Banking world: The future is challenging, but not gloom and doom

(The author is a Professor of
Management and Economics, formerly at IIBM (RBI) Guwahati. He can be contacted at m.bibhas@gmail.com)

In this fast-changing world of innovention (innovation and invention), the entire banking world has been witnessing such things that were hitherto not much in existence. The modern banking industry has brought greater business diversification. Banks in the developing world, like their industrialised counterparts, have also been entering into investments, underwriting of securities, portfolio management, and insurance businesses, among others. In fact, since the beginning of the 21st century, the biggest banks in the industrial world have become complex financial organisations, which, in turn, offer a wide variety of services to international markets and control billions of dollars in cash and assets.

Though it remains difficult to predict future economic trends, no global bank can afford to sit idle and simply hope to be able to react to future changes. Rather, in place of that, based on the functioning of the global banking sector yesterday and today, one can analyse the current situation and make logical deductions about how the banking landscape will shift tomorrow.

Two and two do not always make four in the business world!

Heat is on

Supported by the latest technology, banks are working to identify new business niches, develop customised services, implement innovative strategies, and capture new market opportunities. With further globalisation, consolidation, deregulation, and diversification of the financial industry, the banking sector will become even more complex.

While over the past decade there has been an increasing convergence between the activities of investment and commercial banks, because of the deregulation of the financial sector, today some investment banking [that covers an array of services from asset securitization, coverage of mergers, acquisitions and corporate restructuring to securities underwriting, equity private placements and placements of debt securities with institutional investors] and commercial banking institutions [banking that covers services such as cash management (money transfers, payroll services, bank reconcilement), credit services (asset-based financing, lines of credits, commercial loans or commercial real estate loans), deposit services (checking or savings account services) and foreign exchange] compete directly in money market operations, private placements, project finance, bonds underwriting and financial advisory work.

Taken together, these changes have made banks an even more important entity in the global business community on the one hand, while on the other, the risk dimensions have leapfrogged.

Risk management turns

out to be more vital

Undoubtedly, today, the main function of any bank will continue to be risk management. Banks have to adopt an appropriate risk management approach to maximise shareholder value and 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 for regulators.

Performance continues to be the most critical factor

Especially for all of the banks [in the public sector too], there is a need for better operational performances. One of such vital areas has been the comparatively high cost-income ratio. The cost-income ratios of some of the banks are still unfavourable [quite high] compared to others; they must improve upon this by increasing the business rapidly.

Obviously, this sort of improvement, in turn, hinges on two vital wings: minimization of cost [interest plus operating] and maximisation of income [interest plus non-interest]. The first area has been on the rise due to external factors as well as internal factors, while the second area reflects a better picture emerging from the segments.

Efforts must be made to move in that direction so that, within a reasonable time, the ratio becomes closer to the peer group level.

Naturally, attention will be more on profitability, along with the prime business evaluation indexes like strength and soundness, credit quality, growth, and efficiency.

Next, 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 assessment done in the recent past, 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 in such assessments: the anticipation of the consolidation of large banks around the world in the coming years and the fact that only five or six banks will emerge at the end as major global players.

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 existing customers should receive top priority. 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 management—the sort of relationship management that gives them the personal attention they would not typically get from their larger competitors.

It is business after all.

In fact, in these days, all of the business managers remain concerned with the events that are likely to come up tomorrow: profitability, uncertainty, risks, and related matters. We remember the words of Professor C. K. Prahalad and Gary Hamel: ‘In today’s corporate world, winning in a business is not about being number one; rather, it is about who ‘gets to the future first’. They urged the companies to create their own futures, envision new markets, and reinvent themselves. It is the idea of core competency that actually boosted the BPO and allowed companies to hand over the non-core side of their business operations to others who are willing and can.

Actually, jet-speeded changes in competition, technology, and workforce values are compelling organisations to search for new and more human ways of increasing productivity and competitiveness. The biggest changes have been due to the impact of information and communication technology. The ability to access vast information resources within a matter of minutes and to communicate across huge distances at ever lower costs while improving quality and convenience is transforming the way people and companies interact.

It is becoming harder to achieve market leadership and stay on top.

Obvious enough, good business leaders understand that there are competitive and economic values that could result from talented people. The fact floats that, as organisations strive to do more with few resources, they want to ensure that people are in the right jobs, and of course they are determined, dedicated, and deliver consistently as individuals, teams, and groups.

It is those more competent institutions that emerge as the victor, while others struggle to keep their heads over water. Undoubtedly, it is strategic innovation, not calendar-driven ritual, that could remain the main source of advantage in the days to come. And it is creativity, passion, and, of course, initiatives that help keep one afloat. It is a company’s ability and willingness to make fundamental changes that help transform day-to-day functions.

So, ultimately, the challenge before all is managing the change and the risk with speed and stability. The RBI Governor recently very rightly opined that the future of banking in India would include the adoption of emerging technologies and the customization of products and services. He advised the banks to prepare themselves for facing the dynamic environment while keeping their focus on appropriate business models, sustainability, stability, and consumer centrality’.