Lessons from India's banking sector

At the very outset, let us have a close look at what the latest Economic Survey and the budget reflect about India. Accordingly, the performance of the 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 on the non-banking financial sector. The sector witnessed improvements during fiscal year 2018-19 and the gross Non-Performing Asset (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 in Non-Banking Financial Companies (NBFC) sector, as rightly viewed.

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

 Overall, the picture is not gloomy at all. Rather there are ample reasons to hope for further satisfactory performance during the ongoing fiscal year. But given the strong emphasis on rural development, it needs to 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!

TIME TO SHOULDER MORE RESPONSIBILITIES ON THE RURAL FRONT: On the rural front, there still remains a big gap between the expectations and the results so far achieved. Bringing every part of society into the organised banking fold is the real challenge. Self-Help Group (SHG)-bank linkage process is just a good beginning. This has to continue 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 India, it has already covered huge households. Side-by-side a 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 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 compliant with Basel III standards and the financial sector reforms are on. Though there has been weaknesses - undercapitalised 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 should be treated by banks 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 have 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 banks is not going to bring in sunny days in the absence of a coordinated drive. The banking sector is just one of the wheels in an economy and other wheels have to move simultaneously if development is sincerely targeted.

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 maximise shareholder value/net value and to conform to the Central Bank's guidelines. Again, the adoption of Asset Liability Management (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.

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 to design [the comprehensiveness of the specifications as to how the process is to be 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/Management Information System (MIS) that support the process]; and of course the metrics [the measures used by the company to track the process's performance].

Finally, 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's 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 in 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 change and risk with speed and stability. This can ensure an effective customer-oriented environment.

Dr B K Mukhopadhyay is a noted management economist and international commentator on ongoing business and economic trends.

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