finance article No.

9239
Impact of Globalization on Indian Financial Services
Industry

BY

Dr.V.V.S.K.PRASAD.,M.Com.,M.B.A.,Ph.D.,

Professor and Head

E-Mail: vskprasad.vempati@gmail.com

ABSTRACT

Reforms of the financial sector constitutes the most important component of

India's programme towards economic liberalization.? The recent economic
liberalization measures have opened the door to foreign competitors to enter
into our domestic market. Deregulation in the form of elimination of exchange
controls and interest rate ceilings have made the market more competitive.?
Innovation has become a must for survival.

Many? of the providers and users of capital have changed their roles all over
the world.? Financial intermediaries have come out of their traditional approach
and they are ready to assume more credit risks.? As a consequence, many
innovations have taken place in the global financial sector which have its own
impact on the domestic sector also. The emergences of various financial
institutions and regulatory bodies have transformed the financial services sector
from being a conservative industry to a very dynamic one. In this process this
sector is facing a number of challenges.

In this changed context, the financial services industry? in India has to play a
very positive and dynamic role in the years to come by offering many innovative
products to suit the varied requirements of the millions of prospective investors
spread throughout the country.

Overview

Reforms of the financial sedctor constitutes the most important component of

India's programme towards economic liberalization.? The recent economic
liberalization measures have opened the door to foreign competitors to enter
into our domestic market. Deregulation in the form of elimination of exchange
controls and interest? rate ceilings have made the market more competitive.?
Innovation has become a must for survival.

Many? of the providers and users of capital have changed their roles all over
the world.? Financial intermediaries? have come out of their traditional approach
and they are ready to assume more credit risks.? As a consequence, many
innovations have taken place in the global financial sector. Which have its own
impact? on the domestic sector also. The emergence of various financial
institutions and regulatory? bodies have transformed? the financial services
sector from being a conservative industry to a very dynamic one. In this process
this sector is facing a number of challenges.

Growth in financial services (comprising banking, insurance, real estate and

business services), after dipping to 5.6% in 2003-04 bounced back to 8.7% in
2004-05 and 10.9% in 2005-06. The momentum has been maintained with a
growth of 11.1% in 2006-07.
 Impressive progress in information technology (IT) and IT-enabled services,
both rail and road traffic, and fast addition to existing stock of telephone
connections, particularly mobiles, played a key role in such growth.

Because of Globalization, the financial services industry is in a period of

transition. Market shifts, competition, and technological developments are
ushering in unprecedented changes in the global financial services industry.
Organizations in this highly competitive and increasingly regulated industry will
especially need to focus on making themselves more:

Adept to face increasing transaction volumes, regulation and the integration

of previously disparate global markets

Agile at identifying and managing risk

Operationally efficient

Customer – centric

Optimized in both business & technology

In this scenario, spearheading IT initiatives has become critically important.

Major spending initiative priorities tend to focus on automation to reduce costs

and lessen risk, along with using BPO to gain efficiency and allow internal IT
organizations to focus on strategic initiatives. Delivery of these capabilities at a
high efficiency level but at low costs is one of the major success factors for any
financial services business.
 OBJECTIVE:

The objective of the present paper is to? examine the status of Financial
Services Industry in India and to study the challenges before this industry due to
globalization

To enhance their competitive advantage in this changed environment,

financial services institutions are increasingly harnessing new technologies to
provide superior customer offerings and streamline internal processes. Today's
dynamic marketplace demands that financial services providers emphasize on
technologically advanced, feature-rich solutions, that can operate in real-time
and with the highest degree of precision and reliability.

Information technology is increasingly being considered as critical to the

strategic direction and the day-to-day operation of financial services firms.

Growth in financial services is being bolstered by the opportunities of

demography, emerging markets and ever more innovative products and
services. Yet, organisations also face the challenges of mounting competition,
more complex regulation and ever more exacting customer expectations.
Effective growth strategies are therefore likely to cut across all operating
processes and functional boundaries. Key priorities include ensuring that the
business model takes full account of customers' needs, tax, financial and
regulatory considerations and the organisation's capacity to change the way it
does business. In turn, the objectives and criteria for success need to be clearly
measured.

> A survey of more than 250 financial services executives carried out by
PricewaterhouseCoopers in 2006, found that respondents believe that existing
customers will be their main source of organic growth. Creating operations that
can retain and deliver profits from customers through their lifetime will demand a
significant investment in data gathering and relationship management and may
therefore require a shift in the prevailing cost-income model. This includes a re-
think of training, reward and performance management strategies including a
move from volume-based incentives to rewards geared to client satisfaction and
the profitability of the customer over the lifetime of the relationship. Success will
also require timely and insightful metrics on customers' evolving attitudes and
preferences.
 The? Financial Services & banking industry is changing at a fast pace.
These changes are throwing up fresh challenges like managing complex
technological divergence in a converging market. Banks strive to constantly offer
more to the existing customer base. To achieve this, they emphasize on more
targeted technology investments and high-quality service. To remain
competitive, financial institutions will have to renew their commitment to
investing in new technology strategically -- to reduce costs, improve efficiencies,
and boost revenue-generating initiatives.

Taking full note of these challenges, OFS puts together its banking practice to
help financial institutions improve enterprise performance, comply with
regulatory mandates, boost operational efficiency, and better serve their
customers through OFS' spectrum of solutions and services derived from proven
track record of domain expertise.

The Challenges

Among the key IT challenges facing the Financial Services industry today is:

Preserving investments in old systems while leveraging new technologies to

drive down transactions costs, expand and improve customer service

Integrating enterprise wide disparate systems to gain operational efficiencies

Substantially reducing time for deployment of new systems

Reducing IT costs and obtaining better ROIs for new investments in the
long-term

Only a carefully thought out long-term IT strategy backed by execution,

implementation and support capability can meet these challenges successfully.
 Today's financial services firms face mounting pressures on all fronts:

Credit markets are creating industry turmoil

Tightening credit guidelines that threaten revenue streams

Growing reporting and risk management obligations like Sarbanes-Oxley,

Know Your Customer and Basel II

The difficulties of sustaining growth in overly-saturated markets

Innovative products that address the needs of a diverse client base such as
retirees and young emerging and ethnic segments

Growing concerns over customer data security and identity management

Increasing competition not just from traditional competitors, but from other
organizations that expand their service offerings

The complexities that arise from mergers and acquisitions and from
expanding into the global marketplace

Whether we are trying to maintain competitive advantage, looking for ways to

position our self better for mergers or acquisitions or expanding into the global
marketplace, the challenges are as complex as they are varied. And while we
deal with these fundamental concerns, we are met with increasing demands
from investors, regulators and customers.

The Answers

How do we succeed in this environment? The first step is to ensure that we

have the infrastructure and solutions to support our business strategy. With the
right systems in place, our organization can more rapidly comply with
regulations, operational risk and security issues. We can also open up new
product offerings, reduce customer turnover and minimize fixed costs and
maximize productivity. In addition, the companies can leverage outsourcing
opportunities to reduce overhead, while still enjoying the scalability they need to
support future growth or new initiatives.

The process of globalization has paved the way for the entry of innovative and
sophisticated financial products into our country.? Since the Government is very
keen in removing all obstacles that stand in the way of inflow of foreign capital,
the potentiabilities for the introduction of innovative international financial
products in India are very great. Moreover, India is likely to enter the full
convertibility era soon.? Hence, there is every possibility of introduction of more
and more? innovative and sophisticated financial services in our country.

Realizing all these factors, the Government of India has initiated many steps
to reform the financial services industry.

The Government has already switched over to free pricing of issues from
pricing issues by the Controller of capital issues.

The interest rates have been deregulated

The private sector has been permitted to participate in banking and mutual
funds and the public sector undertakings are being privatized.

The Finance Act, 1992 has brought into effect large scale amendments in the
tax structure of long term capital gains.

The Finance Act, 1994 has given a further boost by lowering the lock – in
period from 3 years to 1 year, in order to get the entitlement as a long – term
capital asset.

The SEBI? has liberalized many stringent conditions so as to boost the

Financial Services Industry.
 In this changed context, the financial services industry? in India has to play a
very positive and dynamic role in the years to come by offering many innovative
products to suit the varied requirements of the millions of prospective investors
spread throughout the country.

*****

>

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