An analytic overview of the banking sector in India : Charting future roadmap

Abstract

This project is concerned with the analysis and understanding of the banking sector of India with an objective of identifying the most relevant and serious issues facing the sector and its implications in the future. Two issues stand out which have been discussed in detail in this report. The first is the issue of higher capital adequacy and the implications of the new Basel accords. Because of the presence of highly integrated markets and global interactions Indian banks are now not as insulated from external disturbances like financial crisis like before. The recent crisis exposed to some extent the impairing effect on the Indian banks because of their exposure to the international markets. The impact was not as widespread and critical in India primarily because the Indian central bank (RBI) had ensured that stringent capital requirements were followed by all banks after taking cue from the Basel II norms and adhering and imposing a stricter regime. The Global regulatory body has now woken up and introduced the new Basel accords which would be brought into effect in a phased manner from the year 2013. These norms have been updated from Basel 2.5 but also have many new provisions, primary of those are higher limit on Tier 1 capital, introduction of liquidity and leverage ratios etc. These norms would have to be followed by the Indian banks too and the RBI is currently working on drafting a guideline for all Indian banks which would be followed by a framework which would be in place by March of next year. Through this study we have tried to predict the implications of these new accords on Indian banks and the possible downside of these norms on banks’ operations and profitability. The challenges and issues of implementation have also been explored in detail. The second issue under consideration is that associated with NPAs. Indian banks have remarkably improved in their operational efficiency and in catering to a larger population but the increasing deterioration of assets in the balance sheet are hurting their profitability. There are a number of present systems for detecting and remedying this problem but in spite of that the absolute level of Gross NPAs for the select banks as on June 30, 2010 rose by 28.7% y-o-y to R80,879 crores with Public Sector banks accounting for almost 75% of the total. Through this study our endeavour have been to analyze the root causes behind the problem and come up with suggestions which if implemented can curb the NPA problem in the Indian context.