By Dr B K Mukhopadhyay
It is a fact that all is not well with the Banking Sector - there has been an upsurge in non-performing assets [NPAs]. The asset quality of banks has deteriorated. Public sector banks account for a disproportiote share of this increase - a matter of big concern indeed!
Time is ripe to extend serious thinking on this score on the part of part of the government as well since it has direct and indirect impact on the fincial system. With weak fincial sector no economy – developed or developing - can forge ahead.
Needless to say there cannot be easy escape route in as much as problems are not created overnight and as such cannot be solved overnight. The human resource rich Indian banking sector undoubtedly has the inherent force to look forward, which, in turn , has to be fully made use of unlike the past where this very factor was not that attended especially by some of the minnows.
Though It had been the fact that lending to low yielding short term loan and increase in non- performing- advances resulted in falling interest earning on advances, among others, yet the goings as a whole, must be given good marks in as much as a number of banking business indicators were moving north replenishing a number of other areas where a fall had been noticed. In a number of cases - cost to income ratio dropped, net interest margin had changed along with the cost of deposits, cost of funds and return on assets. The various areas where the Bank registered good growth include, among others, number of total branches shot up Business under CBS has been 100 percent, number of employees went up along with higher business per employee and that of profit per employee.
So the challenge is to bolster the health of assets and ensure high-quality ALM [assets-liabilities magement].
Forward Looking Potentialities
Not only in India but also the goings in the developing blocks’ banking sector cannot be underrated especially in this age of innovention [innovation plus invention] where the banks from the developing block are fast catching up the global biggies. In fact, technology has virtually changed the entire banking world – big or small. The way technology has been changing – one replacing the other at jet speed – it can easily be forecast that the future is going to be a different one.
Along with the status of emerging market banks, the recently experienced crisis also transformed the role of the state in banking. In Brazil, India and Russia, state-owned banks had seen a sharp improvement in their fortunes, gaining market share / still holding the large share at the expense of private banks.
According to a report by PwC, the E7 banks (7 emerging countries which include the BRIC tions, Indonesia, Turkey and Mexico) will overtake the G7 banks in assets by 2036, which is 10 years ahead of its pre-crisis prediction. ‘Emerging market banks have set new rules in the business of banking, which developed market banks are trying to adjust to, making large investments from their side unlikely in the near future’.
The reality: customer expectations are going up and positive customer-centric support is being extended in the developing zone. Reflecting the reality, global banks are returning to core competencies and at the same time simplifying new products in order to adapt to a new era of customer expectations. Banks in the developing zone are ably competing with developed market banks by winning over local customers by providing greater access to vital fincial services de facto!
Further betterment calls for fostering a number of business development activities for which systematic efforts are to be speeded up. The betterment, in turn, hinges upon two vital wings – minimization of cost [interest plus operating] and maximization of income [interest plus non-interest]. The first area is related to exterl as well as interl factors, while the second area refers to better picture from the segments.
Banks realistic strategic plans could definitely help achieve higher business growth targets. The business growth process in many respects has started moving north and this year the higher business volume could hopefully be achieved.
Range Is Not Clipped
The tural assumption at the macro and micro level was that the MSME units would be the first to be hit by an economic crisis. Though so far as the MSME sector is concerned all cannot be said to be in good shape, yet the small enterprises coped well with adversity. By all indications the MSME units fared better than large industries in the post-2008 period. Export-oriented units in the garments and machine tools sector, for example, have been able, among others, to adjust to sudden macro-economic changes by focusing on the domestic market. A recent RBI paper also notes that MSMEs recorded relatively better performance than non- MSMEs during the slowdown period in at least ten sectors. In fact, they needed a policy support at a time when the global economic crisis seemed to stay.
Specifically, a number of steps which can be actively followed on this score, among others, are:
*Boosting the overall business
*Intensive recovery drive
*Curtailment of comparatively avoidable expenses
*Customer and risk-centric approach
*Full utilization of existing infrastructure
*Boosting staff productivity / skill up gradation through intensification of the Bank’s training system
*Quality lending – emphasis on agri / SME lending - better yield on advances
*Expansion of distribution channel
*And then, not to neglect the HR factor
A number of related steps that banks can reinforce on this score at this juncture to restrict the growth of operating expenses while at the same time increasing the net interest income as well as non-interest income may be thought of:
*Increasing low cost deposits [CASA]
*Increasing quality lending in Retail, SME, Agricultural sectors
*Recovery of NPAs through rigorous follow up inclusive of recovery in Written off accounts
*Restricting avoidable expenses
*Increasing non-interest income through LC / LG business as well as para-banking activities.
It is better not forgotten that profitability is one of the prime business evaluation indexes, simultaneously ranked with other vital indicators like: strength and soundness, credit quality, growth and efficiency and betterment of cost-income ratio. The latter is rightly considered as one of the top sub-criterion in the are of profitability and thus occupies the central place.
It goes without saying that utmost importance is to be attached to the various aspects related to customers delighting since today’s customers are much more demanding compared to those even a decade back. It is really the high time to develop as well as practice a truly customer friendly relationship magement coupled with persol touch at every sphere of banking services so that ultimately customers are retained and thereafter improved customer value stages are subsequently arrived at.
One has to sharpen ones strength so that business growth becomes spontaneous (e.g. retail sector). The size of the balance sheet should be enlarged without compromising on profitability. Calculated move in the are of fund deployment is to be there while at the same time ensuring increased mobilization of deposits (CASA, NRE and FCNR, among others). Side by side it should not be forgotten that in the risky areas problems galore especially the human risk factor.
A careful drive could further enhance the prestige of India’s banking sector before the entire world. So, drive cautiously, bumps ahead!
Dr Mukhopadhyay, a noted Magement Economist and an Intertiol Commentator on Business and Economic Affairs, can be located at firstname.lastname@example.org