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Indian Banking Enters the New Millennium
Era of Growth with quality Improvement

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Title Page & Introduction -Indian Banking in the New Millennium
Brought forward Challenges & emerging great opportunities


Customer Service - the New Mantra of Indian Banking

"Not long ago, a customer has to wait for long hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Like in every other economic option, all good things have to be paid for properly. A decade ago, when I wanted a telegraphic transfer of money from one branch to the other, the most efficient bank used to do it in two days. Today it happens in hours. Electronic fund transfer has been introduced in some of the new generation banks and a few large public sector banks. Cheque clearances within and across major commercial cities are taking place at greater speed. "Any Place Deposit" schemes and Any Time Money have become the order of the day. The old private sector banks are learning new tricks of the trade; the public sector banks are waking up from their slumber; and every bank has come to realise that the name of the game is in service to the customer".
(Mr.Yerran Raju, Faculty, Administrative Staff College of India)


In the project titled "Indian Banking Today & Tomorrow", we discussed the contemporary history of Indian Banking beginning from the period 1991-92 and ending with the Reforms of Narasimham Committee second report i.e. about 1997-98. Indian Banking has entered the new Millennium after a decade of the advent of Financial & Banking Sector Reforms.

In recent years, the banking industry has been undergoing rapid changes, reflecting a number of ongoing reform process. The most significant has been far reaching developments in telecommunication and information technology, which have accelerated and broadened the dissemination of financial information while lowering the costs of many financial activities. A second key impetus for change has been the increasing competition among a broad range of domestic and foreign institutions in providing banking and related financial services. Third, financial activity has become larger relative to overall economic activity in most economies. This has meant that any disruption of the financial markets or financial infrastructure has broader economic ramifications than might have been the case previously. "Indian Banking in the New Millennium" is devoted to study the momentous changes overtaking Indian Banking Industry in the New Millennium after the implementation of the Reforms under Second Narasimham Committee Report.

A voluntary retirement package was offered to the employees of the public sector banks. Banks implemented the package and relieved over one Lac employees during 2000-01. This is a momentous step.

The process of computerisation and application of information technology in banks has gained momentum. Banks are now gradually switching to Internet Banking, creating a network connecting their major branches and administrative offices. On its part RBI has created the INFINET & BANKNET for connecting different banks and financial institutions within the country and SWIFT which serves to connect Indian banks with International Banking Institutions.

"In the last few years, it is no wonder that the banking sector has seen a virtual cornucopia of new products: credit cards, tele-banking, ATMs, quick collection facilities for outstation cheques, retail EFT, Electronic Clearing Services - ECS - Debit and Credit for repetitive payments like dividend, interest, utility bills, Internet Banking, etc. Now there are indications of moving towards the introduction of smart cards, debit cards, on-line banking for e-commerce and financial EDI for straight through processing."(speech of Mr.S.P.Talwar, Dy.Governor, RBI at IDRBT,Hyderabad)

Very recently the Government has passed an Ordinance to create Asset Reconstruction & Securitisation Companies styled "The Securitisation And Reconstruction of Financial Assets And Enforcement of Security Interest Ordinance, 2002" with the stated objective as- an Ordinance "to regulate securitisation and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto".

"After a decade of reforms, the Indian banking sector is slowly emerging stronger. Regulations are forcing the banks to adopt better operational strategies and upgrade their skills. The system is also witnessing the integration of the financial markets. Externally, the happening in the international markets are having their implications on the markets and the players. All these are making the operational environment more volatile and hence challenging for the Indian banks. The Indian banks have nevertheless, withstood all these challenges and are becoming more adaptive to the changing environment."(source: article titled "Indian Banking: Withstanding the Challenges" - http://www.actmindia.org/pages/alm/jan-cs.htm )

In this context, it is worth quoting a few pertinent extracts to focus on the emerging scenario of Indian Banking from an article of Mr.Yerran Raju, Faculty, Administrative Staff College of India, under title "Challenges to Indian Banking in the Next Millennium" appearing in website - http://www.asci.org.in/faculty/byraju/YR_cha_ban.html

"The wave of liberalisation has been guided by the Report of the Committee on Financial System (Narasimham Committee, 1991).

"The report very accurately summarised the objectives of Nationalisation. "Nationalisation was a recognition of the potential of the banking system to promote broader economic objectives such as growth, better regional balance of economic activity and the diffusion of economic power. It was designed to make the system reach out to the small man and the rural and semi-urban areas and to extend credit coverage to sectors hitherto neglected by the banking system and through positive affirmative action provide for such expansion of credit to agriculture and small industry in place of what was regarded as a somewhat oligopolistic situation where the system served mainly the urban and industrial sectors and where the grant of credit was seen to be an act of patronage and receiving it an aspect of privilege."

"The report made the strategic judgement that the problems of Indian Banking were not fundamentally attributable to public ownership, but rather to the managerial and policy environment within which the Banks operated. It was forthright in drawing attention to the high cost, poor service, low profitability, poor loan recovery, and weak capital position of virtually all public owned banks.

"The main explanations provided for this state of affairs were excessive centralisation and political interference, which had served to undermine the sense of institutional autonomy, pride and accountability in the banks".

"On the managerial side, the Narasimham Committee -I made a strong plea for full autonomy for the management of commercial banks. In particular it argued that supervision and control of the commercial banks entrusted entirely to the Reserve Bank Of India, instead of sharing with the Ministry of Finance, Government of India (the owner). Overall it argued that "issues of competitive efficiency and profitability are ownership neutral. It is how the institutions function or are allowed to function that is more important."

"As a consequence, Indian Banking which was operating in a highly comfortable and protected environment till the beginning of 1990s has been pushed into the choppy waters of intense competition. Every aspect of the functioning of the banking industry, be it customer service, resource mobilisation, credit management, asset liability management, investments, human resource development, and forex management underwent dramatic changes with the reform process gathering the momentum and speed".

"In the new millennium, banks should strive to achieve significant increases in their productivity, efficiency, and profitability. The areas of challenges that lie ahead would be:

  • restructuring and reorganizing banks' setup towards thinner and leaner administrative offices;

  • closing down and/or merging of unviable branches particularly in urban and metropolitan branches;
  • forging of strategic alliances to take advantage of the geographic spread of branch network of banks;
  • type of customer concentration with a view to developing niche markets suitable for each bank consistent with its ethos and culture;
  • develop new products and services that would meet the emerging customer needs;
  • professionalising management structures that would be responsive to the changes in the business environment".

"Cyber banking and e-commerce would make large urban branch net work irrelevant. Many Banks will be forced to open more ATMs in the place of their branches in urban areas".

The market is seeing new products such as phone-banking, home-banking, Finance against securities and time (FAST), credit cards etc. The more one goes closer to the customer the more one would get higher volumes and value addition in business. For all banks, repositioning for competitive advantage in the rapidly changing market place will call for large investments in information technology and communication net works".

"The challenges in the new millennium for the banking industry are, therefore, enormous and can be met effectively only when the banking institutions also make knowledge as engine for growth. Embedding knowledge into products can enhance value. Connecting different knowledge sources can create innovative products. This is one of the reasons for the World Development Report,1998-99 to devote to this aspect exclusively. Knowledge management is 90 percent common sense and good management practice. One may find knowledge management is really about:

  • Managing Information: Explicit/Recorded knowledge

  • Managing process-embedded knowledge
  • Managing people-tacit knowledge
  • Managing assets-intellectual capital"

"We will have to increasingly use this knowledge to assess own appetite for strategic investments, to enhance self-evaluation and ensuring growth. Competitive advantage comes from leveraging knowledge to the advantage of institutions."
(http://www.asci.org.in/faculty/byraju/YR_cha_ban.html )

It is very relevant to again quote the words of the Governor of RBI, Mr. Bimal Jalan which set forth the direction in which Indian Banking should strive in the new millennium.

"The primary sources of comparative advantage of nations today are "skills" and the ability to adapt and change. These factors determine the prospects of prosperity and growth of an economy. It is important for the emerging economies like India to base their growth on leadership in new technology, knowledge-based services, and manpower skills (as did the US and Germany in the second half of the Nineteenth Century).

".. I believe that the task that India should set for itself in the new millennium is to transform our banking system from being a largely domestic one to a truly international one. It is striking that while we have made tremendous strides in extending the reach of our banking system domestically, internationally the Indian banking system is conspicuous by its absence. ..... Banking is a service-oriented business requiring high levels of professional and personal skills and national boundaries are no longer very relevant in mobilisation and allocation of capital. Under the new circumstances, there is no reason why India should not emerge as a major international banking centre, just as it has emerged as an important location in the field of information technology and software

"This objective is not something that can be achieved in a short period of time. It can take 10 or even 15 years. But the time to begin and plan is now. This is a vision for the new millennium that I would like to commend for your consideration."

This project titled "Indian Banking In the New Millennium" is devoted to articles describing the efforts of Indian banks in the direction of switching into the new deregulated and highly competitive banking environment and shackling off the old and carried forward legacies.

The first article titled "Ten Years of Banking Reforms - An Assessment of Results Achieved" is a review and assessment of the reform process carried out so far, the achievements and the areas that would need greater attention in the coming years. This represents a gist of address by Shri G.P.Muniappan, Dy. Governor, RBI at the Bank Economist Conference on January 14, 2002 at Kolkata, titled "Indian Banking : Paradigm Shift -A regulatory point of view". This is followed by two articles describing the carried forward turmoil of the banking system contributed by one of the admirers of this website Mr. Kuber Sharma, a student from Mohan Nagar (U.P) studying B.B.A. at the Institute of Technology & Sciences (I.T.S.). The analytical article on VRS is contributed by another student-well-wisher of the website from Kerala University Ms.K.R.Chitra doing her M.Phil course. The article on Internet Banking is by Mr.Madhayan Loganathan, an Indian student hailing from Salem, Tamilnadu, settled and studying in New Zealand. Mr.Gaurav Kohli a student from Goa contributed the article on "Securitisation & Asset Reconstruction"

I am very happy that the up-coming new generation of prospective professionals and Managers have taken keen interest in my website. I express my sincere thanks to all the student admirers and wish them well in their studies and later in their career in our reformed and burgeoning economy.

Next Page - Indian Banking Enters the New Millennium with Renewed Hope & Vision
but with Carried over burdens of a Past Legacy




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