The future of Indian banking should look beyond mergers

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)

Dr. Boidurjo Rick Mukhopadhyay

(The author, international award-winning development and management economist, formerly a Gold Medalist in Economics at Gauhati University)

From ability to profitability - India's banking sector has been steadily attracting global attention because of its proud plumage and performance – continually striving to reach global customers and achieve standards for a global presence – an impeccable achievement of having our wings spread across the globe. At the same time, the very fact remains that banking business environment today is more complex compared to even a decade back – being increasingly customer-centric and also time risk-centric – where efficiency alone or tinkering around the existing strategy skill input levels cannot give the desired level of success.

The very nature of banking business today, essentially calls for adapting to continuous fast-moving changes – that is to say effectively countering the hurdles, while at the same time ensuring profitability through marketing of the product, service range, and value addition. Especially, in today's fiercely competitive world these players have to learn from the past – as well as ongoing experiences – the art of winning over the customer and at the same time retaining the more demanding customers through optimum utilization of manpower and technology. Renovating and adaptability to the changing scenario is the arena where the players have to apply more sophisticated service-rendering skills and abilities. And hence the need is there to reinforce the team with renewed updated visions and attitude.

Adapting to changing environment

As the banking industry enters a period of profound and probably difficult change, the world's banks face a tidal wave of crisis-countering regulatory initiatives and restructuring. The ongoing situation throwing challenges to banks' risk management – putting banks, regulators and governments under pressure to change operating codes. Though compliance costs will rise, yet the new standards are invigorating some businesses. New pressures also bring new ideas and new opportunities.

Obvious enough: it is the day of pure banking and nothing else indeed in as much as the basic job of banks remains as before – banking. The definition remains the same and it is only the nature of operations that has been changing calling for managing the change in this age of fast changing banking business scenario.

In fact, the post Basel III era belongs to banks who could manage the risks effectively. Banks with proper risk management systems would not only gain competitive advantage by way of lower regulatory capital charge but also add value to the shareholders / stakeholders.

As profitability is one of the prime business evaluation indexes, simultaneously with other vital indicators like: strength and soundness, credit quality, growth and efficiency, betterment of cost-income ratio – one of the top sub-criteria in the arena of profitability - occupies the central place. Efforts must be on to move towards that direction so that within a reasonable time the ratio becomes nearer to the peer group level. The betterment, in turn, is hinging upon two vital wings – minimization of cost [interest plus operating] and maximization 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 better picture emerged from the segments.

The point is: the days are not meant for non-performers, ignorant [unwilling to learn at the same time since vanity plays its ugly role] about the contemporary banking world's fast changing nature. Crisis period calls for a careful assessment of the causes, effects as well as the future plans and as such any sort of complacency is out of question. 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.

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.

The purpose here is not to undermine the positive steps that have been taken. Especially, on the part of the regulator it is heartening to mention that continuous efforts are on, among others, in the arena of financial inclusion. But to truly financially include the poor would require creating a variety of risk/vulnerability management mechanisms and ensuring that they are consistently and simultaneously available.

It is better remembered that financial inclusion calls for a holistic approach on the part of the banks in creating awareness about financial products, education, and advice on money management, debt counseling, savings and affordable credit & as such it is imperative that banks need to redesign business strategies to incorporate specific plans to promote financial inclusion of low-income groups treating it both as a business opportunity as well as a corporate social responsibility making use of all of the available resources (viz. technology and expertise available with them as well as the MFIs/NGOs).

The days ahead should not be gloom and doom

Ultimately, it is interaction with customers that would virtually dictate vital part of a bank's business. Now more than ever, banks need to be proactive in engaging their customers using multi-distribution channels to ensure the future of their businesses. The future of retail banking is changing and the institutions have to examine how social networking tools can be beneficial for banks. Banks in developed markets also can learn from their emerging-market counterparts. Traditional retail bank has much to learn from retailers – the mission is to give consumers what they want – a better customer experience.

In fact, for many of the economies especially in the developing block corporate governance is at best at the mediocre level. It is high time Banks boards understood the risks their institutions are taking. A lack of professional experience in complex risk management issues misled boards into an over-reliance on regulatory compliance and risk metrics that failed to spot unprecedented increase in leverage in the years leading up to the crisis.

So, time has come for the bank to win back trust by returning to the basics of banking. This means focusing on retail clients, small and medium-sized enterprises and other corporate customers, helping them with payments, deposits and loans, and supporting the flow of credit to the economy. One of the reasons for banks' existence is to take in money from different sources and maturities, transforming deposits into prudent loans. The value of excess liquidity and long-term funding is better understood. Goldman Sachs' strategy emphasized long-term liabilities and short-term assets. Even so, Goldman responded quickly and decisively early to the crisis, reducing reliance on short-term funding and selling less-liquid assets.

In the light of some of the recent experiences an increased focus is required on the quality and amount of capital, counter-cyclical capital buffers, leverage ratios, liquidity-coverage ratios and the net stable funding ratio – the fast-changing scenario is to be adapted. Reduce systemic risk, regulatory over-enthusiasm – to be done carefully to make sure risks are not simply passed from one institution to another. Banks should get a clearer idea of the extent to which they will have to re-engineer and restructure their businesses.

Again, any sort of merger-amalgamation process must be goal oriented. It remains also a fact that privatization alone cannot solve the banking sector's problems. If the public sector banks go on showing a growth trend why not to encourage them.

A well-developed banking system, ably supported by other development agencies undoubtedly paves the way of fostering the growth engine providing a firm and durable foundation for the overall development of such economies in as much as in this age of globalization banks are considered not merely as dealers in money but also the leaders in development - not only the store houses of the country's wealth but also the reservoirs of resources necessary for development. It has rightly been observed that the very industrial revolution in Europe in the 19th century would not have been possible without a sound system of commercial banking. Over time the maturity level and the effective demand have grown simultaneously.