Challenges for Commercial Banks

Major challenges, which Commercial Banks are today facing

and which are likely to be more poignant in the ensuing years in
view of the irreversible process of the reform and resultant
verisimilitude of many more players entering the banking
sector, are, as outline below:
Problem of Pressure on Profitability
The greatest challenge which PSBs are facing in recent years
arises out of
pressure on their profitability. With continuous expansion of
branches and manpower,thrust on social and rural banking,
directed priority sector lending, maintenance of higher reserve
ratios etc. had their telling impact on the profitability of the
banks.In order to improve financial health of commercial banks
the government provided a dose of hybrid capital and in return
these banks were made to sign a memorandum of
understanding with RBI. The crux of the MOU was on toning up
productivity, efficiency, cost reduction, higher recovery.
Further, accent of banks operations shifted to non-fund based
business with an eye on capital adequacy unremunerative
services, the bank have to offer.
Problem of Low Productivity

Another challenge, which Indian commercial banks are facing, is

low productivity. The low productivity has been due to huge
surplus manpower, absence of good work culture, inflexible
and inefficient labour force in PSBs and absence of employees
commitment to the organisation.
Problem of Non-Performing Assets
A serious threat to the survival and success of Indian banking
system is uncomfortably high level of non-performing assets.
Although NPAs (both Gross and Net) of commercial banks in
India have substantially declined in recent year, still it is 6% of
the total advance. Strengthening non-performing assets are
hurting banks profitability and even the basic inability of the
banking system by way of both nonrecognition of interest
income and loan loss provisioning.
Problem of Resource crunch
There are indication that the household savings comprising
financial savings and
physical assets are moving away from bank deposits to more
sophisticated form of financial assets such as mutual funds,
stock and derivatives or life insurance and pension
contributions.
Problem of Assets-liability mismatch

With more and more bank credit going for infrastructure

lending and commercial
real estate financing while the liability structure of the banks is
getting shorter and shorter, banks are facing serious problem of
assets-liability mismatch.
Problem from Customer
With fast changing life styles and values of customer who are
now better
informed and more sophisticated and who have a wide choice
to choose from various banking and non-banking
intermediaries have become more demanding. Their
expectations in term of product, delivery and price are
increasing. The PSBs lacking in customers orientation are
finding it difficult to even retain their highly valued customers.
Private sector banks have embarked upon customer. These
banks by dint of information technology are offering speedier
service and new and complex products.The telebanking,
anywhere banking, internet banking, are some of the product
innovated by the new players.
Competition from New Players
The commercial banks in India, which enjoyed monoploly
position until recently,

are facing perilous challenges particularly on quality, cost and

flexibility fronts from the newly emerging players. Private
sector banks by dint of their invigorating ambience and work
culture supported by pragmatic leadership, committed,
courteous, affable and trained staff and modern ultra gadgets
are offering excellent customer services.
Challenges due to Globalization
Globalisation and integration of Indian financial market with
world and the
consequent entry of foreign players in domestic market has
infused, in its wake, brutal competitive pressure on the Indian
commercial banks. Foreign players endowed with robust capital
adequacy, high quality assets, world-wide connectivity, benefits
of economics of scale and stupendous risk management skills
are posing serious threats to the existing business of the Indian
banks. Cross-border flows and entry of new products,
particularly derivative instruments, have impact significantly on
the domestic banking sector. These are forcing banks in India to
adjust the product mix, as also to effect rapid changes in their
processes and operations in order to remain competitive in the
globalisation environment. Indian banks are therefore, in
greater pressure to gear themselves to offer not only wide
menu of services but also provide these in an increasingly
efficient manner in term of cost, time and convenience.

Problem of Managing Duality of Ownership

Indian banking is in a peculiar problem of managing conflicting
interest of the
Government of India and RBI on the one hand and the private
shareholders, on the other. Problem of Managing Customer of
Diverse Strata Another very important challenges, which PSBs
are facing, is managing two ends of spectrum of banking
services. PSBs, have two faces: a commercial side and
noncommercial side, each having various strata. Apart from the
above, following deficiencies were noticed in the managing
Credit Risk:
i. The absence of written policies.
ii. The absence of portfolio concentration limits.
iii. Excessive centralization or decentralization of lending
authorities.
iv. Cursory financial analysis of borrower.
v. Infrequent customer contact.
vi. Inadequate checks and balances in credit process.
vii. The absence of loan supervision

viii. A failure to improve collateral position as a credit

deteriorate
ix. Excessive overdraft lending.
x. Incomplete credit filesThe absence of the assets classification
and loan-loss
provisioning standards.
xi. A failure to control and audit the credit process effectively.