DR.

RAM MANOHAR LOHIYA,

NATIONAL LAW UNIVERSITY, LUCKNOW

2015-2016

BANKING LAW

[PROJECT WORK]

ON

FUTURE OF INDIAN BANKING: DEALING WITH FINANCIAL CRISIS

SUBMITTED FOR THE PROJECT WORK UNDERTAKEN IN THE PARTIAL

FULFILLMENT OF B.A. LL.B. (HONS.) 5 YEARS INTEGRATED COURSE OF DR.
RAM MANOHAR LOHIYA NLU, LUCKNOW

SUBMITTED TO: SUBMITTED BY:

MS. APARNA SINGH TANU SHRIVASTAVA

ASST. PROF., LAW ROLL NO.-144; SECTION-B

DR. RMLNLU, LUCKNOW BA.LLB. (H); SEMESTER- V

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ACKNOWLEDGEMENT

I want to express uncommon much obliged and appreciation to my educator Ms. Aparna
Singh who gave me the brilliant chance to finalize this glorious research subject i.e. ‘Future
of Indian Banking: Dealing with Financial Crisis.

This project helped me pick up a major viewpoint about the Project Topic. All through the
exploration period, I have been guided by my educator at whatever point I confronted any
obstacles or was in a state of daze not having the capacity to resolve the intricacies of the
subject. 
I want to thank my University, Dr. Ram Manohar Lohia National Law University, Lucknow,
for giving me the opportunity to be a part of a novel exploration turned educational program
which without a doubt helps the comprehension of the subject. 

I likewise want to thank my guardians, guides and well-wishers who have been a consistent
underpin and have sufficient energy and again looked into my work and have give their
experiences on the matter.

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TABLE OF CONTENTS

INTRODUCTION………………………………………………………………………4

FINANCIAL INCLUSION: RISING TO THE NATIONS EXPECTATIONS…….…5

RESTORING THE PEOPLE ADVANTAGE IN THE PUBLIC SECTOR…………...5

INDIAN BANKING 2020: OPPORTUNITIES AND CHALLENGES…………….…6

TEN MAJOR TRENDS THAT WILL SHAPE THE INDIAN BANKING

INDUSTRY.........................................................................................................................7

TWO CHALLENGES OF THE DECADE……………………………………………….8

FINANCIAL INCLUSION: RISING UP TO THE NATION’S

EXPECTATIONS………………………………………………………………………….9

RESTORING THE PEOPLE ADVANTAGE IN THE PUBLIC SECTOR………..……9

IMPERATIVES FOR THE GOVERNMENT AND REGULATIONS………………….9

CONCLUSION…………………………………………………………………………...11

BIBLIOGRAPHY……………………………………………………………………...…14

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INTRODUCTION

The optimism about Indian economic growth portends well for Indian banks. There are,
however, challenges in retaining profitability and growth in the next decade. The industry has
to live up to high expectations from several quarters. This report highlights ten major trends
that will shape Indian banking over next decade. It identifies two critical and complex
challenges thrown at the industry for which solution has to be found with urgency. The report
outlines potential solutions and articulates key imperatives for government and regulation.
The ten major trends to watch out for are:1

1. Retail banking will be immensely benefited from the Indian demographic dividend.
Mortgages to grow fast and will cross Rs 40 trillion by 2020.

2. Rapid accumulation of wealth in rich households will drive wealth management to 10X
size.

3. “The Next Billion” consumer segment will emerge as the largest in numbers and will
accentuate the demand for low cost banking solutions.

4. Branches and ATMs will need to grow 2X and 5X respectively to serve the huge addition
to bankable population. Low cost branch network with smaller sized branches will be
adopted.

5. Mobile banking will come of age with widespread access to internet on mobile.

1
Accessed from http://www.mbaknol.com/financial-management/indias-apex-bank-the-reserve-bank-of-
indiarbi-its-objectives-and-functions/

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6. Banks will adopt CRM and data warehousing in a major way to reduce customer
acquisition costs and improve risk management.

7. Margins will see downward pressure both on retail and corporate banking spurring banks
to generate more fees and improve operating efficiency.

8. Banks will discover the importance of the SME segment for profitability and growth and
new models to serve SME segment profitably will be found.

9. Investment banking will grow 10X; driven by demand from corporate for transaction
support and capital market access.

10. Infrastructure debt will surpass Rs 45 trillion — half of which will be on bank’s books. It
will touch the ALM limits of banks and will require a significant upgrade of banks’ risk
management systems.

The industry is under spotlight to find solutions for two complex challenges thrown at it. One
challenge comes from the democratic polity of the nation — to find an economically viable
solution for financial inclusion. The second challenge comes from within the public sector
banks — to streamline HR in light of rapid loss of talent due to retirements and to energize
the workforce for the challenges ahead. This report offers suggestions on possible approaches
for banks.2

FINANCIAL INCLUSION: RISING TO THE NATIONS EXPECTATIONS

The level of financial exclusion in India is alarming and the demand for the industry to find a
solution is urgent. A survey3 of banks revealed that the level of confidence in finding
profitable solutions for financial inclusion is not very high. It is clear that conventional
banking models are. Government needs to support banks with incentives for shared
interoperable infrastructure and by reimbursing for government payouts. Banks can do only
so much. Financial inclusion will be meaningless unless the rural economy is stimulated and
rural infrastructure is developed. Banks’ initiatives have to be supplemented with
comprehensive public sector initiatives for rural infrastructure development. There is a gap in
India’s financial services institutional framework for an institution that can play a pivotal role

2
from http://www.rbi.org.in/scripts/aboutusdisplay.aspx?pg=depts.htm
3
http://www.rbi.org.in/scripts/aboutusdisplay.aspx?pg=depts.htm

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in financing rural infrastructure with sufficient government backing. NABARD could be
repositioned for this role.

RESTORING THE PEOPLE ADVANTAGE IN THE PUBLIC SECTOR

Public Sector Banks’ (PSB) ability to deliver depends on stream–lining HR. In 2010, the
average cost per employee in the public sector surpassed the new private sector. With four
decades of legacy to overcome, the solution does not lie in blind adoption of HR practices
from the private sector. It requires careful orchestration of eight initiatives: (A) institute
discipline and to (B) enhance motivation. These initiatives are:

1. Steady talent induction: PSBs have exploited productivity enhancement for growth so far,
but now they need to induct new talent in large numbers to maintain growth. Recruitment
machinery is required to attract talent (as against evaluate applicants) and to retain them
through well planned on–boarding programs. Banks also need to explicitly tackle the
generation gap.

2. Sensitive Performance Management System (PMS): If a PMS is not sensitive to the social
context, it will have a negative impact. Banks must start with credible target setting, group
based incentive systems, appraiser training, and HR process discipline.4

3. Systemic succession planning and career management: Technology should be used to

optimize placements and maintain the skill inventory of the organization.

4. Structural adjustment in cost: New HR practices should be utilized to reduce employee

share of total costs. Banks must enrich roles, enable people with leadership training, and
engage the entire cadres to take up this change as their own.

INDIAN BANKING 2020: OPPORTUNITIES AND CHALLENGES

Banks in India will be ending the last year of this decade on a high note. A spectacular
growth rate coupled with an increase in profitability has led to an impressive performance.
Financial metrics witnessed a significant improvement. Bad debts fell dramatically. Starting
at well above 10 percent in the early 2000s, the gross NPA ratio is currently below 3 percent.
Considering the growth prospects of the Indian economy over the coming decade, the

4
http://www.banknetindia.com/banking/80919.htm

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banking industry rightfully looks forward to a decade full of opportunities. However, there is
no dearth of challenges. The banking industry has to live up to a range of high expectations
from several stakeholders. The Indian economy stands at a critical juncture of its evolution.
Indians look at the next decade with a lot of hope. There are hopes of rapid growth, inclusive
growth, wealth creation, trickle down of wealth, plenty of jobs, better living standards,
quality infrastructure, world class Indian companies, world class convenient banking and
access to basic banking facilities. Demands from polity to support inclusion are growing
shriller by the day. While many Indian industries have demonstrated low–cost innovations
that have caught the world’s fancy, Indian banks have yet to make a substantive impact. The
regulator who has zealously protected the banks’ turf for years may be forced to relent in
light of the demands for faster development. Weak wholesale debt markets that have kept
banks at centre stage of corporate borrowing may finally deepen, leading to pressure on
growth and / or margins. Non Banking Finance Companies (NBFCs), who, barring a few
exceptions, almost became extinct in the last decade may make a comeback. Changing
customer preferences and rapid technology evolution could pose challenges to banks in many
ways. On top of it, the public sector will face a severe handicap in mobilizing itself unless it
addresses its HR on priority. The following major trends will impact the banks in the form of
opportunities or threats over the next decade.

TEN MAJOR TRENDS THAT WILL SHAPE THE INDIAN BANKING INDUSTRY

1. Mortgages to cross Rs 40 trillion by 2020: If by 2020, this ratio were to reach 20 percent, a
number similar to that of China, we could expect the mortgage industry growing at an
average rate of over 20 percent during the next decade. The outstanding mortgages are
expected to cross Rs 40 trillion which is higher than the entire loan book of the banking
industry pegged at Rs 30 trillion.5

2. Wealth management will be big business with 10X growth: Going forward, wealth is
expected to get further concentrated in the hands of a few 2020, the top 5 percent households,
predominantly residing in the metros and Tier I cities, will account for 30 percent of the total
disposable income. Wealth management services will be demanded by the nouveau rich and
will be an integral part of the product portfolio for both, private as well as public sector
banks.

5
http://vbelonghere.blogspot.com/2010/07/torchbearer-of-indias-economic.html

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3. “The Next Billion”6 will be the largest segment: The fact that the income group right below
the middle class in the annual house hold income range of Rs 90,000 to Rs 200,000 per
annum will be the largest group of customers. These customers will be profitably served only
with low cost business models having low break even ticket size of business. The next decade
would witness banks experimenting with different low cost business models, smaller cost
effective branches and new use of technology to serve this segment profitably.

4. The number of branches to grow 2X; ATMs to grow 5X: India has a very low penetration
of branches and ATMs as compared to some of the other developed and developing nations.
It is evident that the bank branches and ATMs are by far the most popular channels, despite a
decade of promotion of alternate channels. As such, there is a requirement of at least 40,000–
50,000 additional branches and 160,000– 190,000 additional ATMs in the coming decade.
This will be 3 times more than the branches and ATMs launched in the last decade.

5. Mobile banking to see huge growth and will redefine transaction banking paradigm: The
uptake of internet and call centres is low in all segments other than foreign banks. Comparing
with usage pattern in US, the significant potential in online and phone channels is apparent.
However, India may evolve differently. The penetration of internet and broad band access in
India has been low so far. However, with the advent of mobile banking, the access to banking
facilities could completely get revolutionized over the next decade.

6. New models to serve the Small and Medium Enterprises (SME): The results of a survey
conducted by FICCI to gauge the level of satisfaction among large, medium and small
business customers with regard to banking services. The large customers are more satisfied
across all dimensions as compared to the medium and small sized ones. The smallest
businesses are most dissatisfied.

7. Investment banking will grow over ten–fold: Investment banking will be among the fastest
growing segments in the banking industry rising from 4 percent to7 percent of the entire
corporate banking revenue pool.7

TWO CHALLENGES OF THE DECADE

6
http://ideas.repec.org/p/ess/wpaper/id2131.html
7
Impact of global financial crisis on Reserve Bank of India as a National Regulator by - Usha Thorat

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There are two areas in which the Indian banking industry will be severely challenged to find a
solution over the next decade. First pertains to the rising expectation from banks to find an
economically viable solution for financial exclusion. The second pertains to human resources
challenge in the public sector. While the first challenge demands unusual innovation and
experimentation, the second threatens to cripple the ability of the largest segment of the
banking industry from being able to innovate and stay competitive. It is unclear that the
solutions to these two challenges will be identified unless the banks were to accord highest
priorities to these and work in concert.

1. Financial inclusion: The issue of financial inclusion is at the centre stage of the agenda of
the government. While the expectation from banks is high, the government is also starting to
look at non banking industries to come forward with a solution. Needless to say, if the answer
does not come from banking industry, non banks will be welcome to nibble at its revenue
pool. It is a strategic priority given that the customer segment in question will be the largest
in number over the next decade and banks stand to lose this relationship.

2. The HR challenge in the public sector: The public sector banks enter the next decade with
the same expectations as their private sector peers but with a severe disadvantage in human
resources. The HR challenge of public sector banks has reached a tipping point. Due to a
legacy of several decades, the public sector banks will witness unprecedented loss of skills
and competencies in form of retiring senior and middle management executives over the next
few years. That coupled with the need for large scale re–skilling, attracting and retaining
fresh talent, controlling the growing employee costs, and introduction of performance
discipline are significant challenges.8

FINANCIAL INCLUSION: RISING UP TO THE NATION’S EXPECTATIONS

The future of democratic polity and social harmony of India rests on the premise of inclusive
growth. Financial inclusion is a crucial driver for such growth. The political leadership is
looking at the banking industry to deliver on this promise over the next few years. Already,
additional competition is planned in the form of new licenses for private sector banks in the
hope that this will lead to innovative business models for inclusive banking. This expectation
will strengthen. Delay in solving the issue could lead to the banking revenue pool being
opened up to non banks to find more creative answers. Many studies and reports have
8
http://finance.indiamart.com/investment_in_india/rbi.html

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highlighted the issue of financial exclusion. Based on research conducted by The Boston
Consulting Group in 2006, 144 million households are financially excluded. 9As per the 2008
Report10 on Financial Inclusion by Dr. C. Rangarajan, over 73 percent of farmer households
currently do not have access to formal sources of credit. In certain geographies this ratio is
much worse. Various experiments — by banks and non banks — have served to highlight the
broad contours of the potential solution. The philosophical framework to fight financial
exclusion has undergone a significant shift from an “obligation” perspective to an
“opportunity” perspective. It is also well established that a downgraded conventional banking
model is not the answer.

RESTORING THE PEOPLE ADVANTAGE IN THE PUBLIC SECTOR

Acquiring and retaining talent is the most critical challenge facing the banking industry,
especially for the Public Sector, Units (PSU) where the situation is most urgent. A four
decade–long legacy shaped by the constraints of state ownership, and short tenures of top
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management has created a precarious instability PSU banks’ Human Resource (HR). The
diminishing people advantage of the public sector banks has to be restored with urgency. This
crisis has reached a tipping point, and the competitiveness of the entire sector hangs in the
balance. Most importantly without addressing its HR issues, the public sector cannot rise to
the challenge of financial inclusion in any meaningful manner.

IMPERATIVES FOR THE GOVERNMENT AND REGULATIONS

Banks and non banks alike need state support and positive regulatory encouragement to
undertake initiatives highlighted here to address the challenges and help the nation actualize
the promise of the decade. Various committees have highlighted a long list of policy
initiatives. Action agenda is complex because it treads across legislative, regulatory, and
economic issues. It requires co–ordination across regulators. 12 Perhaps that is why progress is
slow. Vibrant wholesale debt markets will enable financial services industry assist India more
wholesomely. NBFCs, who have to play a crucial role in various segments.

9
Global financial crisis and key risks: impacts on india and asia by – Rakesh mohan
10
http://www.mbaknol.com/managerial-economics/interest-rate-administration-by-reserve-bank-of-india-rbi-
during-global-recessionsubprime-crisis
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Global financial crisis and key risks: impacts on india and asia by – Rakesh mohan
12
http://www.thehindubusinessline.com/markets/article2624690.ece?ref=wl_opinion

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Enable NABARD to Play Pivotal Role in Rural Infrastructure Development Financial
inclusion alone is not sufficient to drive inclusive economic growth. Economic activity in the
local area (especially rural) has to be given fillip through concurrent multi disciplinary
interventions embedded around core infrastructure development projects. 13 The interventions
vary with each area depending on its economic potential but include a range of initiatives like
capacity building, agricultural extension, watershed development, etc. 14Here market failures
abound. Commercial viability is rarely assured. We need development financial assistance.
We have an institutional gap here. There are multiple state sponsored financial institutions
that are involved in rural infrastructure financing but none with sufficient breadth of
expertise, depth in balance sheet, and backing from government. NABARD comes closest to
an ideal institution for this purpose given its range of expertise, heritage in development
financing and collaborative operating model. NABARD is the conduit for channelling RIDF
funds to states. But they are hardly enough. NABARD needs to be enabled as pivotal
institution for rural infrastructure financing and development.15

CONCLUSION

"The future belongs to those who prepare for it today,"

The Indian banking sector has seen unprecedented growth along with remarkable

improvement in its quality of assets and efficiency since economic liberalisation began in the
early 1990s. From providing plain vanilla banking services, banks have gradually
transformed themselves into universal banks. ATMs, Internet banking, mobile banking and
social banking have made "anytime anywhere banking" the norm now.  In 2011/12, non-cash
payments comprised 91 per cent of total transactions in terms of value and 48 per cent in
terms of volume. Within noncash payments, too, the share of payments through cheques has
come down from 85 per cent to nine per cent in value, and 83 per cent to 52 per cent in
volume between 2005/06 and 2011/12.  Banks have taken other measures to improve their
functioning, too. As a result, there were 20 Indian banks in the UK-based Brand Finance's
annual international ranking of top 500 in 2010, as compared to only six in 2007, according
to a report in a leading financial daily.

13
Global Financial Crisis and Its Impact on India By A. Prasad and C. Panduranga Reddy
14
from http://www.mbaknol.com/financial-management/role-of-reserve-bank-of-india-rbi-in-indian-economy/
15
http://www.asiaeconomywatch.co.uk/2008/02/25/rbi-increases-mnc-monitoring-fearing-subprime-crisis/

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The growth is not restricted to the metropolitan or urban areas. Financial inclusion has been
at the forefront of regulators and policy makers in India, a country where approximately half
of the population still does not have access to banking services. There have been occasions
when banks have acted beyond their role of finance providers. For example, a financial daily
reported that Aryavart Gramin Bank, a regional rural bank sponsored by Bank of India, tied
up with Tata BP Solar to finance "Solar Home Lighting System" for village homes in Uttar
Pradesh. It extended finance of around Rs 10,000 with Rs 3,000 as margin money to be
contributed by the beneficiary.  The equated monthly instalment towards the repayment of the
loan amount was less than the amount the villagers had to spend on kerosene requirements
per month. The bank's initiative resulted in 20,000 houses getting solar power. It also meant
an annual saving of about 192 tanker loads of kerosene.

India's banking system was probably one of the few large banking systems which remained
unscathed by the 2008 global financial crisis. However, there is a lot more to be done to make
it a truly world-class sector. Although there has been little progress on the draft norms for
issuing new banking licences, the entry of new banks could have a significant impact on the
Indian banking system. Given the huge unbanked population, there is surely a scope for more
banks. RBI has been keen on allowing foreign banks a larger role in the Indian banking
system since February 2005, when it first issued the road map for presence of foreign banks
in India. In May 2012, the government also facilitated the process by proposing to exempt
foreign banks from the 30 per cent tax on capital gains and stamp duty while converting
branches into a new entity. RBI has also mandated foreign banks with 20 and more branches
to achieve priority sector targets and sub-targets at par with their domestic counterparts.
Among the many initiatives, the government's UID project is likely to have significant
impact. Given the numbers out of the reach of organised banking, it can prove to be
transformational by giving banks an access to a large untapped customer base. The whole
range of government payments under subsidies and benefits of various welfare schemes - will
be routed through banks. This adds another dimension for banks to manage their relationship
with customers. It already had over 45 million users in India in 2011, which is expected to
grow to over 88 million by the next year with over 75 per cent under the age of 35, according
to media reports. Although banks in India have been a little late in using social media, they
have been making fast progress.

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Technology will play a much larger role in the overall supervision of the banking system.
There are likely to be transformational changes in the entire regulatory system for financial
services.  The changes in the banking landscape will require banks to also adapt to their new
environment. Banks of the future will have to be nimble and lean organisations with
technology integrated to support a sustainable and scalable business. They will need to have a
flexible organisational structure with decentralised decision making to reduce turnaround
time for various processes. This will be especially true when a number of new entities
including non-banking finance companies (NBFCs), large corporate houses and microfinance
institutions (MFIs) get banking licences.

In order to serve potential customers in unbanked areas, banks should be willing to

experiment with various business models to build a scalable and profitable business.
Technology resources will have to be shared to reduce cost. At the same time, banks of the
future will need to understand the technology-savvy Gen-Y customers and design products
accordingly. Banks will have to deploy the majority of their employees in sales and
marketing roles to cross-sell services to existing customers. 

There will be an increased demand for skilled personnel from other disciplines. Banks will
have to use data analytics tools to gain insights from their existing customers' data to increase
their business and customer loyalty. A bank that avoids "one-size-fits-all products", acts as a
knowledge banker, provides all financial needs at a click, is fundamentally strong, manages
risk and adheres to global regulations, harness iOS and Android platforms to the fullest,
design better, faster and convenient delivery channels will no doubt be called a successful
bank.

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BIBLIOGRAPHY

BOOKS REFERRED

1. Study material of Banking Law compiled by Ms. Seema Siddiqui

ARTICLES REFERRED

1. Impact of global financial crisis on Reserve Bank of India as a National Regulator by Usha
Thorat
2. Financial Sector Reforms and Role of RBI by - Dr. Narendra Jadhav,
3. Global financial crisis and key risks: impacts on India and Asia by Rakesh mohan
4. Global Financial Crisis and Its Impact on India by A. Prasad and C. Panduranga Reddy
5. Basel Committee on Banking Supervision, (1999), Enhancing Corporate Governance for
Banking Organisations, September BIS.
6. Bhide, M.G. (2002), Address at NIBM Annual Day on the theme of Corporate Governance
in Banks and Financial Institutions, January.

WEBSITE REFERRED

1. http://www.rbi.org.in/scripts/aboutusdisplay.aspx?pg=depts.htm

2. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=384

3. http://finance.indiamart.com/investment_in_india/rbi.html

4.http://www.mbaknol.com/financial-management/role-of-reserve-bank-of-india-rbi-in-
indian-economy/

5.http://www.asiaeconomywatch.co.uk/2008/02/25/rbi-increases-mnc-monitoring-fearing-
subprime-crisis/

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