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Banking Industry - Funding the Economy

Banking Industry is an essential part of any economy. In fact, banks are the single most important supplier of credit. The banking industry has the capital and commitment to support the financial needs of individuals, businesses and all levels of government. Banks make loans to
consumers to finance purchases of homes, education, cars and major appliances. Bank credit helps small businesses get started, grow and prosper. Banks help state and local governments fund a variety of public improvements like schools, roads, water & sewer and public health
facilities. In each of these roles, banks support the creation of jobs and the growth of our economy.

Banking Industry is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among the top performers in the markets. But currently worldwide the banking industry is facing a tough time due to the failure of
financial system in the biggest economy i.e. United State of America. The problem arises due to default in sub prime mortgage lending clubbed with rising national debt, current account deficit, and fiscal policies of US. This has led to the failure of some big investment banking firm leading to file bankruptcy. Financial Institutions are the one to face the toughest challenge.

Indian Industries has witness an indirect, knock-on effect of the global financial situation and is a reflection of the uncertainty and anxiety in the global financial markets. While no country in world remained completely insulated from the global financial crisis, Indian banking industry
was better placed to cope with the adverse consequences of the financial turmoil. India is relatively better placed due to its robust policy framework, stricter prudential regulations with respect to capital and liquidity and strong growth performance. Recently we have experienced
few positive signs that indicate the recovery of the economy. Increase in primary demand clubbed with stable government has built a strong confidence in the mind of investor.

An added obstacle to the sustained improvement of the banking system is the fact that banks are mandated to provide funding to government- defined priority sectors dominated by small-scale business and agriculture. Loans to these sectors are at high risk of be-coming nonperforming. Private-sector banks must ensure that 25 per cent of their loans are directed towards these priority sectors; for state-owned banks, the figure is 40 per cent. These thresholds restrict the level of credit available to more efficient companies in non-priority sectors.

The level of bad loans has been falling in recent years as a result of the creation of asset-reconstruction companies and a rapid expansion in lending. Non-performing assets (NPA) fell to less than 1.0 per cent for the fiscal year 2008-09. In the near future, for a stint, we expect to
see an increase in Non-performing Assets.

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