In recent times, there has been a noticeable resurgence in India's banking system

following almost a decade of grappling with escalating bad loan challenges.

Thanks to the concerted efforts of policymakers and the proactive measures
taken by banks, the sector is currently on a more secure footing.

Nevertheless, considering historical patterns, the positive trajectory for Indian

banks remains susceptible to the impact of monetary policies and external
uncertainties, such as geopolitical risks.

How have Indian Banks Evolved over the Years?

 First Generation Banking:
o In the period before Independence (up to 1947),
the Swadeshi Movement led to the establishment of
numerous small, local banks, most of which faced failure
primarily due to internal frauds, interconnected lending,
and the amalgamation of trading and banking activities.
 Second Generation Banking (1947-1967):
o Indian banks enabled the consolidation of resources,
mobilised through retail deposits, towards a limited
number of business families or groups, consequently
overlooking the flow of credit to the agriculture sector.
 Third Generation Baking (1967-1991):
o The government successfully severed the link between
industry and banks by nationalising 20 major private
banks in two phases (1969 and 1980) and
introducing priority sector lending in 1972.
o These measures led to a transition from 'class banking'
to 'mass banking' and had a favourable effect on the
widespread expansion of branch networks in rural India,
substantial mobilisation of public deposits, and increased
credit flow to agriculture and allied sectors.
 Fourth Generation Banking (1991-2014):
o During this period, significant reforms were implemented,
including the issuance of new licences to private and
foreign banks to introduce competition, improve
productivity, and enhance efficiency.
o These changes involved leveraging technology,
introducing prudential norms, offering operational
 flexibility with functional autonomy, prioritising the
implementation of best corporate governance practices,
and fortifying the capital base in accordance with Basel
norms.
 Current Model:
o From 2014 onward, the banking sector has embraced
the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and
granted licences to Payments Banks and Small Finance
Banks (SFBs) to attain last-mile connectivity in the
pursuit of financial inclusion.
What is the Current Status of the Indian Banking Regime?
 Background:
o Not too long ago, Indian lenders faced a dire situation
with bad loans, leading to a spike in stressed assets.
Government-owned banks were particularly affected,
with gross NPAs reaching 14.6%.
o To counter these challenges, the government and RBI
implemented a 4R strategy—Recognize NPAs
transparently, Resolution and
recovery, Recapitalization of PSBs, and Reforms in the
financial ecosystem.
o After grappling with seething government and bad loan
issues for nearly a decade, the Indian banking system has
experienced a remarkable turnaround in 2023.
 Profitability and Asset Quality Improvement:
o In FY23, the gross NPA ratio for banks in India
plummeted to 4.41%, the lowest since March 2015.
Cumulatively, PSBs crossed the Rs 1 lakh crore-mark in
profit.
o As per RBI's Financial Stability Report, the capital-to-
risk-weighted assets ratio (CRAR) stands at a robust
16.8%, indicating a strong financial position for
scheduled commercial banks.
o This underscores the sound financial health of Indian
banks, reflecting positively on their ability to absorb
potential risks and maintain stability in the financial
system.
  Policy Reforms and Financial Discipline:
o Reforms introduced over the past eight years focused
on credit discipline, responsible lending, improved
governance, and the adoption of technology. Mergers
of PSBs were instrumental in reducing NPAs.
 Robust Financial Indicators:
o Banks exhibit strong liquidity levels, measured by funds
available for lending. Despite the RBI’s recent monetary
stance of "withdrawal of accommodation," banks
maintain a Liquidity Coverage Ratio at least 20% higher
than the minimum requirement.
o Additionally, major banks, including SBI, PNB, and
Union Bank, demonstrate a capacity to lend "higher for
longer," with Credit-Deposit ratios below 72%.
What Obstacles Lie Ahead for the Indian Banking Sector?
 Infrastructure and Capital Investments Risk:
o Bank lending for upcoming infrastructure and capital
investments, particularly those linked to State government
entities, poses a risk of defaults due to stretched State
finances.
o Banks are advised to set internal exposure limits based on
fiscal/financial assessments of individual States.
 Stock Market and Retail Exposure Risk:
o The seemingly runaway stock market, creating an
illusion of wealth, presents a risk to retail exposures.
Increased demat accounts and high PE ratios across
sectors are indicators of this risk.
o Integrated supervision and rigorous stress tests on retail
portfolios are recommended to address this emerging
risk.
 Interconnected Lending and Governance Challenges:
o The possibility of default becoming a contagion due to
interconnected lending and lax governance norms poses
a significant challenge.
o Focused risk monitoring is necessary, emphasising that
regulation cannot substitute for good governance.
  SME Challenges in a Re-Globalizing World:
o The re-globalization of the world and geopolitical shifts
may challenge Small and medium-sized
enterprises(SMEs), especially in the face of Free Trade
Agreements (FTAs) and regional ambitions.
o Banks need to carefully assess and prepare for potential
risks to SMEs, considering potential disruptions to cash
flows.
 Changing Liabilities Landscape:
o The character of liabilities is changing with digitisation
and evolving consumption trends, impacting retail
deposits. Banks with higher credit-deposit ratios may face
challenges in liquidity coverage.
o A structural shift in Indian savings requires caution and
prudence from bankers, necessitating a careful watch
amidst favourable conditions.
How Can the Indian Banking Sector be Fortified Moving Ahead?
 Building Big Banks:
o The Narasimham Committee Report
(1991) underscored the importance of India having three
or four prominent commercial banks with a presence
both domestically and internationally, in addition to
foreign banks.
 The second tier could include numerous mid-
sized banks, including niche institutions, with
a widespread presence across the economy.
o Consistent with these suggestions, the government has
already consolidated certain PSBs and taken measures to
establish entities like a Development Finance Institution
(DFI) and a Bad Bank.
 Requirement for Differentiated Banks:
o While the universal banking approach has been
commonly favoured, there is a demand for distinct
banking entities to address the unique needs of diverse
customers and borrowers.
  Essentially, these specialised banks would
facilitate financial access in specific areas such
as retail, agriculture, and MSMEs.
o Additionally, establishing proposed DFIs or niche banks
as specialised entities would provide them with access to
low-cost public deposits and enable improved asset-
liability management.
 Blockchain Banking:
o Enhanced risk management can be achieved, and neo-
banks have the opportunity to harness this technology for
advancing digital financial inclusion and supporting the
increased growth of an aspiring and emerging India.
o In the realm of Indian banking, the implementation of
technologies such as Blockchain holds the potential to
facilitate prudential supervision, making oversight and
control over banks more streamlined.
 Addressing Moral Hazard:
o Until now, the occurrence of public sector banks failing
has been infrequent, primarily due to the concealed
sovereign guarantee, instilling greater trust in the public.
Nevertheless, the ongoing privatisation of PSBs
challenges this assurance.
o Consequently, the upcoming wave of banking reforms
should emphasise the necessity for increased individual
deposit insurance and efficient orderly resolution
mechanisms. This aims to reduce moral hazard and
systemic risks, minimising the financial burden on the
public treasury.
 ESG Integration:
o It could be beneficial for Distinctive Banks to consider
listing on a reputable stock exchange and embracing
the ESG (Environmental, Social Responsibility, and
Governance) framework. This approach aims to
enhance value for stakeholders over the long term.
 Enhancing Banking Institutions:
o To address vulnerabilities, the government should
refine regulatory measures, enabling banks to
develop diversified loan portfolios, instituting regulators
 for specific sectors, and granting increased authority to
handle deliberate defaults effectively.
 Facilitating Corporate Bond Market Growth:
o In order to establish a responsive banking system in a
dynamic real economy, there is a requirement to promote
the growth of the corporate bond market, thereby
transitioning away from a bank-centric economic model.
 Enhancing Risk Management Models:
o Develop and implement internal risk models tailored to
individual States, similar to the Bank Exposure Risk
Index, to assess potential risks associated with lending to
State government entities and infrastructure projects.
 Addressing Changes in Liabilities:
o Recognize the changing nature of liabilities influenced
by digitisation and evolving consumption trends.
Develop strategies to adapt to shifts in retail deposits,
especially in Tier 1 and 2 centres.
Conclusion
While celebrating the current success of the banking sector, it is crucial to adopt
a proactive and vigilant stance to navigate the complexities and uncertainties of
the times we live in.
introduction
The advent of globalization and digitalization has transformed the way banking
is done today. The Indian banking system is no exception, it has improved
manifolds in terms of products and services, technology, banking system,
trading facility etc. The increased accessibility of banks to the common man for
his diverse requirements has improved. This evidences the competency of the
Indian banking system with the rest of the world. The improved terms of
Banking technologies have done it all, while banks have become tougher in
terms of development and economic growth. The technology driven banks are
sure to introduce more offers and services to the customers in the future with
robust banking products and innovations. The innovative banking technology
has changed the face of Indian banking and the financial sector. Indian Banking
Sector provides better services similar with other developed banks. The next
generation technologies shall play a vital role in further strengthening the
banking sector. These steady developments are the aftermath of the global
financial predicament, incorporating lessons learnt from the crisis. Time and
again several exercises were undertaken to review the Indian banking system,
despite it coming out relatively unscathed from the crisis. The main plan
though, was to study the various options to meet the growing needs of the
increasingly globalising economy, providing specialised services and deepening
financial inclusion. A number of studies have sought to examine whether the
nature of the banking structure matters for the economic growth of a country.
While there is no broad consensus on the issue, it can be reasonably agreed that
a dynamic and flexible banking system would be more equipped to address the
requirements of a dynamic economy. The objective of the present paper is to
look into the technology adoption in the Indian banking sector and examine the
opportunities and challenges that banking sector has to face in the years to
come.

Opportunities ahead
The year 2017 was swept in by reforms like demonetisation, digital India drive
and global changes like rapid technological advances and an exponential rise in
computing power. From experimentation of use cases on the Block chain
technology, Artificial Intelligence (AI) and Machine Learning to bolstering
operations through Bots and RPA (robotic process automation), the industry is
today geared to embrace challenges and opportunities of the future. It wouldn’t,
hence, be a exaggeration to define 2018 as the ―Year of Cognitive Banking‖;
taking the industry to an inflection point by strategically blending technology
with processes for real-time business impact. Below are the trends that would
define the industry and role of stakeholders going forward: 1. Data Analytics,
Machine Learning and Voice There will be several innovations on customer
interfaces through use of multilingual text and voice. There are various data
points employed to collect customer’s profile and transaction behavior, in order
to predict user needs and design better customer experience. 2. Next Gen
Chatbots In the last two years, major banks globally launched Chatbots
primarily to streamline information and facilitate transactions. This better
quality of interactions with bots, will transform bots to Personal Financial
Assistants, thereby, helping customers in financial decision making. 3. Analytics
of Things and Alternate Lending With increasing implementation of Big Data
and Mobility Solutions by Banks, we could see a new wave of Analytics of
Things or AOT, which would help banks analyze customer interactions with
various devices on Internet of Things IoT and deploy this information to
enhance customer experience and design better lending opportunities. The Peer-
to-Peer frameworks planned, we could also see some alternate lending
platforms flourishing and serving latent customer credit needs. 4. Robotic
Process Automation and Operationally Agile Institutions Over next two years,
operations of Banks would undergo automation through RPA clocking a
staggering decline in Turnaround Time TATs to fulfil a request, commensurates
improvement in customer service. Further, banks would move into agile
architecture and cloud infrastructure in order to shrink various project timelines
and budgets resulting in faster go-to-market of various payment solutions. 5.
Open Banking and Fintech Partnerships Application Programming interfaces
API-integrations have made banking more open than ever. Banks will continue
to work on opening up APIs for more and more businesses to give enterprises a
seamless banking experience. Banks will also partner with various fintech
partners and market places to ensure that banking and payments are
contextualized for various customer segments. 6. Digital Convergence of
Fintechs, Ecommerce and Banks The Digital convergence, Google and Hike
entering the payments space, Banks entering the e-commerce game, Paytm
offering chat, commerce and banking services, Flipkart and Amazon entering
the payments space, is the coming together of Fintechs, Banking and e-
commerce companies. All these aims at providing a one-stop solution to
customers and increasing respective mindshare and wallet share. Regulations to
cover adjacent entities offering banking-related services are in the pipeline. 7.
Smart Cities and Block Chains Heightened activity for implementation of Smart
Cities could herald interesting times for connected payments and IoT. Further,
with NITI Aayog the National Institution to Transform India, focusing on
setting up IndiaChain, Banks could look for potential participation on this
platform and make the KYC and documentation process interoperable –
computer and software able to exchange and make use of information. 8. Cyber
Security and Biometrics Cyber security remains a major challenge for Digital
India the core of National Agenda. It is natural that miscreants would be
tempted to discover loopholes and make attempts to breach existing security
infrastructure. Hence, banks have a laser- focus on cyber security investments
and in implementing newer tools and techniques to defend possible threats. The
mandatory seeding of Aadhaar and the use biometrics for customer
authentication can reduce transaction risks. 9. Impetus to Digital Acceptance
Government policies around Merchant Discount Rates (MDR) would definitely
incentivize small-size peer-topeer transfers and small merchant transactions.
This will have a multiplier effect on acceptance of digital payment solutions
especially by smaller merchants and eventually result in much needed
evangelism and penetration of small payment solutions. 10. Banks will Create
In-house Technology Teams Technology will play a pivotal role in hiring
decisions. Technology will aid in preliminary elimination processcase in point
being the increased use of video resume softwares for automatic screening of
candidates by bots which will help in identifying certain pre-defined
characteristic matches from video interviews submitted by candidates. Also,
hiring and training is moving towards building Deep-tech skills and
understanding emerging technologies. Robotic Process Automations call for up-
skilling of human capital and movement of repetitive jobs to intellectually
stimulating ones.

II. Challenges
The study foresees the following challenges - a) The huge investments in
integration of technologies in banking functions would increase profitability
only with a commitment for strong management and good governance. b) The
competitive advantage from introduction of bank technologies stem only from
the organizational dynamic capabilities which becomes a major challenge. That
is in terms of timely responsiveness, rapid and flexible product innovation and
management capabilities to effectively coordinate internal and external
competencies. c) Training of managerial staff, the operative level personnel in
the use and management of information technology to acquire new skills is a
daunting task. The modernization of work technology without ensuring
reasonable command and control system can lead to loss of managerial
effectiveness. d) Technology inputs have become increasingly economical for
banks. An overriding feature of banks using information technology is that they
are close to a real time interaction between suppliers, producers, distributors and
customers. In the context of public sector banks, the organization structure is
poorly suited to the effective implementation of information technology and it
need to be restructured. e) To achieve and maintain a high service and efficiency
standard, digitalistion needs to go beyond the mere arithmetical calculations and
needs to be leveraged optimally. The main challenge, therefore, is driving the
productivity improvements in banking, acquiring the right dose of technology,
deploying it optimally and at the same time remaining cost effective. f) Banks
must improve their existing HR practices of recruitment, training and
deployment to make the best use of their primary asset, i.e., human resources..
The focus must shift from generalist orientation of the staff to specialist
orientation, i.e., the ability to imbibe and absorb technology. g) Present day
organization needs intellectual capital that is a function of human capital,
structural capital and relationship capital. This alone will translate the
information technology investment into higher performance. There needs to be a
positive interaction between information technology, skills and work
organization. Adopting efficient and productive methodologies that will foster
innovations is need of the time. III. Conclusion Banks are expected to play a
very useful role in the economic development. The emerging markets will
provide enough opportunities for banking business. As banking in India will
become more and more knowledge supported, capital will emerge as the finest
assets of the banking system. Ultimately banking is people and not just figures.
To conclude, the newly improved and innovative facilities offered by banks has
increased the much needed customer base. The Indian economy is projected to
grow at a rate of 5-6 per cent and the country’s banking industry is expected to
reflect this growth. The onus for the growth lies in the capabilities of the
Reserve Bank of India as an able central regulatory authority. The central bank
policies have always shielded Indian banks from excessive leveraging and
making high risk investments. The government support and a careful re-
evaluation of existing business strategies, can set the stage for Indian banks to
become bigger and stronger. The integration of bank technologies for better
banking functions can expand banking business with a global consumer base.
New
Challenges faced by Indian banking industry Developing countries like India,
still has a huge number of people who do not have access to banking services
due to scattered and fragmented locations. But if we talk about those people
who are availing banking services, their expectations are raising as the level of
services are increasing due to the emergence of information Technology and
competition. Since, foreign banks are playing in Indian market, the number of
services offered has increased and banks have laid emphasis on meeting the
customer expectations. Now, the existing situation has created various
challenges and opportunity for Indian Commercial Banks. In order to encounter
the general scenario of banking industry we need to understand the challenges
and opportunities lying with banking industry of India. As banks develop their
strategies for giving customers access to their accounts through various
advanced services like e-banking, mobile banking and net banking, they should
also regard this emerging platform as a potential catalyst for generating
operational efficiencies and as a vehicle for new revenue sources. India's
banking sector has made rapid strides in reforming and aligning itself to the
new competitive business environment. The major challenges faced by bank
are:  High transaction costs A major concern before the banking industry is the
high transaction cost of carrying non-performing assets in their books. The
growth led to strains in the operational efficiency of banks and the
accumulation of nonperforming assets (NPA's) in their loan portfolios.  IT
revolution The application of IT and E-banking is becoming the order of the day
with the banking system heading towards virtual banking.  Timely
technological up gradation Already electronic transfers, clearings, settlements
have reduced translation times. To face competition it is necessary for banks to
absorb the technology and upgrade their services.  Intense competition The
RBI and Government of India kept banking industry open for the participants of
private sector banks and foreign banks and these banks have spearhead the hi-
tech revolution.  Privacy and safety Privacy of customer's information and
safety of their savings is one of the topmost priority of bank. This goes a long
way in influencing customer behavior in the choice of payment methods. 
Global banking The impact of globalization becomes challenges for the
domestic enterprises as they are bound to compete with global players. There
are 36 foreign banks operation in India which becomes a major challenge for
Nationalized and Private Sector Banks.  Financial inclusion Most of the Indian
citizens don't use banking system for their financial requirements. It has
become a necessity to create the awareness and importance of banks amongst
people.  Risk management system Bank need to have in place a fair and
differentiated risk based pricing of products and services since capital comes at
a cost. Banks put the risk management architecture in place to meet the
regulatory requirements without using the risk inputs for taking business
decisions. The risk is not properly priced for various products. The most
challenging part is the availability, integrity the reliability of data.  HR
management This is an area where most of our banks, especially the PNBs, are
found lacking. In their eagerness to expand their core business they tend to
forget the relevance of human expertise which drives their business in a
sustainable manner. The complexities of modern banking and the dependence
on IT makes it all the more important why the banks should have requisite
manpower with right amount of knowledge and experience at appropriate
places.  Standardization and capacity build-up While any development in
offering electronic services is welcome, standalone systems not only work in
silos but also fragment the market to some extent. Hence, as the payments
eco-system matures, inter-operability becomes essential, for which
standardization in processes and procedures is a pre-requisite. This not only
facilitates uniformity in transaction handling but also enables uniform
customer experiences.  Partnerships with non-banks It is imperative that
banks also see the potential for synergetic growth by partnering with these
non-banks and leveraging on their strengths so as to reap efficiency gains for
both the entities. We have seen instances of such partnership, particularly with
MNOs acting as BCs. Similar development should occur in other areas too. A
word of caution is, however, essential - banks cannot abdicate their
responsibilities towards customers, in ensuring safe and secure services,
particularly in scenarios where a large part of the activities involved in
payments are outsourced.  Growth of banking The Indian Banking industry
experienced sustained productivity growth, which was driven mainly by
technological progress. Foreign banks appear to have acted as technological
innovators when competition increased, which added to the competitive
pressure in the market.  Employees retention Long time banking employees
are becoming disenchanted with the industry and are often resistant to
perform up to new expectations. The diminishing employee morale results in
decreased revenue. Due to the intrinsically close ties between staff and clients,
losing those employees completely can mean the loss of valuable customer
relationships.  Social and ethical aspects There are some banks, which
proactively undertake the responsibility to bear the social and ethical aspects
of banking. This is a challenge for commercial banks to consider these aspects
in their working. Apart from profit maximization, commercial banks are
supported to support those organizations, which have some social concerns. 
Rural market Banking in India is fairly nature in terms of supply, product range
and reach, even though reach in rural India still remains a challenges for the
private sector and foreign banks. In terms of quality of assets and capital
adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets relative to other banks in comparable economies in its region.
For example recently, ICICI Bank Ltd. merged the Bank of Rajasthan Ltd. in
order to increase its reach in rural market and market share significantly.
Recently, SBI has merged State Bank of Indore in 2010.  Enhancing corporate
governance Banks are special organizations because their managers have a
fiduciary duty to depositors as well as shareholders and thus a solution to the
'principal agent problem aimed at maximizing shareholder value is
inappropriate. Therefore, the good Corporate Government of banks requires
regulation to balance the interest of depositors and taxpayers with those of the
shareholders. Moreover, banks are important participants in the payment and
settlement system and as such corporate government is highly relevant for
them.  Emerging challenges for 2015-16 1. Deceleration in economic growth
impacting expansion of banking sector 2. Maintaining asset quality in the face
of growing non-performing assets restructuring of advances. 3. Augmenting
capital and maintaining prudential capital 4. Preserving and augment
profitability in a stressed environment 5. Implementing financial inclusion &
Direct Benefits Transfer 6. Increased competition from both within the banking
sector with various banks becoming aggressive 7. Adopting and adapting to
technological changes/innovation to meet regulatory norms and tap alternative
channels. 8. Improving quality of human resources for working efficiently under
the latest technological developments 9. Capital mobilization 10.
Implementation of Basel III Suggestions Increase the presence of the bank in
multiple geographies in order to increase market share is another tool to
combat competitors. Therefore Indian nationalized and private sector banks
must spread their wings towards global markets as some of them have already
done it. As per the above discussed facts it can be said that the biggest
challenge for banking industry is to serve the mass and huge market of India.
To face different challenges the following areas need to be focused  To make
stringent norms pertaining to bad loans and restructured assets and their
resolution Norms to improve asset quality, recovery, liquidity and the balance
sheets of banks  Consolidation and mergers and entry of new players to bring
competition, innovation and productivity. It would also bring economies of
scale  Continuous bank licensing  Converting some urban co-op. banks into
commercial banks could aid them to operate in mainstream with lower risk. 
Separate licenses for niche areas like wealth management investment banking
 Reforms in corporate debt market, government debt market & money market
 Focus on asset-liability management for banks  Increased usage of
technology in banking as it will help in up gradation, design more e-products;
also sustain and scale business  Focus on financial inclusion/deepening  Steps
to remove structural bottlenecks on credit delivery and free pricing of financial
assets  Transparency, improvement in clearing and settlement practices 
Reforms aimed at creating liquidity and depth for efficient price discovery of
banking products  Bank should reduce the non-productive efforts with the
help of technological innovations and improve the process efficiencie

Conclusion
Indian banks face the challenges of sustenance with the
increased competition and need to develop proactive
strategies with focus on product innovation, off-balance
sheet activities to increase their income from non-core
activity, efficiency in service delivery process, effective risk
management etc. and more importantly on customer
satisfaction.
It is evident that post liberalization era has spread new
colors of growth in India, but simultaneously it has also
posed some challenges. This paper discusses the various
challenges and opportunities. Banks are striving to combat
the competition. The competition from global banks and
technological innovation has compelled the banks to rethink
their policies and strategies. Different products provided by
foreign banks to Indian customers have forced the Indian
banks to diversify and upgrade themselves so as to compete
and survive in the market.