Banking sector: Challenging times ahead

By Dr B K Mukhopadhyay

Risk taking is an inherent function of banking – Allan Greenspan

Mauro Guillen, Wharton Professor of Intertiol Magement and Rajan Kohli, head of the banking & fincial services business at Wipro Technologies critically observes: banks across the world are facing multiple pressures on their profitability with tighter regulatory requirements, changing customer preferences and increased competition. However, technology can help them overcome those pressures. Digital tools allow banks to offer new services, grow in underserved markets, achieve omni-channel presence, automate processes to lower costs, be more transparent to customers and regulators, lower risk and combat fraud.

Reflecting the Reality

It is ture of operations that is changing [not banking as is sometimes said]. Section 5(b) defines banking ‘Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise’.

In many economies Banks are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits and advances. Side by side: intense competition for business involving both the assets and liabilities together with increasing volatility in the interest rates has brought pressure on the magement  of banks to maintain a good balance among spreads. Banks are exposed more to credit and market risks in view of the asset-liability transformation and with liberalisation of banks’ operations have become complex and large, calling for better strategic magement.

Following the observations of B Ghosh, the then MD Of Indusind Bank, we can summarize the current goings - aggressive entry strategies of foreign banks to retail / SME segment; customer retention initiatives by PSU Banks ; aggressive price-war on especially retail Credit ;rapid penetration of  persol computers, mobile phones; on-line trading and purchase options’ encouraged increased usage of technology banking ; better economic scerio and continuous rise in per capita income further pushing the living standards of people; customers’ preference to more and more alterte channels for convenience; shrinking fee based income from remittance due to RTGS and other technology initiatives ; higher short term interest and flatter yield curves phenomel rise in nuclear and dual income families  & enhanced spending power; increasing literacy levels; higher adaptability to technology banking; growing consumerism; fiscal incentives to housing loans.

And turally the customer-centric and risk-centric challenges are ever growing, where speed and stability are the talk of the town.

It is really satisfying that banks are more serious now regarding combating money-laundering, reinforcing KYC, devising ways and means to bolster customers’ confidence-level and leaning heavily on risk magement devices [viz. ALM being an integrated risk magement approach for maging liquidity risk, interest rate risk].

Bringing every part of the society into the organized banking fold is the real challenge. SHG- bank linkage process is just a good beginning, which, in turn, is to be continued in such a manner that it really becomes a revolution ensuring assets generation on a continuous and spontaneous basis. There is no doubt that the SHG concept has been working well not only in India but also in even tiny States like Mali.  In our country it has already covered huge households. Side by side the need is there to upgrade these groups. Rural bank branches should evolve a system that not only provide credit but also allow farmers to earn better. A credit-plus mechanism could help them repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate among the poor.

Green Climate fincing: The heat is on

Banks have been responding to the newer chapter. Major steps that are being by leading banks [like Yes Bank] taken may be noted here:

1. Innovation is the differentiator: innovating credit mechanisms – Green Bonds, Credit Enhancement and Blended Fince. Increased focus on emerging sectors like water, energy, efficiency, smart Cities, sustaible MSMEs, e-Mobility, could yield better results.

2. Bolstering Lending Practices: via revising cost of Capital – integrating environmental and social risks integrated with credit risk coupled with creating level playing field to ascertain cost of capital

3. Transparency and Disclosure: non-fincial disclosures are to be mandatory which, in turn, could better ratings and recognitions such as DJSI.  FTSE4 Good and CDP could attract green investors along with climate change impact reporting to make markets more efficient

4. Stress-Test Portfolios: climate stress tests in fincial services to mitigate risk of increasing credit and insurance due to tural disasters as well as refreshing regulatory guidelines to cover wider risks associated with climate change

5. Setting up Green Credit Mechanisms: banks to mobilize green fince to accelerate private investments for SDGs

6. Standardization: green fincing have to encompass all important elements such as assets and mechanisms plus tiol Policy for Green Fince benchmarked with global practices

Tackling NPA: The big headache

Banks’ assets quality has been terrible - bad loans or NPAs in the public sector banks are a cause for concern for all stakeholders. As of now banks have to provide huge amount in terms of provisioning. The asset quality of banks has deteriorated at a frightening pace with public sector banks bearing the maximum brunt of bad loans, a Reserve Bank of India panel report opined in the recent past.  Lion’s share of total bank provisions were held by public sector banks, demonstrating the high level of stress visible in these banks. This has taken its toll on profitability for public sector banks.

Very rightly stern warning to willful defaulters has been declared - it has been rightly reflected that banks may go in for change in magement of the defaulting party if it fails to clear dues – “there will be tough action against willful defaulters, which can include even the change of magement because so much money is stuck. So we want to recover that. If origil borrower does not come up with some option of repayment, then we will call some other person, if he is able to provide that then assets could be handed over to the other person.”

Challenges from many fronts loom large

Then what about raising of capital?Public sector banks have to explore more the possibility of setting up holding company and Special Purpose Vehicle (SPV) to raise funds for expansion as the government may not be able to provide more and more additiol capital support.  Various options like ESOPs, SPV model and holding company model may be tested on this score by which banks could raise funds from the market to meet their capital requirement. It is important to note on this score that State Bank of India announced plans to set up a holding company in as much as setting up a holding company is one of the possibilities (for raising capital) for exploring options for raising funds.

Needless to say that the only certainty about the future is that it will be uncertain and change will occur at an increasing rate. It will also be more complex. So, bank has to develop a strategy before developing a Web presence as well as to develop a strategy by focusing on technology, branding, marketing, and service.

Filly, banking businesses need to harness the talent of all of the employees to succeed. How do we address the leaky pipeline of talented employees leaving before they can reach the top? How do we change the governce and leadership of banking business so as to unleash the power of diversity!!

Dr Mukhopadhyay, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be located at m.bibhas@gmail.com