Unbound Growth Potentials For Indian Banking System Article

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Unbound growth potentials for Indian banking system

Indian banking system has witnessed unbound growth prospective due to the structural and operational changes. Now, the NPA is in control and the growth is sustainable.

Author: Addi Vardhaman

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Banking sector has remained the backbone of Indian economy since independence. After the reformative measures of 1991, this industry has been undergoing major changes. Advent of hi-tech communication and information technology has facilitated growth in Internet banking, ATM Network, Electronic transfer of funds and quick dissemination of information between different branches. Marketing of banking services has undergone a sea change in the last decade. Marketing of banking services means organizing right activities and programmes to render right services to the right people at the right place, at the right time at the right price and with right communication and promotion facility.

There are some other factors which have catalysed the transformation. The entry of more and more foreign banks and private sector banks, lean and nimble footed structure, have intensified the growth potentials in the Indian banking industry. Structural reforms have improved the health of Indian banking sector. The reforms include the enactment of the securitization Act to step up fast loan recoveries, establishment of professional asset reconstruction companies, initiatives on improving the pattern of recoveries from non-performing Assets (NPAs) and change on the basis of income recognition. These reforms have raised transparency and efficiency in the banking system.

The sudden swift in treasury income and smart loan recoveries has helped Indian Banks to have

record profitability. The following factors are likely to drive banking sector performance from in the coming years:

1. Credit growth likely to remain healthy at around 20-23% and deposit growth at 18% during the current five year plan.

2. The pressure on creating additional credit is now reduced. Banks can continue to cut deposit rates, the rate cut is likely to translate into better margins.

3. CASA ratios could stabilise and neutralise rate cut effects.

4. Non- interest income is likely to remain strong and third party product distribution is increasing.

5. Slowdown in retail credit, buoyant economy, rising wages and increased employment

opportunities provide a room for quality asset portfolio of banks.

The net non-performing loans to GDP has declined sharply to 1% in 2007 compared to 10.4% in 2002 . A buoyant economy, higher profitability, and asset inflation will definitely strengthen balance sheet in the corporate sector and improve asset quality of the Indian financial and banking sector.

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Unbound growth potentials for Indian banking system