Indian Financial Market Challenges Essay

The financial services sector is emerging from the worst financial crisis for 80 years. Tighter regulation, an overhang of debt in the west and the immense growth in the power of banks in emerging economies will transform the landscape of banking. The global financial system suffered a profound and traumatic shock in September 2008 when US investment bank Lehman Brothers collapsed. As market players withdrew from the financial system, credit dried up and world trade collapsed, there was a real and immediate fear that the world was heading for a repeat of the Great Depression of the 1930s. Two years on and there is growing optimism that both the world economy and the banking industry are recovering from the impact of the financial crisis. But it is equally clear that the financial world has changed permanently, both in terms of who holds the balance of power within global industry and how banks will be allowed to operate in future. Issues faced by Indian Financial / banking sector: Issue 1-Issue of consolidation – It is the current buzzword in the banking industry worldwide. The largest bank in China with an asset base of over US $400 billion. In contrast, the total asset of the largest two banks in India, one in public sector and another a private entity, are US $105 billion and US $38 billion. These figures are extremely illuminating and the onus is on Indian banks to take cognizance of this fact. The Government has raised the cap on FDI in private banks. The Reserve Bank has, on its part, suggested certain changes in the Banking Regulation (Amendment) Bill, 2003 that seek to address some of the legal impediments arising in the consolidation process. Issue 2-The second issue of import is that of management of costs. Cost containment is a key to sustainability of bank profits as well as their long-term viability. In 2003, operating costs of banks, expressed as per cent of total average asset, was lower than 2 per cent in major European economies like Sweden, Austria, Germany and France. In contrast, in 2004, operating costs of commercial banks in India were 2. 2 per cent of total assets. The downward stickiness continued in 2005 as operating costs have remained well above 2 per cent, as percentage of total assets. Issue 3- Issue is the management of sticky assets. This is a key to the stability and continued viability of the banking sector. Although the ratio of non performing loans to total assets are higher in comparison to international standards, the Indian banks have done a marvelous job in containment of non performing loans (NPL) in recent times. Non-performing loans to total loans of banks were 1. 2 per cent in the US, 1. 4 per cent in Canada and in the range of 2-5 per cent in major European economies. In contrast, the same for Indian banks was 7. 2 per cent in 2004-05. Gross NPL ratio for Indian scheduled commercial banks declined to 5. per cent in 2005 bearing testimony to the serious efforts by our banking system to converge towards global benchmarks. Global Issues and my recommendations: The core challenge for banks / financial sector, as for all organizations, is to create long-term sustainable success. Banks need to understand their business models and have the confidence that these will deliver sustainable value – with appropriate risk mitigations as necessary. They also need to understand the role of performance indicators and executive incentives in driving the right, or wrong, behaviors – as well as how good governance can make a difference. The financial crisis showed that some banks did not grasp these issues adequately. This is where the management person can play a key role. By providing high quality management information, the management person supports business success by enabling evidence based decision making as well as effective allocation of resources and robust risk management. For example, the tools and techniques used by management persons, such as activity based costing help banks to achieve cost leadership. They can also provide information to enhance understanding of customer, product and delivery channel profitability– key issues for retail banks