Essays on Risk Management In Banking: A Study On Indian Banking Assignment

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Risk Management in Banking: A Study on Indian BankingOverview of Banking in IndiaCurrently, India has 96 scheduled commercial banks (SCBs), with the government of India holding a stake, 38 foreign banks and 31 private banks (Jaminaran, 2008). They have a network of over 49,000 ATMs and 53,000 branches (McKinsey & Company, 2007). According to a study a rating agency, public sector banks have more than 75 per cent of total assets of the banking industry, with the foreign and private banks holding 6.5 per cent and 18.2 per cent respectively (Gibson, 2007).

The Government of India initiated measures to play a major role in the nation’s economic life, and the Industrial Policy Resolution adopted by the government in 1948 visualized a mixed economy (Gopinath, 2007). This led to active involvement of the state in various segments of the economy including finance and banking. The major steps that were taken to regulate banking included (Gibson, 2007): (1) In 1948, India’s central banking authority, the Reserve Bank of India (RBI), was nationalized hence becoming an government owned institution. (2) In 1949, the Banking Regulation Act was enacted and it empowered the RBI to control, inspect and regulate the Indian banks.

(3) The Banking Regulation Act made a provision that no new branch or bank of an existing bank could be initiated without a license from RBI, and no two banks could share directors. Nevertheless, despite these provisions, regulations and control, banks in India, went on to be operated and owned by private individuals. This changed with the introduction of nationalization of major banks in India on 9 July 1989 (Gopinath, 2006).

The Indian Nanking sector emerged as an important tool to facilitate the development of the Indian economy. It also became a large employer and a debate came up about the possibility to nationalize the industry. The reason for nationalization was to give the government more control of credit delivery (Mokashi, 2008). With the success of nationalization, the government was given the capability of controlling approximately 91 per cent banking businesses in India (Gibson, 2007). After two nationalized banks, the New Bank of India and Punjab National bank, merged in 1993, nationalized banks began to grow at a pace 4 per cent, closer to the average economic growth (Gibson, 2007).

Years later, the government embarked on a policy of liberalization, allowing a small number of private banks. These were referred to as new Generation tech-savvy banks, which included Global Trust Bank (McKinsey & Company, 2007). It later amalgamated with Oriental Bank of Commerce, HDFC Bank, Axis Bank, and ICICI Bank. This move, and the rapid economic growth, revitalized the Indian banking sector, which has seen rapid growth from the three sectors of banks: Foreign banks, private banks and government banks.

The next initiative for the Indian banking has been established with the proposed ease in norms of Foreign Direct Investment, whereby Foreign Investors banks will be given voting rights. These rights would exceed the present cap of 10 per cent which at present has gone up to 74 per cent with some restrictions (Janakiraman, 2008). The new policy shook the sector for banking in India completely. Until now, bankers were used to the 4-6-4 method functioning; which was, borrow at 4 per cent, lend at 6 per cent and go home at 4 (RBI, 2007).

The new wave introduced tech-savvy and a modern outlook of working for traditional banks. These led to the retail boom in India, where people not only demanded more from their banks but also received more. Currently, the banking industry is fairly mature in terms of product range, suppy and reach; even though rural India remains a challenge for the foreign banks and private sector. In terms of capital adequacy and quality of assets, Indian banks are considered to have transparent, strong, and clean balance sheets compared with other banks in similar economies in the region.

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