Across the world, banks propel the economy and are influenced by the business cycles. Indian banking too is similarly affected, where corporates issue GDRs/ADRs or raise ECBs, as a source of cheaper funds. Globally, banks are increasingly resorting to automation to establish touch points with their customers through ATMs, kiosks, mobile phones, Internet, etc. Indian banks too have caught pace in computerizing their operations, in adopting core banking solutions, etc. Though small in size when compared to international banks (in terms of net worth or total assets), the ratios of RoE, RoA, net NPA, and NIM of Indian banks are comparable to international standards. Indian banks have posted the highest return on equity (RoE) when compared to the rest of their Asian peers (including Singapore and Japan) in the last three years. According to Moody's Investor Services data, Indian lenders have posted the highest RoE of 20.38% (system average of three years), closely followed by Indonesia at 20.19% and New Zealand at 18.83%.
The rapid growth of the Indian economy has had its positive impact on banks too. Credit has grown at such a fast pace during the last two years that banks have substantially reduced their holdings of government securities, bringing them down to near mandated levels. Thus, banks are increasingly performing the role of credit creators rather than merely serving to channelize public savings to the government. With increasing competition, the role of the banks as financial intermediaries has also expanded to include services such as bancassurance, marketing of mutual funds, provision of credit/debit cards, wealth management, etc., have been helping to slow the healthy growth in fee-based income. All these developments have helped in reducing the proportion of NPAs as well as in broad basing the risk by expanding the sources of income. Going forward, the challenge will be to further reduce intermediation costs and to re-skill the employees towards a marketing orientation from the existing distribution orientation.
Though the differences between public and private sector banks still remain in terms of government ownership and consequential effects on the scope and speed of strategic decision-making, the difference is narrowing day by day, especially in operational areas. No longer is it that easy for the government to exercise blanket fiat over strategic decisions too, as the media is quick to point out the "interference". Public shareholding, even though in a minority, also has its own say. Today, some of the public sector banks are more technology-savvy and more profitable than some of their private sector counterparts.
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