The underlying theme of the Reserve Bank of India's report on ‘Trend and Progress of Banking' for 2010-11 is that domestic banks, which have acquitted themselves quite creditably in the recent past, will have to equip themselves to face an uncertain future. Increasingly, the banks and their regulator will be evaluated against global benchmarks. So far, banks in India have grown, showing remarkable resilience. Sporting adequate reserves of capital and liquidity, they have been able to improve both their profitability and asset quality. Given the high growth potential of the economy and favourable demographics, banks have immense opportunities to expand their business with traditional as well as innovative products. However, they face a number of challenges. Important among them are two: to maintain capital adequacy and to put in place risk management systems that would meet global standards. For some of the larger banks, the process of moving towards the Basel III regulatory regime has already begun. While the banking system as an entity may not have any great difficulty in adjusting to the new capital rules, there might be slippages at the level of individual banks, and they would have to augment their capital urgently. Studies by the RBI show a high level of inter-linkages among banks and this introduces an element of vulnerability. Checking the contagion will become particularly onerous for the RBI if the less regulated entities such as non-bank financial companies and mutual funds are also taken into reckoning.
Management of asset quality has always been a challenging task. It's more so now, because the apparent improvement in the levels of non-performing assets hides some disquieting trends. For instance, loan recoveries have not kept pace with slippages since 2007-08. The rising interest rates and the substantial restructuring done during the crisis period can undermine the asset quality of banks. There is an urgent need for all banks to address the NPA-related concerns and tighten their credit risk management systems. Over the past 15 years, Indian banks have raised the productive level remarkably and, in the process, moved closer to global benchmarks. Yet, they should do a lot more by way of attracting people's savings and channelling them into investment. In effect, this means banks will have to cut their ‘net interest margin', which in any case is high compared to some emerging economies. In the long term, the bank sector should work towards financial inclusion, where its products are accessible to everyone and its services run efficiently. In the medium term, banks have ample opportunities to grow, the challenges notwithstanding.
There is need of our bank to form a syndicate to focus on township. Still there is lot of scope in semi urban town, although, some nationalized banks have access to this area but lacking in good services. Insurance may also be one sector in which banks have huge opportunity if they focus on semi urban areas.
Inclusive banking where bank products are accessible to every one and the efficient running of the services of the bank, as you suggest, are the healthy remedy for invigorating the banking sector. However, things are not that rosy in this aspect. The uninitiated in the rural space are virtually taken for granted by the banking officials. Recently, a village woman was advised that the savings bank account does not provide for any interest! Banking industry is coerced to swerve from sound fiscal principles thanks to uncouth political intervention. The bankers tend to promote a consumption culture a la the Americans. Ending the tax incentives to the wealthier and creating new incentives to encourage the low and the middle income people to svae augurs well for the growth of rural banking. Such a measure is bound to help combat rural poverty. Many farmers are ending their lives these days. An efficient banking system can help these hapless people from bankruptcy and consequent suicide.
For yet another reason, today;s meeting the PM is having with the stricken private ailineds will be keenly watched by all. There will be worries whether the government, as the dominant owner asks the banks to lend further to the airlines. Some of the banks are arguing that haivng given them loans, denying them further at this stage will worsen the situation. But this is a specious logic. If the loans turn sour,a s they surely will, the banks will lose substantial amounts. This will cripple the financial sector along with the failure of private airlines. Regulator will have also to watch the situation carefully to protect the banks from giving further loans to aviation industry.
This is in reference to the article ‘The challenges in banking ‘.Financial sector reforms introduced in the early 1990s as a part of the structural reforms have touched upon almost all aspects of banking operations. The deregulation of interest rates constituted an integral part of financial sector reforms. The interest rate regime has been largely deregulated with a view to achieving better price discovery and efficient resource allocation. It is clear that we are at the beginning of this new phase in theIndian banking with competitive pressure, both domestic and external, catching up and the need for banks to continuously reassess and reposition themselves in their business plans.
Most of our public sector and private sector banks have to reach rural India. Even in our semi urban areas reasonably good and reliable banking services are not available to the poor. It is a fact that in many towns and cities, spread of banks’ branches is not so good as to reach the lower middle class and poor. My suggestion is that time has come for establishment of ‘National Bank of India Post’. If a business model which suits the needs of all classes of consumers in the rural, semi urban areas and remote areas in towns and metros is implemented and if adequate care is taken from the beginning to man such a bank with the right kind and size of staff, the bank of India Post will be a successful and socially useful business venture of the government. The new bank will also make people far less dependent on unreliable co-operative credit societies and banks, many of whom have duped the public in the past.
The third critical factor is -HRD, especially in the context of financial inclusion.Availability of skilled,trained manpower is a serious handicap,reckoning super-annuation,VRS and pension driven early departure .Skill to evaluate projects for term finance is another aspect not to speak of resource mis-match in such lending. With the opening of branches in smaller villages and financial inclusion,it will be difficult to find and post managers and staff with knowledge of local culture,farming &non-farming activities and language.The financial facilitators themselves are urban oriented.Managers and staff have their own reasons to resist rural posting- lack of "education,health and housing infrastructure". When forced,they mark physical presence but with no mind for more involved work;They are away on week-ends and frequently on leave.Technology can help only in a limited way,now or in the near furure.A new innovative recruitment and training process is to be found.
Indian banks' exposure to derivative markets is very less. Going forward with further deregulation we can expect more activity in these markets. That calls for world class credit and market risk management systems,which entails greater investment. With foreign banks too gearing up to meet Basel 3 standards coupled with crisis in Europe, we can expect lot of funds leaving India. Raising capital from markets in current scenario would not be attractive. Indian banks need to do some serious thinking.
The Hindu's excellent analysis of the pros and cons of Indian Finance and banking is a necessary step towards generating financial and banking awareness in the enlightened class of Indian society.We must be really proud and maintaining our financial system which is capable of vehemently withstanding the global economic impediments. However,the country's financial condition should be solidified and strong in all dimensions under the leadership of an economist.
Two of the main problems with Banking Sector performance evlauation are: 1. NPA is a most vulnerable area for manipulation by Banks in India for a long time and the same is the case in many other countries. Not only NPA is not properly classified but also interest is charged to NPA and profit inflated to post a rosy picture of performance. This often happens when the CEO of the Banks are about to retire or move out on other plum jobs. 2. “Net interest margin” may be higher than global average. But then globally services charges have been properly estimated and charged on user-pay basis. This aspect has been very weak with Indian Banks as they do not apply proper costing of services.Also at times to lure corporate business, many of the services are not charged or subsidised. Risk management policy also need to be implemented.
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