Challenges Faced

Technology and the growing pressure to increase shareholder value are driving globalization, consolidation and convergence in the banking industry, while cost reduction continues to be a priority. A successful Bank will have to first meet and address several challenges that the industry currently faces. It will have to be nimble and agile enough to respond to a market that is seeing growth driven primarily by new products and services. This includes opportunities in the retail front such as credit cards, consumer finance, wealth management and private banking and on the wholesale banking front through, fee based income, investment banking and advisory services.

Banking is one of the riskiest businesses. Effective risk management will be the singular most important challenge that banks will to face in the race ahead. Risk preparedness of banks, despite the various measures taken by the regulatory authorities is still comparatively low. Lack of adequate data and technology, lack of skilled personnel, requirement of new systems and consequent investment, lack of awareness of global best practices and the tendency in the industry to have a short-term focus are some of the reasons for the low level of risk preparedness. It is up to the banks to convert the risk management system to a business opportunity by arriving at an optimum risk-return trade off. Pricing of loan products, which is now assuming great importance in view of the regulatory & competitive forces, will also have to depend on arriving at the optimum risk-return trade off. Foreign players with huge capital resources, cutting edge technology, international best practices and skilled personnel are expected to be force in the banking market. Banks will have to be prepared with mature and efficient risk management systems if it has to successfully compete with the Goliaths. Identifying appropriate solutions including innovative software tools, training and upgrading of human resources and building up of a data base is thus of paramount importance. Robust credit rating frameworks and building of data warehouses for computing probability of default etc is therefore very essential.

Yet another challenge banks will have to face is the drying up of opportunities to make huge profits which were hitherto available for the asking in a declining interest scenario. Additionally, with spreads now decreasing on account of competition both on the deposit and credit front, Banks will have to literally battle hard for each dollar to be added to the bottom-line.