Dr B K Mukhopadhyay
(The author is a Professor of Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)
The world of finance is in dispensible, but what is written on the wall is invisible, not that difficult to read, and difficult to face!! But the reality must be faced; at best, one can postpone the same!!
In this age of innovention—innovation plus invention—a fast-changing techno-savvy world—the buzzword is there—to strengthen the marketing team and at the same time the very effectiveness so that the market share is broadened over time 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, it is required to be given appropriate weight inasmuch as retaining customers 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.
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 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 to ensure that the bank holds adequate capital and reserves to make sure that its solvency and stability are not threatened.
Here comes Basel III, the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Securities) 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.)
Basel 3 measures aim to: improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source; improve risk management and governance; and, at the same time, target strengthening banks’ transparency and disclosures. The Basel III guidelines are aimed at improving the ability of banks to withstand periods of economic and financial stress, inasmuch as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector. Basel 3 is only a continuation of the effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. According to the Basel Committee on Banking Supervision, “Basel III is a comprehensive set of reform measures developed by the Basel Committee on Banking Supervision to strengthen the regulation, supervision, and risk management of the banking sector.”.
Obviously, banks have learned a good lesson from the recent recessionary experience. As the incidence leaned heavily on the failure of the internal risk management system, the banks have become much more cautious compared to previous days. It is also a fact that risk management practices have been there prior to such incidences. But as of now, they look more seriously before the leap. 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 in response to changing market situations, and risk management practices being widely understood.
The banks are more cautious about customer dealings. Though as a whole, the trends are encouraging, yet regarding the management of assets and liabilities, a lot of things are to be done—the assessments made more specifically, especially keeping in view the newer risk factors, and so also so far as talent retention strategy is concerned [some of India’s small banks are still miserably failing on this score mainly because of a lack of vision, leadership styles, and the like].
In fact, recent evidence suggests 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, as is the depth, capability, and efficiency of the financial system.
Clearly speaking, the crisis period taught the lesson of careful assessment of the causes, effects, and future plans, and as such, any sort of complacency is out of the question. Under the ongoing scenario, especially 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 will be intense competition, both intra- and inter-bank [players being government-owned banks, old private sector banks, new private sector banks, and foreign banks], not only at the macro-level but also at the very micro-level.
Appropriate financial sector policies call for encouraging, on the one hand, competition and providing the right incentives to 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 the adoption of a strategy for inclusion that goes 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, the crisis period taught the lesson of careful assessment of the causes, effects, and future plans, and as such, any sort of complacency is out of the question. Under the ongoing scenario, especially 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 will be intense competition, both intra- and inter-bank [players being government-owned banks, old private sector banks, new private sector banks, and foreign banks], not only at the macro-level but also at the very micro-level.
Naturally, fixation of strategies, continuous upgrading of skills, and making the best use of talent, backed by effective planning techniques that take care of the forthcoming series of happenings and things, pose the biggest challenge. Thus, the future is for them to emerge as top risk managers through optimal utilisation 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 ageing building does not suffer from unnoticed pilferage. Business boosting does not have a short-cut formula. Reality is something where one has to keep pace with changing needs, thus correcting the strategies to be followed. What is more, one particular strategy is not going to necessarily lead to 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, efforts to retain existing customers should be beefed up. It is crucial to provide bank customers with a pleasant environment, and naturally, the look must be improved in ways related to service quality. It is for enhancing customers’ experiences; the value proposition that is given is relationship – the sort of relationship management that gives them the personal attention they would not typically get from their larger competitors.
In fact, stability and resilience during financial turbulence are to be rigidly watched and practiced. Dr. Rangarajan, former Governor of the Reserve Bank of India, was very correct in saying that with a 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 cautioned against any sort of complacency. Bankruptcy proceedings need to be reformed for effective enforcement of creditor rights and to enhance the creditor’s confidence level in the matter of contract enforcement.
Naturally, fixation of strategies, continuous upgrading of skills, and making the best use of talent, backed by effective planning techniques that take care of the forthcoming series of happenings and things, pose the biggest challenge. Thus, the future is for them to emerge as top risk managers through optimal utilisation of all of the resources—physical, financial, technological, and the most important one—the human resource.
What will happen tomorrow cannot simply be said, as it is nothing but a mystery. Yesterday is history; why not learn from it? It is a good teacher. Simply following others’ paths may lead to putting one’s leg into a bottomless pit. This is business! India possesses the latent talent to withstand the storm and adapt to fast-changing reality!!