Indian banks are recording an impressive performance in terms of profitability, capital adequacy, NPA levels, risk management and so on. But accomplishment of competitive advantage necessitates continued thrust on efficiency, productivity and profitability and technological upgradation on a much higher scale.

The Indian economy has been undergoing a process of economic liberalization since 1991. As the success of economic reforms is not possible without bringing in necessary reforms in the financial sector, the government of India launched banking sector reforms in 1992. These reforms were based on the recommendations of the Narsimhan Committee Report (1992). Financial sector reforms were initiated with a view to improve efficiency in the process of financial intermediation, enhancing the effectiveness in the conduct of monetary policy and creating conditions for integration of the domestic financial sector with the global financial sector.

The Indian banking industry is at a defining moment. Indian banks have successfully met several challenges in the last decade. But bigger challenges lie ahead. According to Standard & Poor's, four major challenges lie ahead for them. In the near future, the strength of the banking sector will be decided by how they deal with interest rate risk, how they adhere to Basel II capital adequacy norms, attain profitability and cope with the real-time gross settlement system. In addition, Indian banks are also facing challenges such as deteriorating asset quality, worrying level of NPAs, market risk management, tight prudential norms, asset-liability management, and increasing pressures on profitability.

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