Discuss various challenges being faced by Indian Commercial Banks in the current scenario. (HPAS Mains Question Paper 2022 – GS 3, Q.16)
Commercial banks in India are financial institutions that provide a variety of services, such as accepting deposits, making loans, and facilitating financial transactions. Commercial banks in India are classified as public sector banks, private sector banks, foreign banks, and cooperative banks.
The Indian government owns public sector banks, which account for the vast majority of banking in the country. State Bank of India, Punjab National Bank, and Bank of Baroda are the most significant public sector banks in India.
Private sector banks are owned by private individuals or corporations, and their importance has grown in recent years. HDFC Bank, ICICI Bank, and Axis Bank are among India’s largest private sector banks.
Recent data and reports show that Indian commercial banks are currently facing a number of challenges.
Some of the critical challenges and data are as follows:
- Non-Performing Assets (NPAs): The problem of NPAs is one of the most severe challenges that Indian commercial banks face. According to the Reserve Bank of India’s (RBI) Financial Stability Report (FSR), the gross NPA ratio of India’s scheduled commercial banks (SCBs) was 7.5% in March 2021.
- Capital Adequacy: With the implementation of Basel III norms, Indian banks are required to maintain higher capital adequacy ratios in order to maintain financial stability. According to the RBI’s FSR, the CRAR of public sector banks (PSBs) in India was 12.7% as of March 2021, which was lower than the regulatory minimum of 11.5%. The FSR also stated that PSBs may need an additional Rs. 1.2 lakh crore in capital over the next two years to meet Basel III standards.
- Digital Disruption: The rise of digital banking and fintech companies is upending Indian commercial banks’ traditional business models. According to a Boston Consulting Group report, digital payments in India will reach $1 trillion by 2023, up from $65 billion in 2019. Banks must invest in digital technology and improve their customer experience to remain competitive. However, the high cost of technology and the shortage of skilled IT professionals pose significant challenges to banks.
- Interest Rate Risk: Because of their extensive exposure to long-term assets such as loans and investments, Indian commercial banks face interest rate risk. The interest rate risk of SCBs increased during the pandemic, according to the RBI’s FSR, due to increased liquidity and duration gaps. The FSR also stated that if inflation expectations rise, SCBs may face a higher risk of interest rate reversal.
