India’s Rs 77 trillion (US$ 1.25 trillion)-banking industry is the backbone to the economy. The sector emerged strong from global financial turmoil and proved its mettle when the developed economies were shaking.
India’s banking sector is on a high-growth trajectory with around 3.5 ATMs and less than seven bank branches per 100,000 people, according to a World Bank report. The statistics are going to improve in near future as the Government aims to have maximum financial inclusion in the country. Policymakers are making all the efforts to provide a facilitating policy framework and infrastructure support to ensure meaningful financial inclusion. Apart from that, financial institutions are collaborating with other service providers (in the fields of telecom, technology and consumer product providers) to create an enabling environment.
Financial inclusion as per RBI is defined as the process of ensuring reach of financial services to masses through some structured network such as banks. It also ensures the increase of credit and debit transactions through its various policies. Earlier people in villages used to take loan from unstructured and unmonitored creditors which used to charge high interest rates. Financial inclusion schemes help such downtrodden and needy people by providing them loans at market interest rates.
The household access to financial services can be classified in three categories which are wealth creation, credit and contingency planning. Wealth creation includes savings and investments by a household depending upon their financial well being and risk perception. Through increased financial inclusion people of lower sections of society deposit their money in banks. This makes them earn interest and enables them to keep their money in safe hands.
Credit includes different kinds of loans such as housing loans, consumption loans, emergency loans and loans for business livelihood. There are various schemes that government has launched to provide business opportunities to poor people by providing them loans. One such scheme is MUDRA Yojna under which loans are provided to first time takers or to people with high credit ratings. Through such schemes government ensures that villagers do not have to depend upon local lenders for loans.
Contingency planning includes retirement savings, insurance contingencies and buffer savings. These schemes ensure older ones to be financially stable and not be dependent on anyone. Also insurance schemes such as crop insurance safeguard farmers against any instances of crop damage.
Another report prepared by KPMG prepared in association with the Confederation of Indian Industry (CII) states that the Indian banking sector is expected to become fifth largest in the world by 2025. The report highlights that India is one of the top 10 economies of the world and with relatively lower domestic credit to gross domestic product (GDP) percentage, their lies a huge scope of growth for the banking sector. Bank credit is expected to grow at a compounded annual growth rate (CAGR) of 17 per cent in the medium term, eventually leading to higher credit penetration in the economy. This clubbed with schemes like Mudra yojna and RBI’s initiatives like payment banks will surely increase bank’s reach in the rural area.
Banking in India is generally fairly mature in terms of supply, product range and reach, even though reach in rural India still remains a challenge for the private sector and foreign banks.
Consequently, we have seen some examples of inorganic growth strategy adopted by some nationalized and private sector banks to face upcoming challenges in banking industry of India.
For example recently, ICICI Bank Ltd. merged the Bank of Rajasthan Ltd. in order to increase its reach in rural market and market share significantly. State Bank of India (SBI), the largest public sector bank in India has also adopted the same strategy to retain its position. It is in the process of acquiring its associates. Recently, SBI has merged State Bank of Indore in 2010.
Still there is a wide gap between population level and reach of banks in the rural market. Bank density and ATM density is still not at par with developing economies like China. Banks have come up with various lucrative products targeting the rural strata. Payment banks created by RBI are one such initiative.
As per the above discussion, we can say that the biggest challenge for banking industry is to serve the mass market of India. Companies are shifting their focus from product to customer.
The better we understand our customers, the more successful we will be in meeting their needs.
In order to mitigate above mentioned challenges Indian banks must cut their cost of their services. Another aspect to encounter the challenges is product differentiation. Apart from traditional banking services, Indian banks must adopt some product innovation so that they can compete in gamut of competition. Technology up gradation is an inevitable aspect to face challenges.