The banking system is considered to be the backbone of any country especially in implementing and executing the economic reforms introduced by the RBI. The banking sector is one of the largest and most dominant sectors in India.
As the banking sector holds multiple stakeholders, there are a lot of changes that have been made in the reforms and regulations governing this sector. Even though the Indian banking system supports one of the biggest and fastest growing economies in the World, there are several loopholes in the system that need plugging from time to time. The two major governing policies - Monetary policy and Fiscal policy keep changing from time to time.
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Despite the several measures taken by the government and the ministry of finance, one major aspect still creates a bottleneck in the entire system – Non-performing Assets or NPAs. According to a report released by the Reserve Bank of India, the gross non-performing assets have gone up year on year at a rate of 25%. The severity of the situation lies in the fact that there is a nearly a 110 Billion Dollar gap between the stressed assets of the system and the provisions available for them.
The public sector banks are more exposed to the severities of stressed assets. As the public sector banks are rooted deeply in the rural as well as the urban areas, the chances of a potential fraud are much higher. This results in an increased level of stressed assets. On the other hand, the private sector banks enjoy a more educated and financially backed customer base; generally belonging to the urban segment. Hence the stressed assets in the case of private banks are quite less.
See Also: Understanding The Indian Banking Sector
Almost a decade ago, the public sector banks enjoyed a huge corporate customer base. These corporates were badly in need of funds. Public sector banks were the heavy lenders. This resulted in a hike in the balance sheets of most public sector banks. Another reason for this was that nearly a decade ago, there were not many private sector banks and people did not trust them.
With the increasing market capitalization of private sector banks, the trends have changed. As the private banks are much more organized and offer greater transparency, the corporate borrowers have shifted towards them.
The corporates who borrowed money from the public sector banks are facing difficult times due to a near-recession period. Their interest-coverage ratio is less than 1; indicating an incapability to repay the borrowed loans.
Despite the fact that the global economy is heading towards a recession, the Indian banking system is robust enough to fight back. The new developments are quite promising and have shown a positive trend in the GDP growth rate over the past four years and are expected to reach 7.7% by the end of the current financial year. A higher GDP is indicative of the economic prosperity of a country.
Technological advances have led to more and more customers adopting banking services. The mobile banking segment has attracted a huge customer base. Public sector banks are also adapting to the changes.
As internet banking is also a cheaper and easier alternative, the outreach is more across all customer bases. Success also goes to the mobile network companies who drastically dropped the prices of internet services by the end of the year 2013. As per a report released by the Indian Banks’ Association, nearly 80% of the financial transactions were made through online channels in the year 2016.
The only aspect that needs to be touched by public sector banks is customer relationship management. Banks need to think of strategies that will make them an indispensable part of peoples’ lives especially the public sector banks. With a little more infrastructure at customers’ disposal and curating customizable products; this gap would be filled.
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