A financial system, which is intrinsically strong, functionally varied and displays efficiency and flexibility, is creating a market-driven, productive and competitive economy. A strong system supports higher levels of investment and promotes growth in the economy. The financial system in India consists of financial institutions, financial markets, financial instruments and services. The financial institutions are further classified as banking and non- banking institutions. The Reserve Bank of India (RBI) act as regulator is the apex institution in the financial system. Other important financial institutions are the commercial banks (in the public and private sector), cooperative banks, regional rural banks and development banks. Non-bank financial institutions includes finance and leasing companies and other institutions like LIC, GIC, UTI, Mutual funds, Provident Funds, Post Office Banks etc.
(Source: Indian Financial System & Indian Banking Sector by Mamta Ratti)
The Indian financial system has been confronted with number of problems so it necessitated the financial sector reforms for adequate performance of banking industry. In the light of these requirements, two experts committees were set up in 1991 and 1998 under the chairmanship of M. Narasimhan and P.Chindambaram. The first committee widely came to be known as Narasimhan committee I (1991) on financial system in India, and second one as Narasimhan committee II(1998) on banking sector reforms so as to examine all aspects relating to the structure, organisation, functions and procedures of the financial system. The Committees proposed reforms in the financial sector to bring about operational flexibility and functional autonomy, for overall efficiency, productivity and profitability. In the banking sector, the measures have been taken aimed at restoring viability of the banking system, bringing about an internationally accepted level of accounting and disclosure standards and introducing capital adequacy norms in a phased manner. Most of the measures suggested by the Committees have been accepted by the Government. The Interest rates have been deregulated over a period of time, transperancy branch-licensing procedures have been liberalised and Statutory Liquidity Ratio (SLR) and Cash Reserve, Ratio (CRR) have been reduced.
The first phase of reforms focussed on modification of the policy framework, improvement in financial health of the institutions and creation of a competitive environment. The second phase of reforms target the three interrelated issues viz. (i) strengthening the foundations of the banking system; (ii) establishing procedures, upgrading technology and human resource development; and (iii) structural changes in the system.
(Source: Planning commission-vision 2020 for India, The financial sector by Rohit Sarkar)
Indian banking industry has been growing at a fast speed and is challenged with several facets like new regulations from time to time, changing customer needs and perceptions. The banking system traces the lives of millions and has to be stimulated by larger social objectives such as fast growth of agriculture, small industries and exports, rising of literacy rate, encouraging new entrepreneurs and development of backward areas.
Indian Banking Sector has perceived a number of changes. Most of the banks in India have begun to take an innovative idea towards banking with the objective of creating more value for customers and to attract more and more customers in the banking network. It is found that Indian banking has experienced a huge transformation in the years since Independence. The rate of renovation was particularly high in the 1990s and 2000s, when a number of innovations changed the way banking was supposed and it was the result of autonomous and induced necessities of the environment. In the 1990s, the banking sector in India, manifest greater emphasis being placed on technology and innovation. Banks began to use technology to provide better quality of services at greater speed. Information technology has made it convenient for customers to do their banking activities from geographically diverse places which earlier remain uncovered. Banks also enlighten their focus on rural markets and introduced a variety of services geared to the special needs and desire of their rural customers. Banking activities also shifted their traditional scope and new concepts like personal banking, retailing, investment banking, corporate banking, agriculture and rural banking, social banking and bancassurance were introduced.
Further, banking sector in India was also moving rapidly towards universal banking and electronic transactions, which were expected to change the way banking would be perceived in the future. It is observed that technology has been playing a crucial role in the tremendous improvement of banking services and operations. Important events in the evolution of new age payment systems in India which includes arrival of card-based payments, debit card, credit card -late 1980’s and early 1990’s; introduction of Electronic Clearing Service (ECS) in late 1990’s; Electronic Funds Transfer/ Special EFT (EFT/SEFT) in the early 2000’s; Real Time Gross Settlement (RTGS) in March 2004; NEFT (National Electronic Funds Transfer) as a replacement for EFT/SEFT in 2005/06; Plan for implementation of cheque truncation system as a pilot programme in New Delhi in 2007 and further implementation in 2013; migration from cash and cheque based payment system; it has become a necessity to electronic fund transfer system.
(Source: Social and Innovative Banking Strategies for Sustainable Banking in India by Sanjay Kanti Das)
The payments industry has witnessed significant changes over last few years due to business requirements and technology innovations. In the last decade, India has shifted from traditional payment methods, i.e., cash/paper based payments to modern electronic payment systems. Though, 97% of payment transactions for public sector banks are paper based as compared to 60% for private sector banks. In the recent past, the RBI has taken multiple steps to support electronification of payment instruments such as, establishing National Payments Corporation of India (NPCI) to act as an umbrella institution for all the retail payment systems, regulation and promotion of acceptance channels including ATMs, POS and payment gateway policy guidelines for issuance and operation of pre-paid payment instruments etc., issued guidelines and security measures for all online transactions.
The types of paper-less payment system has further sub categorised into different forms such as electronic payment system includes National electronic fund transfer, Mobile phone based systems or IMPS, Electronic clearing service, POS or payment gateway and ATMs. The another type that is card based it includes debit cards, credit cards and prepaid cards or smart cards. The third another type is Large value payments it includes Real time gross settlement and cheque truncation system.
The growth of various payment instruments are described as follows:
‘ There are approximately 374 million debit cards in India as of October 2013. With more than 49 million debit cards issued in 2012’13 and a larger number expected to be issued in 2014’15, this rapid pace of growth is set to continue.
‘ More than 18 million credit cards are in circulation. However, banks have adopted a cautious approach to acquire new customers compared to the ad hoc approach adopted for fast growth during2008’09. Credit card usage stands at 0.3% of total electronic transactions for public sector banks.
‘ Pre-paid cards have grown by 50% from year 2012 to 2013. The pre-paid card market grew from INR 200 billion to INR700 billion during this period.
‘ The percentage of all online transactions for private sector banks are as follows:
Debit cards (43%), Credit cards (28%) and Internet banking (29%).
‘ The ATMs grew at a CAGR of 24% during the period 2011’13 with 133,000 ATMs deployed currently. The presence of POS has also grown at a CAGR of 27% during 2013,with the deployment of 9.63 lakhs POS.
(Source: Banking on Technology- prespectives on Indian banking industry by Ernest Young (EY) organisation)
The development of the Indian banking industry has been incredible over the past decade. It is apparent from the higher level of credit expansion, expanding profitability and productivity similar to banks in developed markets, lower frequency of non-performing assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Today, Indian banking industry is enriched both in terms of offering value added services and delivering quality service. Researcher and thinkers all over the world thought that the world financial crisis would affect the Indian banking sector in a serious manner. But the strong foundation of Indian banking system have support from well- structured financial systems and the projected impact of the world crisis was almost insignificant. Instead, it helped the banks to get reinforced further and become closer to the customer with innovative approach.
(Source: Social and Innovative Banking Strategies for Sustainable Banking in India by Sanjay Kanti Das.)
Financial innovation is important for banks in order to survive in changing banking environment. It has been widely recognized by many leading scholars, including Miller (1986) and Merton (1992), have highlighted the importance of products and services in the financial arena. Innovative ideas are noticeable in diverse industries and in different forms. For example innovation in product development is one of the forms of innovation that has been used by banks. Right from the beginning stage of financial modernization innovations have been playing major roles in curbing financial exclusions and improving the ways banking services are rendered to people. Financial innovation is one of the extensively used banking terminologies. It has been used to represent any change in the scale, scope and delivery of financial services.
The deregulation of financial service industry and increased competition with in the banking system led to increased emphasis on the ability to design new products, develop better process, and implement more effective solution for complex financial problems. These financial innovations are a result of number of Government regulations, tax policies, globalization, liberalization, privatization, integration with the international financial market and increasing risk in the domestic financial market. Financial innovation is the process through which finance managers or intermediary institutions in financial markets add value to existing products that satisfy the user needs.
The banks are looking for new ways not only to attract but also to retain the customers and gain competitive advantage over their competitors. The main reason for this change is changing customer needs and expectations. Customers in urban India no longer want to wait in long queues and spend hours in banking transactions.
(Source: Technological Innovation in Indian Banking Industry by Seema Malik)
The change in customer’s expectations and perception towards products or services of banking sector has led to the development of ATMs, Mobile banking, internet banking, corporate banking, investment banking, NRI banking, etc. It brings the shift in banking industry from traditional banking to modern banking, class banking to mass banking and universal banking that allows the customers to get all facilities under one roof. Therefore, the banks are attempted to strengthen customer relationship and move towards ‘relationship banking. In the light of all these changes an attempt is made to study the growth and development of banking products in both public and private sector banks.