What are the main challenges facing Indian banks?

By Puja Sharma

The financial sector is the backbone of every economy. Banks need to remain financially healthy. As in 2008, a financial crisis could cause a recession in a country if it is not handled correctly. Developing countries such as India are particularly affected by this. According to S S Mundra, deputy governor of the Reserve Bank of India, banks play a vital role in activating and sustaining economic growth, especially in developing countries, according to a study by Kotak securities.

Regulatory Initiatives and Other Developments in the Financial Sector Regulators across the globe are focusing their attention on reprioritising regulatory initiatives even as they learn from the lessons gleaned during the pandemic.

Strengthening the regulation of nonbank financial intermediation remains a priority. Developments in the crypto ecosystem and the broader role of technology in financial services are also receiving increased attention. Domestically, efforts continue to fortify the financial system against sudden shocks and to improve the credit environment to support recovery while ensuring macroeconomic and financial stability.

A few of the challenges faced by the Indian banks are:

• The quality of assets: Bad loans pose the greatest risk to India’s banks. Since the economy has slowed down, bad loans or non-performing assets (NPAs) have increased. In this case, the borrower does not repay the loan.
• Accuracy of capital: By setting aside money as a ‘provision’, a bank ensures it is protected from bad loans. There is no other use for this money, including lending. As a result, banks have less capital to use for various operations. To measure a bank’s capital adequacy ratio is used.
• Managing employees and technology: Increasing numbers of public-sector bank employees are retiring these days. The younger, more experienced employees are replacing the elder, more experienced employees. This, however, occurs at the junior level. Therefore, there would be a virtual void at the middle and senior levels.
• Managing the balance sheet: The past few years have seen many banks delay setting aside provisions (for future bad loans). During a bank’s chief executive’s short tenure, they are motivated to post higher net profits and cheer investors.

In Mundra’s speech, he said that India’s banks face a variety of problems that affect their profitability and financial stability.

According to a report by IBEF, The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 56 regional rural banks, 1485 urban cooperative banks, and 96,000 rural cooperative banks in addition to cooperative credit institutions As of September 2021, the total number of ATMs in India reached 213,145 out of which 47.5% are in rural and semi-urban areas.

In FY18-FY21, bank assets across sectors increased. Total assets across the banking sector (including public and private sector banks) increased to US$ 2.48 trillion in FY21. In FY21, total assets in the public and private banking sectors were US$ 1,602.65 billion and US$ 878.56 billion, respectively.

There remain many challenges two years after the pandemic began: from implementing technology solutions holistically to staying ahead of the impacts of digital assets; from climate change to workplace/workforce evolution to other systemic societal challenges. Despite these and others, banking institutions are eager to grow, scale, and achieve new heights. But the window for bold and transformational action may soon be closing.

Banks are on the verge of making or breaking. They only have a limited time to decide how they want to position themselves in the new global financial architecture that digitalisation will bring about. However, banks will face various growing challenges and uncertainties in the near end.

Many banks have yet to implement their pledges to sustainable finance. Now is the time for banks to deliver on their commitments as global problems in public health, social justice, and climate change intensify and converge. Sustainable finance efforts are not only good for the environment, but they also have the potential to provide new economic opportunities.