Improving the Competitiveness of the Indian Banking System

Author: Bindu Ananth, IFMR Trust, & Vineet Sukumar, IFMR Capital, September 2013

Abstract: This note assesses the state of the Indian banking system including its small overall size and high concentration risk, poor indicators of financial inclusion and depth, opaque balance sheets, weak profitability, and highly covariant strategies followed by government-owned banks.

It further highlights “mega-trends” that are shaping the future of banking in India such as globally heightened systemic risk concerns, the emergence of electronic money, specialised payment networks, and branch networks, the emergence of regulated non-bank intermediaries for credit delivery to the last mile, the emergence of risk transmission markets and products like securitisation and credit default swaps, and the deepening of the domestic bond and commercial paper markets.

Finally, it recommends a number of strategies for change such as identifying and designing a supervision regime for systemically important financial institutions (SIFI), separating public policy motives from prudential regulation to clearly reveal the true picture of the balance sheet, ensuring ubiquity of electronic payments in the next three years by combining bank and non-bank elements, making priority sector policy more outcome-focussed and proactively allowing for bank and non-bank partnerships, facilitating risk transmission for banks through bond markets, securitisation, and credit derivatives, and building supportive real sector and financial sector infrastructure.

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