Banking: What more reforms are in store?

By Dr B K Mukhopadhyay

The Indian Scerio

So, as per the current musings, the merger of State Bank of India (SBI) with its five associate banks and Bharatiya Mahila Bank will be fast-tracked so that the process is completed within the next nine months. On June 15, 2016, the Cabinet gave an in-principle approval to the SBI’s proposal for the merger, which would place it among the world’s top 50 banks in terms of assets. After working out the scheme of amalgamation in the next few weeks, SBI would seek the fil approval from the Cabinet as per the Section 35 of the SBI Act.

A right decision indeed. But what about the next?

It is expected that nothing should be done in haste keeping in view the contribution to the tiol economy – social and commercial – while at the same time health of the fincial system is to remain good in every sense, in as much as the performance of most of the PSU Players are not that bad, rather it is going north over the decades.

Incidentally, it may be mentioned here that the last merger of SBI (with SBI Indore) was in 2010. For the same besides the government approval, SBI would need nods of market regulator Sebi as three of its associate banks — State Bank of Mysore, State Bank of Bikaner and Jaipur and State Bank of Travancore are listed on the stock exchanges. The two unlisted associate banks are State Bank of Hyderabad and State Bank of Patiala. There could be a requirement to also seek the nod of the Competition Commission of India. However, the merger will result in a consolidated entity commanding a deposit base of over Rs 21.5 lakh crore or nearly a fifth of the banking system’s total deposit base [of Rs 97 lakh crore].

“The merger of SBI and its associate banks is a win-win for both. While the network of SBI would stand to increase, its reach would multiply. One can expect efficiency to be created from ratiolisation of branches, common treasury pooling and proper deployment of a large skilled resource base,” according to the SBI Chairman.

Are the Right Things Being Done?

The government’s ultimate aim is to reduce the number of public sector banks to less than 10 from 27 at present.

However, the Global rating agency Moody’s sounded a word of caution on consolidation among Indian banks. The banks’ weakened metrics since 2012 and weak performance mean that many have difficulties meeting minimum regulatory requirements without regular capital injections from the government. As a result, few public sector banks have the excess capital required to acquire meaningfully sized peers.

Moody’s also sees considerable challenges from potential opposition from employee unions, which could hamper merger efforts and drive up costs.

In The Global Context - What Is Written on the Wall?

The vicious circle of investment operating at low levels and a dearth of money in the worldwide economy have forced magement to put on their thinking caps and explore new avenues to raise capital or funds. The conventiol methods have not produced fruitful results and magement has to leap the walls of traditiol fincing options to innovate and attract investors to raise funds. Expansions, new projects and repayment of old debts, all plans linger on paper as magers fail to find a secure and inexpensive way to raise funds.

Obvious enough: to what extent the ongoing global situation will be affecting developing countries depends on a number of factors: level of interdependence with intertiol capital markets; level of export trade diversification and of foreign direct investment (FDI); level of liabilities in foreign currencies; level of foreign currency reserves and the trade deficit; level of inflation and the budget deficit; diversification of local economy and macroeconomic stability; and then obviously performance of local institutions.

In case any recessiory trend develops in the medium to long term different negative impacts on the different sector of the economy would be there. Of course, the real impacts will depend on a range of factors [the extent of the economic downturn globally and the resulting decrease in commodity demand and prices]. Other major determints are the impacts of the crisis on private capital flows.

Specifically, to evaluate the impact on the developing economy, four basic areas on this score come to the fore: (i) the direct impacts of the crisis on the economy’s fince and banking system; (ii) the potential impacts on private capital flows and ODA levels; (iii) the potential impacts on commodity demand and prices and (iv) the potential impacts on macroeconomic indicators, growth and the Millennium Development Goals (MDGs).

It has been an experienced fact that instability in fincial markets around the world spills over to the ‘real economy’ in poorer countries. It is vital that policymakers understand how this crisis could be avoided so that developing countries are saved from far reaching consequences. It will be necessary to bring out impacts on aid, appropriate social protection measures and implications for fincial architecture.

The set of policy responses can, therefore, be considered with regard to what is needed immediately and in the medium to long term to minimize the probable loss of welfare owing to such a possible hit. Optimal policies therefore should be perceived in terms of what is possible in the short run as a response to any recurrence to global fincial turbulence, and what should be the long-term objective in order to avert reoccurrence of recent past experiences while minimizing the impact in terms of welfare losses for the people.

Innovative Practices Hold the Key

So the best way is to look forward in a positive manner to capture new opportunities. Banks have overcome previous crises by finding innovative ways to increase the top line. Although opportunities may seem to be limited, huge scope is there to improve pricing, to adapt products to the needs of customers, and to find new pockets of growth (taking advantage of the better risk-magement processes many have introduced in the wake of the crisis). Banking remains one of the most fragmented sectors globally, and depending on the stance of tiol regulators some institutions should be able to pursue large-scale mergers and acquisitions.

Even before the industry digests the additiol capital requirements from Basel III and other surcharges as considered by global and tiol regulators, banking in developed countries would be facing a significant returns gap and turally corrective measures remain a must for them as well.

Is it then that there would be no silver lining?? Mckinsay’s assessment indicates the probable happening - emerging markets will contribute nearly half of all banking revenues around the world by 2020, compared with just one-third today, and will represent 60 percent of all revenue growth in banking over the next decade. To achieve an ROE of 12 percent by 2015, European and North American banks will have to add more than $350 billion of net profits in the intervening period—double the current level - the sum being more than the total profits of   the global pharmaceutical and automotive industries combined!  

The upshot: banks in both Europe and North America must find ways to work with less capital and to use what they have more efficiently [shifting a substantial part of their lending to the capital markets so that banks do less direct lending and help revive the corporate-bond market - in case of Europe such bonds account for only 20 percent of the credit needs of companies, as compared against 60 to 70 percent in the United States]. So, all depend on the specific region-wise situation vis-à-vis market trends, among others. It is clear there are no short cut routes available in hand and taming down the mece depends on taking up a realistic strategy indeed. In fact, banks can elimite as much as half of the cost of their branches by moving sales and service online. Some banks have shown what can be achieved through the application of lean and other techniques [like: cutting the time to process a mortgage to 60 minutes, from days]. It is clear that without radical action to shrink balance sheets, cut costs, and increase revenues, banks will be uble to attract sufficient new capital from the investment community and to play their critical role in underpinning economic recovery and growth

(The writer is a noted Magement Economist, an Intertiol Commentator on Business and Economic Trends and Principal, Eminent College of Magement and Technology, can be reached at m.bibhas@gmail.com)