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Banking on the future

December 04, 2006

Abstract: Three major issues need to be addressed before banks can act as an engine for India’s growth. The first relates to scale, which is critical for operational efficiency. In the absence of sufficient mergers and acquisitions (M&A), Indian banks have remained too small by global standards. Unfortunately, public sector banks have exhibited a lukewarm response to the roadmap recently laid out by the RBI to remove restrictions on their consolidation. The second issue relates to inclusion. Banks have yet to find a sound mechanism to finance service businesses that have no collateral to offer. The other inclusion related challenge for the banking system is to facilitate transactions among people who are part of the informal, cash-oriented economy. The third theme is technology. While the aspiration is a seamless electronic integration across the entire banking system, the reality today is that even integration within any single bank across its multiple systems is a distant milestone.

Keywords: banks, risk mitigation, technology; scale, consolidation; inclusion; collateral; cash-oriented economy; mergers and acquisitions (M&A); electronic integration; unbanked; operating efficiency; informal economy

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