India’s Banking Sector Marches Ahead

Dr BK Mukhopadhyay

Good Going?

At the very outset let us have a close look at what the latest Economic Survey and the budget reflect. Accordingly, the performance of banking sector has improved as bad loans declined and credit growth accelerated in the last fiscal but financial flows are constrained due to fall in money raised from capital markets and stress in the non-banking financial sector.

The sector witnessed improvement during 2018-19 and the gross NPA ratio decreased from 11.5 per cent to 10.1 per cent between March 2018 and December 2018. The monetary policy witnessed a U-turn over the last year. The benchmark policy rate was first hiked by 50 basis points (bps) and later reduced by 75 bps due to weaker than anticipated inflation, growth slowdown and softer international monetary conditions, However, financial flows to the economy remained constrained because of decline in the amount of equity finance raised from capital markets and stress on Non-Banking Financial Companies (NBFC) sector, as rightly viewed.

It has also been rightly opined in the economic survey on issue of liquidity that the situation on average moved in the deficit zone in the last two quarters of 2018-19 as well as in first quarter of 2019-20.

So, in the overall sense the picture is not a gloomy one, rather reasons are there to hope further satisfactory performance during the ongoing fiscal year. But given the strong emphasis on rural development it will be seen to what extent this banking sector can contribute better via rural lending /financial inclusion /SME /skill bolstering and of course better risk management leading to contraction of regional imbalance which in India has been a strong reality over the years!

Rural Front : Time to Shoulder more Responsibilities

So far as the rural front is concerned still there remains a wide gap between the expectations and the results so far achieved. Bringing every part of the society into the organized banking fold is the real challenge. SHG-bank linkage process is just a good beginning, which, in turn, is to be continued in such a manner that it really becomes a revolution ensuring assets generation on a continuous and spontaneous basis. There is no doubt that the SHG concept has been working well not only in India but also in even tiny States like Mali. In our country it has already covered huge households. Side by side the need is there to upgrade these groups. SHGs need to graduate themselves from providing consumption/agricultural credit to micro enterprises-level economic activities in order to generate a higher income level - upgrading from papads and pickles to higher level of economic activities – as rightly observed by the noted economist Dr. C. Rangarajan. Rural bank branches should evolve a system that not only provide credit but also allow farmers to earn better. A credit-plus mechanism could help them repay the loans easily. No one can dwell better than banks on inclusive growth and as such the crucial need is there to percolate among the poor.

Clearly speaking inclusive growth is the current compulsion of a sound public policy. It is true that there has been a convergence in the business interest of the banking community in financial inclusion. As things stand today, India’s banking sector is on the verge of becoming complaint with Basel III standards and the financial sector reforms are on. Though there has been weaknesses – undercapitalized commercial banks, problem-ridden [but potential] cooperative banks - yet the very aspect of financial inclusion has been running well in tune with the financial sector reforms now underway. Financial inclusion is to be treated as a business investment. Banks are to move to the masses as a natural process of financial inclusion. It is a fact that to ensure stability on the liabilities side of business, banks are to focus on expanding retail deposits base. This obviously includes taking deposits from rural and semi-urban regions of the country.

But putting the entire responsibility on the banks is not going to bring in sunny days in the absence of coordinated drive. Banking sector is just one of the wheels in a n economy and other wheels have to move simultaneously if development is sincerely targeted.

Urban or Rural : Risk Is Where the Business Is

Undoubtedly, today, the main function of any bank would continue to be risk management. Banks have to adapt to more 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.

It Is Business after All

Business processes must become more mature and the Institution must be able to deliver higher performance spatially, temporally, hierarchically and functionally. 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].

Finally, 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 financial 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 managing the change, manage the risk with speed and stability. Can we bring in an effective customer-oriented environment?