Name: Amey Patale

Course: PGDM Finance (2017 – 19)

Banking Sector Challenges and Opportunities

Introduction
“A bank should be something one can bank upon” as quoted by the Deputy Governor of RBI, Dr. Viral Archarya. Banks play
an important economic function of maturity transformation i.e. the deposits are generally demand deposits and the loans
provided by banks are of longer terms. Thus, banks are the life-line of an economy which help to channel customer savings
to loans to businesses which in turn accelerate the businesses and thus improve the quality of life of everyone. Indian
banking system is facing several challenges at this point in time. Currently, poor asset quality is the main threat to the
Banking sector, especially due to high Non-Performing asset (NPA) ratio of around 15%. The overall PSB sector reported a
net loss in FY 2017 -18, as shown below.

The RBI has taken various measures for resolution of stressed assets, like the Insolvency and Bankruptcy Code (IBC) 2016.
By the end of FY18, around 40% of NPAs were under the IBC process. To speed up the resolution process the government
has come up with setting up of AMC/ AIF, which is called as Project Sashakt. In meantime to accelerate the credit outflow
from banks, the government came up with Bank Recapitalization and also various NPA preventive measures like prompt
corrective action framework.
  Growth in Deposit:

Deposit Growth (YoY)

20.00% 18.17%
18.00%
15.37%
16.00%
12.78% 13.45%
14.00% 12.15% 11.78%
12.00%
10.00%
7.59%
8.00%
6.00%
4.00%
2.00%
0.00%
2011 2012 2013 2014 2015 2016 2017

Deposit Growth YoY

Source: RBI

There has been a declining trend in the growth rate of deposits from 2014, mostly attributed to less attractive returns,
boom in the equity markets. Savings have thus moved to other asset classes from bank deposits. The sharp rise in the
deposits in FY 17 can be attributed to demonetization.

 Growth in Credit:

There has been a significant growth in credit to Industry, Services sector, Personal Loans and Agricultural activities. The
below chart shows the growth of credit to different sectors between August 2018 -17 and August 2017-16.

Growth in Bank Credit YoY

30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
Agriculture & Industry (Micro Services Personal Loans Priority Sector
-5.00%
Allied Activities & Small,
Medium and
Large)

Aug, 2018 over Aug, 2017 Aug, 2017 over Aug, 2016

Source: RBI

The growth in the credit to the above sectors in 2018-17 over 2017-16 can be attributed to the normalization of the initial
implementation issues of GST.
  Sectoral distribution of bank credit.

The total outstanding credit from 2015 – 18 grew at a CAGR of 13.2% and from 2008 -15 it grew at a CAGR of 18.2%. The
decline in the growth of the outstanding credit from 2015 – 18 can be attributed to Asset Quality Recognition (AQR) activity
carried out, which helped in identifying the Non-performing Assets. The growth in bank credit from FY 08 to FY 15 can
been attributed to large disbursements to the industrial sector. The growth of outstanding credit post FY 15 can be
attributed to personal loans and services sector loans.

Key Challenges
 Asset Quality
The primary reason for the increase in stressed assets post 2008 was due to aggressive lending, willful default/
loan frauds/ corruption. With view of such situation Asset Quality Review was conducted in 2015 for clean
and provisioned balance sheets. The aggregate gross NPAs/ NPLs of SCBs increased primarily as a result of this
transparent recognition of stressed assets as NPAs, from Rs. 3,23,464 crore, as on 31.3.2015, to Rs. 10,35,528
crore, as on 31.3.2018, as per RBI data on global operations.

The presence of NPAs is higher among PSBs as compared to private sector Banks. In coming quarter, it is
expected that the PSBs profits would be lower, due to recognition of more NPAs and the provisions made for
the same.
 Private Sector Banks (NPAs)

 Public Sector Banks (NPAs)

 The net profits of PSBs have taken a hit due to higher provisions required as compared to private sector
banks.

 Capital Adequacy
The CRAR had been declining steadily post, FY2011. This was because of the aggressive lending and the
government’s decision to perform AQR in 2015. With the recognition of more NPAs, by AQR, it becomes more
pertinent for banks to maintain more capital to prevent the decline in CRAR below the recommended levels.
Although the levels of CRAR have shown an increase in recent year, the rise in NPAs can pose a huge challenge to
banks.
 Capital Adequacy Ratio (Per cent)
16

13.6 13.3 13.9 14.2 14.2 13.6

14 13 13 13.2 13
12.8 12.9 12.7
12.4 12.3
12
12 11.4 11.1 11.3 11.5
10.4
10
8.7
8

Source: RBI

 Priority Sector Lending Shortfall

There are number of banks unable to achieve the quota of Priority Sector Lending for the past three years.

Scheduled Commercial Banks having shortfall in lending to priority sector would be allocated amounts for
contribution to the Rural Infrastructure Development Fund (RIDF) established with NABARD and other Funds with
NABARD/NHB/SIDBI/ MUDRA Ltd. as decided by GOI from time to time.

The contribution of Priority sector lending by PSBs, is little more than twice the amount by private sector banks,
which is also a reason for higher NPAs amongst the PSBs.
 PMJDY
Accounts opened under Pradhan Mantri Jan Dhan Yojana (PMJDY) are Basic Savings Bank Deposit (BSBD)
Accounts. There is no limit on the number of deposits that can be made in a month, a maximum of four
withdrawals in a month, including ATM withdrawals is allowed. As per RBI circular, saving accounts are treated as
inoperative in case there is no customer induced transaction for 2 years. Basis this criteria, as on 11.7.2018, there
are 6.05 crore inactive PMJDY accounts (source: banks). Although the number of PMJDY accounts are increasing,
the challenge is to get them operative.
  Balance Sheet Management
Over the last few years there have been several attempts by banks to post higher profits by deferring or delaying
provisions. Making higher provisions would help not only to strengthen the balance sheet but also to reduce the
dividend pay-out, better control over tax out-go. The board should take proactive calls for Balance Sheet
Management.

 Human Resources Issue

This is a decade of retirement of top management in most of the PSBs. Though the recruitment is happening at
junior level, this problem would leave gaps in several mid and top management levels, which might affect several
decision making processes as these people play an important role in execution of the managements’ strategy.

Key Opportunities
 Fintech Partnerships
Digital alternatives to lending have emerged to address the issues of long KYC, high-cost of borrowing, availability
of collateral, credit profile. Lenders in partnership with Fintech companies, create credit scores based on social
profile, algorithms to match borrowers with institutional lenders based on the credit profile. P2P lending brings
individual lenders and borrowers together.

 Artificial Intelligence and Cognitive abilities

The use of AI for Cognitive engagement, via voice & facial recognition, Cognitive Automation for repetitive
activities using Optical Character Recognition technology, Machine Learning etc., Cognitive Insights and Shaping
strategies to determine key patterns by processing a large amount of data e.g. by using Big Data

 Blockchain and Distributed Ledger Technology

The shift from central authorities to distributed network of computers would undermine the existence of banks.
Banks on the other hand are trying to leverage the Blockchain and DLT via, Digital Currency, Trade Finance, Identity
management and KYC by collaborating with various startups.

 Robotic Process Automation

RPA is best suited for processes that are repetitive, deterministic and have less ambiguity. RPAs usage requires
the following characteristics, processes with defined rules, manual effort is high, standardized input and output,
input data should be electronic and the process volumes must be high enough to justify automation.

Sources:
i) Banking and Financial Services Report 2019 Q1 – Fitch Solutions
ii) Banks Performance Update – Q1 FY 2019 – CARE Ratings
iii) Lok Sabha Questions
iv) RBI Speeches
v) Banking on the Future: Vision 2020