The Hindu Business Line : The changing face of Indian banking

Bank CEOs are well aware that `clicks' cannot replace bricks completely. Even in the age of computerisation and core banking solutions, there is need for bankers to know their customers and be sensitive to their needs. The bankers are, therefore, committed to higher professionalism of their staff to cater to the diverse demands placed on banks by the emerging clientele. While KYC norms are desirable, they do impose a burden on customers from the lower-income groups.

WITH INCREASING computerisation, banks need to know the customer — K. K. Mustafah.

The age of customer-friendly banking is gone even though the Reserve Bank of India (RBI) preaches Know Your Customer. If you want to know your bank balance in a new-fangled private sector bank, you are better off if you have a phone identification number, which usually runs into seven digits. Instead of a hello from the banker, you get a ring tone, which says press nine for English, dial your phone identification number and your account number. No passbooks; only computerised sheets. All this in the name of core banking solutions! Where are we heading in these days of faceless computers and bored managers?

KYC norms

I have been looking for answers from all and sundry. Fortunately, the latest issue of Bank Quest dated April-June 2006, a publication of the Indian Institute of Banking and Finance, has published a report on the views expressed by CEOs of various public sector banks, indicating the direction the PSBs are likely to take in the coming decade. The discussion covers various critical issues, including the applicability of Know Your Customer (KYC) norms, the problems imposed by the demands for financial inclusion, the needs of higher professionalism and, above all, the Basel-II norms. The CEOs are fully aware that "clicks" cannot replace bricks completely. Even in the age of computerisation and core banking solutions, there is need for bankers to know their customers and be sensitive to their needs. The bankers are, therefore, committed to higher professionalism of their staff to cater to the diverse demands placed on banks by the emerging clientele. A question that has been posed is whether there is need for `certification' of bank professionals. The answer seems to be that separate certification of bank professionals may not be necessary. The current state of professional education, where banking is not taught, leaves a lot to be desired.

The Institute of Banking and Finance does a good job of providing for courses and tests. Generally, bankers are left very much on their own and have to learn on the job. There is a need to provide for courses to fill this gap. Bankers can easily fund such an institution, which can play a role in training future bank professionals. Whether there is need for separate certification, apart from the provision of CAIIB must be decided upon by the banking community. In these days when banks are going global, there may be justification for creating an institution of specialisation, which can train experts, both locally and globally.

Sharing credit information

The report of the CEOs' interaction also touches upon another important subject — whether bankers should start rating their clients and share information with fellow-bankers. The consensus seems to be that there is need for sharing credit information, especially through the special institution for such purpose — the Credit Information Bureau. It would be against national interest to refrain from doing so on the alleged ground that information is proprietary in nature. So far as creating a rating service is concerned, it becomes important in the context of the new Basel-II norms, where there is need for rating of credit risks.

Some banks have conflict of interests as they are equity holders in existing established rating agencies. There is a need to strengthen these agencies. I do not feel there is scope for establishing more rating agencies, as it is already a crowded field and competition beyond a limit could kill some existing incumbents.

There has been an interesting exchange of views on the concept of KYC and financial inclusion. The interaction among the bank CEOs recognises that the KYC norms are a necessary evil; even an anti-money laundering imperative. At the same time, it imposes a severe burden on the potential customers belonging to the lower-income groups, who may not be able to provide the necessary documentary proofs. There have been recent amendments to the KYC norms, to suit the disadvantaged sections. There is also the new concept of the no-frills account, which dispenses with such requirements for those who operate below specified limits.

Also, the KYC norms require continuous updating based on actual experience. It is difficult for banks to provide the software of sufficient sophistication to interpret the norms in such a large population as ours. Selective application of KYC norms to persons holding sufficiently large and active accounts may enable the reduction of KYC's burden on the already stressed bank staff.

Raising funds

The bank CEOs were optimistic on the prospects of raising additional funds to meet the capital adequacy requirements. Some though raising perpetual loans to be the easier option. Whether the RBI is willing to accommodate bankers' request for accessing perpetuity loans as a means of raising capital is not clear. The central bank seems to have reservations in this regard, but not in all cases.

Loans raised in perpetuity have a limited clientele. There may not be sufficient potential appetite for them. This, however, is on the assumption that fresh IPOs of banks do not go ahead at the speed mandated by banks' need for additional capital. The answer is to increase the profitability of banks.

In this context, there is a reference on the question of increasing fees income for banks. There is no consensus on the question of ideal fees to total income as an objective.

The CEOs also discussed the prospects of mergers and acquisitions among PSBs. The M&As are not to be determined merely by the value proposition. There is also a question of synergy between the merging entities.

While policy-makers have pleaded for mergers on the ground that, globally, banks are of much larger size than ours, it emerges from the discussion that mergers among PSBs are not easy. They are mostly similar in HR problems and customer distribution. Above all, there are also troublesome potential personnel problems which, in our litigious environment, can take time to resolve. There is also an interesting discussion on outsourcing of bank work. While outsourcing can be more cost-effective and -efficient, it can be less customer-friendly.

There are also issues of KYC and the customer confidentiality. In this age when India has benefited from the outsourcing by foreign banks, it seems rather ironic that our own banks should be constrained in resorting to outsourcing themselves. If it yields value-addition, it shall be encouraged. Outsourcing should not be opposed for the sake of opposition. The discussion among CEOs is unique, in the sense that it is transparent and brought out a `worm's' eye view of the problem.

The Institute of Banking and Finance has brought into the open the views of CEOs, which do matter. Hopefully, the policy-makers `include' these views in their consideration of banking policy issues, especially the KYC norms.