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India Banking 2010: Towards a High-performing Sector India Banking 2010 Towards a High-performing Sector
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India Banking 2010
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The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermedia- tion in India is higher and bank penetration is far lower than in other markets. India’s banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The failure to respond to changing market reali- ties has stunted the development of the financial sector in many developing countries. A weak banking structure has been unable to fuel contin- ued growth, which has harmed the long-term health of their economies. In this “white paper”, we emphasise the need to act both decisively and quickly to build an enabling, rather than a limiting, banking sector in India. GOOD PERFORMANCE, QUESTIONABLE HEALTH Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The bank- ing index has grown at a compounded annual rate of over 51 per cent since April 2001 as com- pared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhanc- ing the payments system and integrating regula- tions between commercial and co-operative banks. However, the cost of intermediation remains high and bank penetration is limited to only a few cus- tomer segments and geographies. While bank lending has been a significant driver of GDP growth and employment, periodic instances of the “failure” of some weak banks have often threatened the stability of the system. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infra- structure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless 3 Executive Summary
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addressed, could seriously weaken the health of the sector. Further, the inability of bank manage- ments (with some notable exceptions) to improve
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