The Indian banking sector which demonstrated a high degree of resilience during the global economic crisis is facing the challenges of meeting the financial needs of a fast growing economy. Inevitably, there have been stresses and strains. According to the Reserve Bank of India's annual report on ‘Trends and Progress of Banking in India,' the performance of commercial banks during 2009-10 was subdued. A slowdown in deposit growth caused a deceleration in the disbursement of credit. Consequently, their combined balance sheets expanded at a slower rate. Their net profits have been growing but at a slower rate. All other parameters, such as the return on assets and on equity, corroborate the point that their profitability is under stress. At the aggregate level, non-performing assets (NPAs) have been increasing. Although not alarming, the deterioration in asset quality underlines the need for banks to step up the provisions, especially at a time when the enhanced Basel II capital norms take effect. While Indian banks are comfortably placed for now, they will have to shore up their capital base in the future. On the positive side, banks have been extending their geographical coverage through their branches and ATMs, thereby bringing about financial inclusion across the country.
The RBI has been gradually shifting its policy focus from crisis management to recovery management. In fact, some of its more recent measures aim at preventing the creation of an asset bubble in the residential property markets in big cities. Over the past year, there has been a renewed policy emphasis on customer service, promoting the free flow of credit to small and medium enterprises, and adopting the latest technology. Outside India, and especially in the West, concerns have remained over downside risks, especially those relating to profitability and quality of assets. Major banks that were rescued with public money need to regain their standing and identity by ending their dependence on emergency support measures from the exchequer. As the RBI points out, there are important lessons from the global economic crisis for banking policies. The need for regulation to stay ahead of innovation has been well understood, as evidenced by the central bank's cautious approach to the introduction of new products, such as credit default swaps and certain types of derivatives. Having shielded the financial sector from the worst consequences of the economic crisis, the RBI is preparing the ground for new policy initiatives, including the licensing of new banks.
