India’s banking sector is the lifeline of the economy. It is one of the driving forces that support India’s economic growth and plays a catalytic role in monitoring of the economy and sustaining its growth. But the banking sector is on the verge of revolutionary changes and is grappling with major challenges. One of the major challenges is the burden of bad loans. Other major challenges include changing face of the banking sector in relation to KYC norms and digitization, stagnant loan growth and the disruptive changes of regulations.
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External forces like customer expectations, technological innovations and adaptations, regulatory requirements, demographics and economics are reshaping the banking industry. Today India’s banking sector is at a critical juncture. Banks must not only adapt to these changes but also radically innovate themselves for the new opportunities to come. These challenges, if not addressed quickly and adequately, may result in loss of opportunities as and when the economic growth starts picking up momentum.
The article aims to discuss the changes undergone by the banking sector, the new initiatives and the ways to boost the efficiency of the banking sector.
Despite economic disturbances, India’s banking sector has shown some positive growth. There has been an expansion and upward mobility of the middle class. The banks expect a further rise in the number of people availing banking services. The banks expect 89 million households to join social segment by the year 2025.
See Also: Understanding The Indian Banking Sector
There has been a significant rise in the number of people opting for internet and mobile banking. These customers advocate the opening of banking marketplaces online. The reducing cost of internet access has helped in the adoption of digital banking. Now, we can witness a rise in the number of users of digital banking and e-wallets for even the smallest transactions. Now most of the consumers rely on their mobile phones for banking activities rather than bank branches.
A regulatory push from the government through the RBI has encouraged more competition and the emergence of online business models. The RBI has released new categories of banking license for payments banks and small finance banks. The foreign banks find it easier to enter the Indian market as they can set a fully owned subsidiary in India. The new regulations pertaining to removed restrictions of branch footprints or efforts to raise domestic capital has helped them to do so.
Meanwhile, the government has also launched programs for the financial inclusion of the poorer sections of the society through Pradhan Mantri Jan Dhan Yojana. Thus previously unbanked customers can now open zero balance bank accounts and directly receive government subsidies and insurances, remittances and grants. This way the government has not only to strengthen the financial infrastructure but have also been able to reach the distress groups who need help.
See Also: Consolidation in Indian Banking Sector
Other initiatives of the banks include low-cost programs like RuPay that allows these groups to access facilities of debit/credit card. Unified payments Interface (UPI) and Bharat Interface for Money (BHIM) has enabled the inclusion of small businesses and traders by providing instant fund transfer facilities on the go.
However, the success of these digital initiatives can be attributed to the success of the National Unique Identification Number that enables customers to authenticate themselves within 5 minutes. Other platforms like DigiLocker, enables people to carry important documents and certificates in digital format.
These developments enable the financial players to get an opportunity to build innovative business models for the new generation of customers. With lesser infrastructure cost and innovation, the banks have the advantage to serve these new-age customers in a better way.
Despite the potential and the opportunities of banks, there are still few roadblocks that stop it from unleashing its true potential. Here are some measures that will help the banks remove these traditional roadblocks:
With the emergence of digital initiative, banks can now make smarter and faster decisions in financial services. Instead of relying solely on traditional sources like credit bureaus and financial transaction records, banks can now use upgraded technology to understand the behaviour patterns of its customers. Credit bureaus rate the customer on few parameters like bank credit transactions, but new apps can help banks understand how creditworthy the customer is by reading his daily transactions, e-commerce purchases, utility payments and social media accounts. Many fintech are already encroaching on the digital banking space by using ‘data tsunami’ to address the short financial needs of these customers.
See Also: Banking system in India
Some of the best opportunities in Indian banking in the coming years will accrue to partnership. This strategy will allow banks to enter the daily life of the customers to meet their financial needs. Thus this approach will require the banks to develop partnership with apps and fintech for creating integrated digital infrastructure. The mechanism will be able to build an entirely digital model based on which they can decipher their customers’ requirements. Thus, it has the potential to change the economics and the ability to serve underserved segments.
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