Challenges of Banking Sector Essay

3168 Words Jun 14th, 2012 13 Pages
Article on Indian Banking Sector: “The challenges that the banking sector in India faces”
It is by now well recognized that India is one of the fastest growing economies in the world.
Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. India has a better banking system in place vis a vis other developing countries, but there are several issues that need to be ironed out.
In this article, we try and look into the challenges that the banking sector in India faces.
Interest Rate Risk:
Interest rate risk can be defined as exposure of bank’s net interest income to adverse movements in interest rates. A bank’s balance sheet consists mainly of rupee assets and
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Given these facts, banks will have to look at alternative sources of investment.
Interest Rates And Non-Performing Assets:
The best indicator of the health of the banking industry in a country is its level of NPAs. Given this fact, Indian banks seem to be better placed than they were in the past. A few banks have even managed to reduce their net NPAs to less than one percent (before the merger of Global Trust Bank into Oriental Bank of Commerce, OBC was a zero NPA bank). But as the bond yields start to raise the chances are the net NPAs will also start to go up. This will happen because the banks have been making huge provisions against the money they made on their bond portfolios in a scenario where bond yields were falling.
Reduced NPAs generally gives the impression that banks have strengthened their credit appraisal processes over the years. This does not seem to be the case. With increasing bond yields, treasury income will come down and if the banks wish to make large provisions, the money will have to come from their interest income, and this in turn, shall bring down the profitability of banks.
Competition In Retail Banking:
The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to Corporates. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with

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