How technology is changing Indian banking sector

The Indian banking sector has been evolving since the year 1770 when the Bank of Hindustan was established in Calcutta and subsequently in its various avatars-when the General Bank of India, which came into existence in 1886 again in Calcutta; and then Bank of Calcutta (later Bank of Bengal - 1806 ), Bank of Bombay and Bank of Madras merging in 1921 to become the Imperial Bank of India which became the State Bank of India ( SBI) in 1955.

The Indian banking system saw another phase of metamorphosis in 1969 when all the leading commercial banks were nationalised by the then prime minister and finance minister, Indira Gandhi. The third phase which actually started changing the face of the Indian banking was the post-1991 economic liberalisation which opened up the banking sector to increased competition and transformation offering better fare to customers.

Technology to the fore

Banks have changed in their operations and moved towards universal banking along with the increased usage of technology and technology-based services offering alternate channels such as smart cards, ATMs, usage of the internet, mobile and social banking. Banks have started deploying core banking, human resource management (HRM) and enterprise risk (ERP) management and process re-engineering etc to improve on their performance and productivity. Majority of banks are insisting on cashless and paperless payment modes.

According to a KPMG study, a research analysts says, as of FY2012, non-cash payments constituted 91 per cent in value terms as compared to 88 per cent in FY in 2010 and 48 per cent in terms of value from 35 per cent in FY 2010. A bank analyst says the payments made through cheques in total non-cash transaction too has come down to 52 per cent from 83 per cent in volume terms, and to nine per cent from 85 per cent in value terms during between FY 2006 and FY 2012.

Indian banks get top billing globally

This has resulted in putting 20 Indian banks in their standing globally. In 2010, the UK-based Brand Finance's annual ranking put these banks in the top 500 banks by their brand value. In 2007, only six Indian banks had the top standing globally.

To see further growth in the banking sector regulators and policy makers have been emphasising on financial inclusion to cover all sections of the society. Half of India's population does not bank. The regulators and policy makers have started taking a serious view of this. As a result, the top regulator the Reserve Bank of India (RBI) is now encouraging various entities including non-banking finance companies (NBFCs), co-operative banks, regional rural banks (RRBs), self-help entities, business correspondents in rural areas and microfinance companies which have now given exposure to non-banked rural areas. This shows that at some point of time banking services would reach rural areas as much as they do in urban and semi-urban areas.

The government and the regulator have taken several measures including mandatory opening of at least 25 per cent of new bank branches in unbanked rural areas, giving impetus to opening of new branches in tier III-VI cities. The mandatory and simplified Know Your Customer (KYC) detailing for opening small accounts have made things easier for banks to extend their reach.

Banks have also become finance providers for community services development. Post-liberalisation India has also been attracting banks from various foreign lands. These now number 40 - from 28 in FY in 2008 and have a 7 per cent share of the total assets management. Over 20 Indian banks have now opened over 240 offices overseas.

Future outlook

The banking system has to implement Basel III guidelines as per the directive of the RBI to make it a stronger sector. Some of the key measures of this include creating firm measures to make it foolproof of systemic risks, stringent timelines, ongoing improvement of quality and quantity of capital, liquidity risk management, value-based practices, solid mechanism, disclosures for total transparency and reduction of systemic risk in derivative and other money-related markets.

The RBI has stipulated a time frame of five years to implement Basel III norms. But there are economy related hurdles as the government which holds majority stake in the public sector banks (PSBs) copes with the high fiscal deficit. Once the government decides to dilute its shares in the PSBs and brings it down to around 51 per cent, the Indian banking sector would see a sea change. Also, a large number of foreign players and big Indian corporates are awaiting government clearances for setting up new generation banks. Once there is clarity on this issue things would change drastically.
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