Defects of Indian Banking System| Essentials of a Sound Banking System

State the main defects of Indian banking system. What are the essentials of a sound banking system?

Contents

Defects of Indian Banking System

Following are the defects of Indian banking system:

1. Insufficient Banking Facilities: Although commercial banks have spread over in every corner of the country. However they are very less in considering the public. For states having more population, it is essential that branches of banks should be opened. Banks should be spread over in the rural areas.

2. Inadequate Mobility of Resources: In our banking system there is four inadequate mobility of resources. It requires more efforts to increase mobility of resources.

3. Insufficient Banking Activities: Banking activities are not sufficient in relation to rural areas, weaker sections etc.

4. Low Efficiency: Low efficiency is also a defect of Indian banking system. The main cause of it is lack of discipline and accountability of employees.

5. Trend of Low Profit: Profit earning ratio of banks is decreasing day by day due to following:

Rapid branch expansion,
Continuous stress on social goals,
Increase in legal liquidity ratio and cash collection ratio,
Increase in industrial sickness,
Increase in financial inefficiency.

6. Inferior Customer Service : Commercial banks provide inferior customer services. They do not pay sufficient and genuine attention on customer services.

Following are the causes of inferior customer service:

Lack of discipline,
Carelessness in the selection and training of staff,
Inbalanced size of banks,
More customers etc.

Essentials of a Sound Banking System

Following are the essentials of a sound banking system:

1. Stability: Stability is essential for a sound banking system. If banking system is instable public will not believe on it. For the stability of banking system it is essential that debts and investments should be invested properly and liquidity should be maintained.

2. Liquidity: Liquidity means satisfaction of demand of customers. Banks should keep cash with him in certain and sufficient amount. If bank want to invest money, it should invest in such assets which can be converted into cash easily.

3. Profitability: Profit is also essential for a sound banking system. Commercial banks also have to earn return for their shareholders so that banks can pay return to shareholders.

4. Element of Flexibility: A sound banking system should be flexible i.e. deposit system and credit system should be made so flexible to fulfil psychological and practical requirements of customers.

5. Element of Decentralisation : Decentralisation is essential for a sound banking system. Branches should be spread over each corner of the country.

6. Balance between Central Bank and Commercial Bank : It is also essential for a sound banking system that there should be coordination between central and bank and commercial banks.

7. Other Essentials: These are as under :