Banking Sector Reforms

A four-point agenda for Indian banking in the post-covid world


From UPSC perspective, the following things are important :

Prelims level: Return on Equity

Mains level: Paper 3- 4 point agenda for banks to deal with the fallout of the pandemic successfully

The article suggest 4 imperatives to the banks in India to emerge successful from pain inflicted by the pandemic.

Impact of pandemic on banking industry

  • Unlike other shocks, covid is not a banking crisis; it is, instead, a crisis of the real economy.
  • Globally, the average return on equity (RoE) for banks could go below 1.5% in 2021 before recovering to the 2019 pre-crisis levels of 9% by 2024
  • This is effectively a loss of five years for the banking industry.
  • This will likely play out in two stages:
  • 1) Loan loss provisions over a period of 12-18 months.
  • 2) Followed by a period where banking revenue growth lags gross domestic product growth, or GDP.

Important role played by banks in pandemic

  • India has entered this crisis well-capitalized.
  • Their provision coverage ratios improved to 65% in 2019-20, compared to 41% in 2016-17, and RoE (return on equity) has turned positive to 2.5% after two years of negative readings.
  • The banking system is playing a critical role in the economic recovery by supporting businesses and individuals.
  • New challenges, however, continue to emerge. These, if left unmitigated, will lead to severe losses in efficiencies gained.

4 Imperative to tackle the emerging challenges to banking

1) Need to increase productivity

  • Indian banks start at a materially higher cost-to-assets ratio of 2.2% versus 1.4% globally.
  • Regaining pre-covid RoE levels and negating higher risk costs and margin compression will, however, require that Indian banks improve productivity by over 30%.
  • The Indian banking sector lagged in efficiency improvements; other industrial peers have leveraged a combination of digital adoption and analytics, and strong governance.

Suggestions for productivity transformation

  • The productivity transformation will comprise multiple agendas.
  • To start with, there will be a branch format and network re-configuration for custormers who has shifted to online mode.
  • To drive a permanent digital shift, banks will need to accelerate digital engagement via contact centre transformations.
  • In conjunction, there will be the equally important need to create minimum viable support functions (zero-based operations, demand management across human resources, finance, marketing).
  • And, finally, there will be the need to re-skill the workforce for digital operations.

2) Pre-emptive risk management

  • The second imperative is pre-emptive risk management.
  • Banks must rapidly rewire their policies and analytical models such that they reflect fast- moving indicators of risk.
  • This means investing in self-serve channels, digital nudges and frictionless journeys across payments, settlements and recoveries.
  • The overall collections strategy will have to be underpinned by micro-segmentation, and also leverage analytical models to drive efficiency.

3) Technology imperative

  • The third is the technology imperative that must scale with demand and analytical complexity.
  • Banks are required to handle high digital traffic and process enormous data sets, and regulators getting increasingly sensitive on downtimes.
  • This will requires modernizing core banking platforms, creating the data architecture that supports the analytics life-cycle, instituting modern engineering practices and moving towards automated infrastructure.

4) Capital management

  • Banks with exposure to hard-hit sectors will face more of a challenge.
  • And existing risk models are unlikely to be tuned to the differentiated impact the pandemic has had on various sectors.
  • Risk teams will need to review critical models and add overlays to account for different credit risk in each sector.
  • Scenario planning, stress testing and balance sheet optimization will need to become core to planning and management decisions.


In its own way, the pandemic has given banks a glimpse into the art of the possible. Banks should take this opportunity to embed their newfound speed and agility, reinvent their business model, and collaborate with the communities they serve to recast their contract with society.

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