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Banking sector: Tomorrow will be another day, may be more stormy

Sentinel Digital DeskBy : Sentinel Digital Desk

  |  15 March 2016 12:00 AM GMT

By Dr B K Mukhopadhyay

The world of fince – indispensible but what is written on the wall –invisible – not that difficult to read – difficult to face!! But the reality must be faced; at best one can postpone the same!!

In this age of ‘innovention’ – innovation plus invention - fast changing techno-savvy world - the buzzword is there - strengthen the marketing team and at the same time the very effectiveness so that the market share is broadened overtime following a set of strategies that are customer- centric and at the same time risk-centric in approach. To achieve the same continuously changing business environment is required to be given appropriate weight age in as much as retaining the customer emerges to be the biggest challenge all over the banking world now and for that matter following a renovated strategy [ e.g. a joint- drive like inter-institutiol ] could strengthen the base.

The then RBI (Reserve Bank of India) Deputy Governor R Gandhi very rightly opined the other day that ‘most business activities and operations are driven by considerations of returns or profitability. However the search for returns exposes the businesses to risks. Also risks escalate and multiply with returns sought – banks are no different; only the element of riskiness in the banks’ business and operations is higher as they not only carry out their operations with borrowed money and with high leverage but also attempt to provide a vast range of fincial services’. Accordingly, “Banks perform multifarious functions. However fincial intermediation and maturity transformation are by far the most significant activities performed by banks’ Risk magement has to ensure that the bank holds adequate capital and reserves to make sure that its solvency and stability are not threatened.”

Here comes Basel III - the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk. (Basel I and Basel II are the earlier versions of the same, and were less stringent)

Basel 3 measures aim to: improve the banking sector’s ability to absorb shocks arising from fincial and economic stress, whatever the source; improve risk magement and governce while at the same time targets to strengthen banks’ transparency and disclosures. The Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and fincial stress in as much as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector. Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. According to Basel Committee on Banking Supervision “Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk magement of the banking sector”.

Obvious enough, banks have learnt a good lesson from the recent recessiory experience. As the incidence leaned heavily on failure of the interl risk magement system, the banks have become much more cautious compared to previous days. It is also a fact that the risk magement practices have been there previous to such incidences. But as of now they look more seriously before the leap. Current trends are also reflecting departure from traditiol practices in a number of ways – auditing is attached more importance [compliance is taken seriously than before], switching over to the base rate regime, interest rates being revised more frequently responding to changing market situations, risk magement practices being widely understood.

The banks are more cautious about customer dealings. Though as a whole the trends are encouraging, yet regarding magement of assets and liabilities a lot of things are to be done – the assessments made more specifically especially keeping in view the newer risks factors and so also so far as talent retention strategy is concerned [some of the India’s small banks still miserably failing on this score mainly because of lack of vision, leadership styles and the like].

In fact, recent evidences suggest that fince is not only pro-growth, but also pro-poor and economies with better developed fincial systems experienced faster reductions in income inequality and poverty. For ensuring fast and consistent economic and social development a well functioning fincial system is an essential pre-requisite and so also the depth, capability and efficiency of the fincial system.

Clearly speaking, crisis period taught the lesson - careful assessment of the causes, effects as well as the future plans - and as such any sort of complacency is out of question. What is more under the ongoing scerio - especially keeping in view the fast changing banking scerio – where a particular technology is being replaced rapidly by another technology - it is better to take for granted that in the near future there would be intense competition – intra and inter [players being Government owned banks, old private sector banks, new private sector banks and foreign banks] not only at the macro- level, but at the very micro-level also.

Appropriate fincial sector policies calls for encouraging on the one hand competition and provide the right incentives to the individuals and on the other extending necessary support to foster growth, poverty reduction and better distributive justice making full use of the capacities. Improving fincial access in a way that most benefits the poor calls for adoption of strategy for inclusion that travels well beyond credit for poor households and as such it is vital to broaden the focus of attention to improving access for all who remain excluded

In fact, crisis period taught the lesson - careful assessment of the causes, effects as well as the future plans - and as such any sort of complacency is out of question. What is more under the ongoing scerio - especially keeping in view the fast changing banking scerio – where a particular technology is being replaced rapidly by another technology - it is better to take for granted that in the near future there would be intense competition – intra and inter [players being Government owned banks, old private sector banks, new private sector banks and foreign banks] not only at the macro- level, but at the very micro-level also.

turally, fixation of strategies, continuous up gradation of skill and making best use of talent backed by effective planning techniques that take care of the forthcoming series of happenings / things, pose the biggest challenge. Thus the future is for them who emerge to be top risk magers through optimal utilization of all of the resources – physical, fincial, technological and the most important one – the human resource.

The need is very much there to follow a defensive marketing strategy as well so that the aging building does not suffer from unnoticed pilferage. Business boosting does not have any short cut formula. Reality is something where one has to keep pace with the changing needs and thus correcting the strategies to be followed. What is more, one particular strategy is not going to necessarily give lasting success. As the very term strategy is borrowed from military science – the process followed should adhere to the situation warranted.

Well-maged, aggressive branches are sure to attract an increasing proportion of the banking business in a particular region while at the same time boosting efforts towards retaining the existing customers should be beefed up. It is crucial to provide bank customers with a pleasant environment and turally the look must be for improving ways related to the service quality. It is for enhancing customers’ experience – the value proposition that is given is relationship – the sort of relationship magement that gives the persol attention they would not typically get from the larger competitors.

In fact stability and resilience during fincial turbulence is to be rigidly watched and practiced. Dr Rangarajan, former Governor of Reserve Bank of India, was very correct in saying that with judicious action plan India can weather the storm earlier than others. The Committee on Fincial Sector Assessment [CFSA] clearly stated that the banking system had not exhibited any significant vulnerabilities and cautions against any sort of complacency. Bankruptcy proceedings need to be reformed for effective enforcement of creditor rights and for enhancing creditor’s confidence-level in the matter of contract enforcement.

turally, fixation of strategies, continuous up gradation of skill and making best use of talent backed by effective planning techniques that take care of the forthcoming series of happenings / things, pose the biggest challenge. Thus the future is for them who emerge to be top risk magers through optimal utilization of all of the resources – physical, fincial, technological and the most important one – the human resource. What will happen tomorrow cannot simply be said as it is nothing but mystery. Yesterday is history – why not to learn from it? It is a good teacher. Simply following the others’ path may lead to putting one’s leg into a bottomless pit. This is business! India possess the latent talent – withstand the storm, adapt to fast changing reality!!

(The Writer, a noted Magement Economist, an Intertiol Commentator on Business and Economic Affairs and Director, Netaji Subhas Institute of Business Magement, Jharkhand, India, can be reached at m.bibhas@gmail.com)

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