Has to Walk the Extra Mile for Bettering Tomorrow’s Scenario

Dr BK Mukhopadhyay

A noted management economist and an international commentator on business and economic affairs. He may be reached at m.bibhas@gmail.com

Keeping in view the fast changing banking scenario – 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.

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 financial services.

Accordingly, “Banks perform multifarious functions. However financial intermediation and maturity transformation are by far the most significant activities performed by banks’ risk management has to ensure that the bank holds adequate capital and reserves to make sure that its solvency and stability are not threatened.

Current trends are also reflecting departure from traditional 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 management practices being widely understood.

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).

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

Whether the Policies Followed are Realistic and Implementable:

Appropriate financial sector policies call 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 financial 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. Naturally, 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 managers through optimal utilization of all of the resources – physical, financial, 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-managed, 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 naturally 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 management that gives the personal attention they would not typically get from the larger competitors.

In fact stability and resilience during financial 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 Financial 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.

Naturally, 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 managers through optimal utilization of all of the resources – physical, financial, technological and the most important one – the human resource.

Fast and Consistent will Win the Race

The challenge, therefore, remains threefold: acquiring the right technology, deploying it optimally and remaining cost-effective whilst delivering sustainable returns to shareholders. Thus, managing technology so as to reap the maximum benefits remains the key challenge for 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 / behavioural make up of their employees – undergoes cautious treading. It is a pure case of change management and as such banks need to focus on appropriate capacity building measures to equip their employees to handle advanced risk management 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 management. Banks have to adopt appropriate risk management 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.

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-institutional ] could strengthen the base.