By Dr B K Mukhopadhyay
Risk taking is an inherent function of banking – Allan Greenspan
One thing is often dodged even at the senior level – is it that the banking is changing? It is ture of operations that is changing not banking. Section 5(b) defines banking 'Accepting for the purpose of lending or investment of deposits or money repayable on demand or otherwise and withdrawals 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 banks' operations have become complex and large, calling for better strategic magement.
Fast Changing Banking Business Scerio
So, the time is ripe for warming up. BASEL III norms are being complied and the same is slated to go for better risk magement – the main requirement in this fast changing banking scerio. Needless to say, adequate compliance is not going to be an easy affair.
Basel III is intended to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. It is well known a fact by now that it refers to a global, voluntary regulatory framework on bank capital adequacy, stress testing, and market liquidity risk. It was agreed upon by the members of the Basel Committee on Banking Supervision in 2010–11, and was scheduled to be introduced from 2013 until 2015; however, changes from 1 April 2013 extended implementation until 31 March 2018 and again extended to 31 March 2019. The third installment of the Basel Accords (see Basel I, Basel II) was developed in response to the deficiencies in fincial regulation revealed by the fincial crisis of 2007–08. The Basel III standard very correctly aims to strengthen the requirements from the Basel II standard on bank's minimum capital ratios. In addition, it introduces requirements on liquid asset holdings and funding stability, thereby seeking to mitigate the risk of a run on the bank.
It is really satisfying that the asset-liability [ALM] magement have been gaining ground at every level - ALM being an integrated risk magement approach for maging liquidity risk, interest rate risk. 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.
Especially for the small banks [in public sector too] the need is there to better operatiol performances. One of such vital areas has been comparatively high cost-income ratio. The cost-income ratios of some of the small banks are still unfavourable [quite high] compared to the biggies and thus these small banks must improve upon by increasing the business rapidly.
As profitability is one of the prime business evaluation indexes, simultaneously with other vital indicators like: strength and soundness, credit quality, growth and efficiency, betterment of cost-income ratio – one of the top sub-criterion in the are of profitability - occupies the central place. Efforts must be on to move towards that direction so that within a reasoble time the ratio becomes nearer to the peer group level.
The betterment, in turn, is hinging upon two vital wings – minimization of cost [interest plus operating] and maximization of income [interest plus non-interest]. The first area has been on the rise due to exterl factors as well as interl factors, while the second area reflects better picture emerged from the segments.
Filly, what is written on the wall? The banking sector is set to consolidate globally with only five or six lenders emerging as major players [viz. HSBC, Deutsche Bank, Lloyds' Bank, etc]. As per the Deutsche Bank recent assessment, for example, one European bank will remain among the global majors after the consolidation process and that must be Deutsche Bank [in terms of market value, it ranks 24th among the global fincial institutions].There are reasons to keep faith on such assessments - the anticipation of consolidation of large banks around the world in the coming years and only five or six banks will emerge at the end as major global players.
So, ultimately the challenge before all is maging the change, mage the risk with speed and stability.
Business processes must become more mature and the Institution must be able to deliver higher performance-spatially, temporally, hierarchically and functiolly. Obviously, to achieve the same the starting point is designing [the comprehensiveness of the specifications as to how the process is to executed]; followed by the performers [people executing the process based on skill and knowledge]; owner [persons shouldering the responsibility for the process as well as the results]; infrastructure [information/MIS that support the process]; and of course the metrics [the measures the company uses to track the process's performance].
In Lieu Of Conclusion
Boosting of service quality, keeping in view the very ture of effective demand, is the crying need. The challenge is not only to acquire the customer, but also to retain him in the business for furthering the process of improved customer value. And of course the formula for trade off comes into play in such a vital context. Quality is nothing but a summation of cost and time. Changing any one of these variables would lead to change the outcome. If the amount of time is shortened to complete the assignment, either the cost is to be increased or quality is to be lowered. Quality refers to identifying the quality standards relevant to the assignment and determining how to measure and satisfy them.
The challenge, therefore, remains threefold: acquiring the right technology, deploying it optimally and remaining cost-effective whilst delivering sustaible returns to shareholders. Thus, maging technology so as to reap the maximum benefits remains a key challenge for the Indian banks.
As has rightly been diagnosed - an institution can optimize performance by ensuring that each of the three sides of the performance triangle - corporate culture, the task the individual must perform and the motivation / behavioral make up of their employees – undergoes cautious treading. It is a pure case of change magement and as such banks need to focus on appropriate capacity building measures to equip their employees to handle advanced risk magement systems. And it will not be out of the place to mention here that the supervisors as well need to equally equip themselves with appropriate skills to have effective supervision in adopting those systems.
Undoubtedly, today, the main function of any bank would continue to be risk magement. Banks have to adopt appropriate risk magement approach to maximize shareholder value / net value and to conform to the Central Bank's guidelines. Again, the adoption of ALM and diversification of activities to earn fee income resulted in the assumption of risks which had to be hedged by derivatives. Since major banks are foreign exchange dealers, exchange risk and interest risk have to be covered. Again, derivatives themselves carry a lot of risk which has become a major concern of regulators.
Dr Mukhopadhyay, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be located at email@example.com