The Reserve Bank of India (RBI) on Monday said there were emerging concerns about banking sector stability related to disproportionate growth in credit to sectors such as real estate, infrastructure, NBFCs and retail segment, persistent asset-liability mismatches, higher provisioning requirement and reliance on short-term borrowings to fund asset growth.
The RBI released its Report on Trend and Progress of Banking in India 2010-11. The report reviews the performances of the global and Indian banking sectors and presents the salient policy developments relating to each of these sectors during 2010-11. Within the domestic banking sector, the report entails a comprehensive analysis of commercial banks, cooperative banks, and non-banking financial institutions.
However the report said during 2010-11, banks were able to improve their profitability and asset quality. Stress test showed that the banking sector remained reasonably resilient to liquidity and interest rate shocks.
At the present juncture, the key issues related to the Indian banking sector include: prospective migration to Basel III while upgrading the existing risk management practices under Basel II; transition to International Financial Reporting Standards (IFRS) and required upgradation in information technology and human resource infrastructure; improvement in corporate governance practices in banks; and the overall need to become more competitive on the back of scale, scope, prudence and knowledge to be able to efficiently serve the needs of the economy and to exploit emerging opportunities, particularly with regard to financial inclusion.
The RBI said the financial performance of financial institutions (FIs) deteriorated during 2010-11 mainly due to decrease in operating profits and net profits. There was a sharp rise in operating expenses during the year mainly on account of wage revision.
The report conveys that despite challenges, the banking sector in India can look forward to enormous opportunities in their quest for long-term growth. In the long-term, the RBI said, banks need to build on four principles, namely, efficiency, stability, transparency and inclusion. The banking sector needs to focus on growth through inclusion, innovation and diversification while complying with domestic regulations and internalising international best practices.
