewho are availing banking services, their expectations are raising as the level of services areincreasing due to the emergence of Information Technology and competition. Since, foreignbanks are playing in Indian market, the number of services offered has increased and banks havelaid emphasis on meeting the customer expectations.Now, the existing situation has created various challenges and opportunity for Indian CommercialBanks. In order to encounter the general scenario of banking industry we need to understand thechallenges and opportunities lying with banking industry of India.

Rural MarketBanking in India is generally fairly mature in terms of supply, product range and reach, eventhough reach in rural India still remains a challenge for the private sector and foreign banks. Interms of quality of assets and capital adequacy, Indian banks are considered to have clean,strong and transparent balance sheets relative to other banks in comparable economies in itsregion.Consequently, we have seen some examples of inorganic growth strategy adopted by somenationalized and private sector banks to face upcoming challenges in banking industry of India.For example recently, ICICI Bank Ltd. merged the Bank of Rajasthan Ltd. in order to increase itsreach in rural market and market share significantly. State Bank of India (SBI), the largest publicsector bank in India has also adopted the same strategy to retain its position. It is in the processof acquiring its associates. Recently, SBI has merged State Bank of Indore in 2010.

Management of RisksThe growing competition increases the competitiveness among banks. But, existing globalbanking scenario is seriously posing threats for Indian banking industry. We have alreadywitnessed the bankruptcy of some foreign banks. Moreover, they compared risk management practices betweenthe two sets of banks. The study found the three most important types of risk i.e. commercialbanks foreign exchange risk, followed by credit risk, and operating risk They used multivariatestatistical techniques to summarize these accounting ratios. Moreover, the paper also analyzed the impact of these risk management scores on stock returns through regression analysis.Researchers found that Indian banks' risk management capabilities have been improving overtime. Returns on the banks' stocks appeared to be sensitive to risk management capability ofbanks. The study suggest that banks want to enhance shareholder wealth will have to focus onsuccessfully managing various risks

Market Discipline and TransparencyAccording to Fernando (2011) transparency and disclosure norms as part of internationallyaccepted corporate governance practices are assuming greater importance in the emergingenvironment. Banks are expected to be more responsive and accountable to the investors. Bankshave to disclose in their balance sheets a plethora of information on the maturity profiles of assetsand liabilities, lending to sensitive sectors, movements in NPAs, capital, provisions, shareholdingsof the government, value of investment in India and abroad, operating and profitability indicthe total investments made in the equity share, units of mutual funds, bonds, debentures, aggregate advances against shares and so on

Human Resource ManagementGelade and Ivery (2003) examined relationships between human resource management (HRM),work climate, and organizational performance in the branch network of a retail bank. Significantcorrelations were found between work climate, human resource practices, and businessperformance. The results showed that the correlations between climate and performance cannotbe explained by their common dependence on HRM factors, and that the data are consistent witha mediation model in which the effects of HRM practices on business performance are partiallymediated by work climate [8].Bartel (2004) studied the relationship between human resource management and establishmentperformance of employees on the manufacturing sector. Using a unique longitudinal datasetcollected through site visits to branch operations of a large bank, the author extends his researchto the service sector. Because branch managers had considerable discretion in managing their

operations and employees, the HRM environment could vary across branches. Site visitsprovided specific examples of managerial practices that affected branch performance. Ananalysis of responses to the bank’s employee attitude survey that controls for unobserved branchand manager characteristics shows a positive relationship between branch performance andemployees’ satisfaction with the quality of performance evaluation, feedback, and recognition atthe branch—the “incentives” dimension of a high-performance work system. In some fixed effectsspecifications, satisfaction with the quality of communications at the branch was also important

Environmental ConcernsIt is quite clear from the recently formed Copenhagen Climate Council (CCC) that there is asevere need for environmental awareness among all the countries of the world. CCC publishedThought Leadership Series on Climate Change which is a collection of inspirational, concise andclearly argued pieces from some of the world's most renowned thinkers and business leaders onclimate change. The objective of the pieces is to assist in enhancing the public and politicalawareness of the actions that could have a significant impact on global emissions growth and todisseminate the message that it is time to act. The Thought Leadership Series was aimed atexplaining and spreading awareness of the key elements in the business and policy response tothe climate problem. The rationale for the Thought Leadership Series was to change the focus ofpeople.

Social and Ethical AspectsThere are some banks, which proactively undertake the responsibility to bear the social andethical aspects of banking. This is a challenge for commercial banks to consider the theseaspects in their working. Apart from profit maximization, commercial banks are supposed tosupport those organizations, which have some social concerns.

CHALLENGES AHEAD:

The banking industry in India is undergoing a major change due to the advancement in Indian economy and continuous deregulation. These multiple changes happening in series has a ripple effect on banking industry which is trying to be organized completely, regulated sellers of market to completed deregulated customers market

1. Deregulation:

This continuous deregulation has given rise to extreme competition with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and policies for foreign exchange in banking market. The deregulation of the industry coupled with decontrol in the interest rates has led to entry of a number of players in the banking industry. Thereby reduced corporate credit off which has resulted in large number of competitors battling for the same pie.

2. Modified New rules:

As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with

lucrative pricing and freebees to offer. New channels squeezed spreads, demanding customers better service, marketing skills heightened competition, defined new rules of the game pressure on efficiency. Need for new orientation diffused customer loyalty. Bank has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

3. Efficiency:

Excellent efficiencies are required at banker's end to establish a balance between the commercial and social considerations Bank need to access low cost funds and simultaneously improve the efficiency and efficacy. Owing to cut-throat competition in the industry, banks are facing pricing pressure, have to give thrust on retail assets.

4. Diffused customer loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more demanding and the loyalties are diffused. Value added offerings bound customers to change their preferences and perspective. These are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

5. Misaligned mindset:

These changes are creating challenges, as employees are made to adapt to changing conditions. The employees are resisting to change and the seller market mindset is yet to be changed. These problems coupled with fear of uncertainty and control orientation. Moreover banking industry is accepting the latest technology but utilization is far below from satisfactory level.

6. Competency gap:

The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. Placing the right skill at the right place will determine success. The focus of people will be doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

i) 'Know Your Customer' (KYC) Guidelines – Anti Money

Laundering Standards : Banks were advised in 2002 to follow

certain customer identification procedure for opening of accounts and

monitoring transactions of a suspicious nature for the purpose of

reporting it to appropriate authority. These ‘Know Your Customer’

guidelines were revisited in the context of the recommendations made

by the Financial Action Task Force on Anti Money Laundering

standards and on Combating Financing of Terrorism. These standards

have become the international benchmark for framing Anti Money

Laundering and combating financing of terrorism policies by the

regulatory authorities. Compliance with these standards both by the

banks/financial institutions and the country has become necessary for

international financial relationships. Detailed guidelines based on the

Recommendations of the Financial Action Task Force and the paper

issued on Customer Due Diligence for banks by the Basel Committee

on Banking Supervision, with indicative suggestions wherever

considered necessary, were issued to banks in November 2004. Banks

were required to ensure that a proper policy framework on ‘Know

Your Customer’ and Anti-Money Laundering measures is formulated

and put in place with the approval of the Board within three months

and be fully compliant with these guidelines before December 31,

2005. Compliance with the above is a significant challenge to the

entire banking industry to fortify itself against misuse by anti-social

persons/ entities and thus project a picture of solidarity and financial

integrity of the Indian banking system to the international community.

Transparency and Disclosures

Capital adequacy Asset quality Maturity distribution of select items of assets and liabilities Profitability Country risk exposure Risk exposures in derivatives

Segment reporting Related Party disclosures

Improving Risk Management Systems

Technology : A few banks which have impressive branch networks have not been able to meet their customers’ expectations due to inefficiencies arising out of inadequate investment in technology and consequently faced an erosion of their market shares. The beneficiaries are those banks which have invested in technology. Another distinct advantage of use of technology is the ability to effectively use quantitative techniques and models which can enhance the quality of their risk management systems

Branch banking:. Traditionally banks have been looking to expansion of their branch network to increase their business. Against this background it is interesting to observe that the new private sector banks as well as the foreign banks have been able to achieve business expansion through other means. It has been realized that it might not be necessary to establish a wider brick and mortar network to reach a wider population. Banks are, therefore, examining the potential benefits that may accrue by tapping the agency arrangement route and the outsourcing route. While proceeding in this direction banks ought not to lose sight of the new risks that they might be assuming and hence put in place appropriate strategies and systems for managing these new risks