Is Banking in India Risky?

Risk Management is protecting one’s asset against any losses.  Risk in any form of business has to be first identified and analyzed and then eliminated or reduced.  With a similar purpose IIIRM (Indian Institute of Insurance and Risk Management) was formed in India in 1983 with 300 plus managers.

In the late 80’s Japanese banks grew mammoth size without any set regulations.  At this advent, Basel I was introduced to standardize the regulations governing the global banking industry.  However the regulations became weak in such countries where the regulatory framework was not very strong.  Therefore, Basel II was introduced which has better ideas and is based on the better understanding of risks with more transparency.

It is believed that a strong economy and financial institution is required to sustain a long journey.  Therefore, banking system is the core body of the country especially for a developing country like India.  Risk Management plays a very crucial role for an organization’s survival leading to stronger financial sectors.

Here in India families still, do not show utmost trust in the country’s financial system.  It is an age old story and people still like stacking their assets at home rather in banks.   India still ranks high when it comes to buying gold and people hardly keep money in banks.  This is when the transparency, that Basel II talk of, comes handy and the perception of Indian Financial system being weak can be resolved and changed.

The above mentioned model to be up and running in India banks should create their own set of internal risk models and move towards more transparent assets like bonds and not loans.  India is highly vulnerable to risk though we have a large economy.  India has seen a lot of disasters the major one being the one in Bhuj in 2001 where the government revenue was 7% and uninsured revenue loss was 1% of GDP as proven by the figures. In today’s economic downturn banking industry is facing a serious problem especially when the competitors are giving a cut throat competition by new technological innovations, international integration and Basel II regulations.

The risk department in the banks (worldwide) not only manages credit risk in the market but also handles Market Risk and Operational Risks.  These risk factors depend upon country to country depending upon the landscape and social factors. The Department of Human Resource also plays a key factor to monitor the risks, deploy for right man force, educate them and conduct Risk audits on a timely basis.

Today many banks are merging Times Bank and HDFC merged in 2001, Bank of Madura with ICICI in 2002, Benares State Bank with Bank of Baroda in 2003 and Global Trust Bank with Oriental Bank of Commerce.  These banks merged to save themselves from default and high losses. Banks may choose to merge to become global players in the coming years.

The country’s largest public sector players, The State Bank of India, others like Bank of India and Bank of Baroda, are keen on having a strong overseas presence. In UK, Bank of India, Bank of Baroda and Canara Bank have also begun operations.  The use of internet banking has crossed borders and it is now possible to market products and services on a global basis.  India has signed the Financial Services Agreement in 1997 which shall give India an opportunity to expand their business across the world.  India as it is, is in a spotlight next to China with the growth on GDP.

With millions of Indians opening savings accounts, using credit cards and taking car loans for the first time, according to the Reserve Bank of India, the central bank report. Indian banks cumulatively reported a 13% jump in income to about $30 billion in the year that ended March 31, 2009.  In the fourth quarter of 2008, total bank deposits in rural areas climbed 20% from a year earlier, following 12% growth in 2007.  At the nation’s largest lender, Mumbai-based State Bank, rural deposits grew 30% to 2.16 trillion rupees, or $45 billion, in the fiscal year ended March 31, 2009. The bank advanced loans of 1.21 trillion rupees, or $25 billion, up 18% with a default rate of 0.5%. Further, the “Industry Vision 2010” is that many international players would be visible in the Indian Market and Indian financial institutions would be going global.  Indian Banks have evolved immensely during the last few years and set the country at the forefront of the developing world. We saw that Indian Banks even during the time of recession sustained & remained insulated. It proved that they have strong liquidity. Furthermore, with the implementation of Basel II they will amongst the foremost banking systems in the world. Prestigious Universities have already started grooming their students and have introduced curriculums like Strategic Management in Banking which will equip them to fight against turbulence, give extraordinary customer service and last but certainly not the least, control risk.

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