Modernisation of India’s Banking Sector

Author: Deepti George, IFMR Finance Foundation, October 2016

This paper is part of the Notes on the Indian Financial System series.

Abstract:

Banks in India, whether large or small, have traditionally been required to adopt similar strategies to expanding their banking businesses. These strategies have been characterised by an almost exclusive Originate-To-Hold-till-Maturity (HTM) approach to building their asset books, with origination strategies that have often been high cost and high risk in nature and resulting in several anomalies that are currently plaguing the Indian banking system. This paper seeks to lay out a set of ideas that look at root causes of bank performance, which will then pave way for the modernisation of the sector. At the heart of these recommendations is an attempt to go back to first principles of banking and to reflect on what banks’ managements and boards (notwithstanding their ownership patterns), and the banking supervisor need to focus on in order to set the course for a globally competitive banking sector for India. Some of the important recommendations pertain to a more focused adoption of approaches and tools that help reveal the true costs of origination which will then lead to better risk-based pricing, and various steps to be taken to reimagine the role of full-service banks from being ‘risk originators’ to ‘risk aggregators’ that are well equipped to actively rebalance their portfolios and use diversification as a strategy for effective risk aggregation.

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