The Indian financial system
has attained a praisewor-
thy stature by (a) promoting financial intermediation in
the economy, (b) accelerating the pace of growth of financial savings,
(c) extending credit support to the vital sectors of agriculture
and industry of the economy, (d) providing liquidity and payment
services to the real sector of the economy, and by (e) catering to
the credit requirements of all the sections of the economy namely
the household, industry, government, weaker sections of the society
and so on. In the Indian financial system, the banking sector
occupies a unique position. It has played a vital role as a growth
facilitator and has achieved commendable heights in the national
economy. The banking sector has shown remarkable responsiveness to
the needs of a planned economy. There is a considerable progress in
its efforts at deposit mobilization and has taken a number of
measures in the recent past for accelerating the growth rate of deposits. A
recourse to this, the commercial banks have opened a number
of branches in urban, semi-urban and rural areas and have
introduced a number of attractive schemes and free services to
the customer to attract more deposits.
In the present reform regime, the banking sector has been
characterized as an inefficient sector with low profitability,
extraordinary low average return on assets compared to international
standard, low capitalization, low ratio of capital and reserve to
total assets, gradual decline in the ratio of spread to total assets,
inadequate capital base to cover credit risk, unhealthy bottom lines,
lack of transparency in balance sheet/profit and loss statements and
so on. The actual picture of financial health is even worse as the
current indicators are based on the accounting concept of profits
constructed by an alternative set of accounting rules, the GAAP
and are not based on `income recognition and provisioning
criteria'. Therefore, this sector needs to be strengthened and
consequently financial sector reforms have been emphasized for the Indian
banking sector. The Reserve Bank of India's (RBI) decentralization
and autonomy package will require the banks to redress their role
under the market-driven economy.
Deepening and widening of the
financial markets, growing disintermediation process,
adoption of modern technology, rising customer expectation,
innovative financial services and scheme supplement with suitable
credit delivery mechanism are some of the challenges for which the
banks would be required to reorient their organizational structure
and modify their strategies. The guidelines with respect to the
transparency of the balance sheet, capital adequacy, and provisioning
norms and so on have been put in place vis-à-vis global standards. |
