The main objective of the Indian banking sector reforms of the 1990s was to promote a diversified, efficient and competitive financial system with the ultimate goal of improving the efficiency of resources through operational flexibility, improved financial viability and institutional strengthening, to bring it at par with global benchmarks. However, with increased d-regulation of financial markets and subsequent integration of the global economy, the period also noticed turbulence for global financial markets; 63 countries suffered from systemic banking crisis in that decade, much higher than 45 in the 1980s. It is particularly noteworthy here that India could pursue its process of financial deregulation and opening of the economy without suffering financial crisis during this turbulent period in world financial markets.
Even today, the fact that current annual growth of around 8 percent can be achieved in India at about 30 percent rate of gross domestic investment suggests that the economy is functioning quite efficiently. As the Indian economy continues on such a growth path and attempts to accelerate it, new demands are being placed on the banking sector. Higher sustained growth has contributed to the movement of a large number of households into higher income categories, and hence, higher consumption categories, along with enhanced demand for financial savings opportunities. On the production side, industrial expansion has accelerated; merchandise trade growth is high; and there are vast demands for infrastructure investment, from the public sector, private sector and through public private partnerships. Indian banks have to be encouraged to expand fast, both through organic growth and through consolidation, in order to fuel the growth of large firms and to strengthen their risk assessment systems, for catering to the requirements of smaller firms. Various policy measures are in process to help this transition along. However, at the global scenario shows that, only 22 Indian banks figure in the list of top 1000 banks and there are only 5 Indian banks in the list of top 500 banks. The biggest Indian bank, State Bank of India, has a market capitalization of under US$ 10 billion compared to the market capitalization of US$ 243 billion of Citigroup. Indian banking sector has a long way to go before they become relatively significant players. Having said that, there are sufficient reasons to believe that the Indian banking sector is poised for tremendous growth and with proper policy framework in place, it would be very soon, matching their global counterparts on most of the relevant banking indicators/ parameters (except size, for some time to come).
From the perspective of banking products and services being offered through internet, Internet banking is nothing more than traditional banking services delivered through an electronic communication backbone, viz, Internet. But, in the process it has thrown open issues which have ramifications beyond what a new delivery channel would normally envisage and, hence, has compelled regulators world over to take note of this emerging channel. Some of the distinctive features of internet-banking are:
1. It removes the traditional geographical barriers as it could reach out to customers of different countries / legal jurisdiction. This has raised the question of jurisdiction of law / supervisory system to which such transactions should be subjected.
2. It has added a new dimension to different kinds of risks traditionally associated with banking, heightening some of them and throwing new risk control challenges.
3. Security of banking transactions, validity of electronic contract, customers’ privacy, etc., which have all along been concerns of both bankers and supervisors have assumed different dimensions given that Internet is a public domain, not subject to control by any single authority or group of users.
4. It poses a strategic risk of loss of business to those banks who do not respond in time, to this new technology, being the efficient and cost effective delivery Mechanism of banking services.
5. A new form of competition has emerged both from the existing players and new players of the market who are not strictly banks.