The Hindu Business Line : Risk management can be a competitive weapon in financial services

Consolidation in the Indian banking industry has largely involved takeover of a weak or failed bank by a public sector bank. There are limited instances of market-driven mergers

Mr Ashwani Puri, Executive Director, PricewaterhouseCoopers.

Good credit management in financial services is all about data and covers the entire value chain of credit origination, credit decision and credit management, says Mr Ashwani Puri, executive director, Pr icewaterhouseCoopers.

“The Basel II guidelines also require the use of internal rating models and credit risk models, which again are dependent on historical and portfolio data,” he adds, during a recent e-mail interaction with Business Line.

“Initiatives like CIBIL (Credit Information Bureau India Ltd), use of credit scoring models and reduced reliance on judgment would go a long way towards improving the credit origination qualities.”

Excerpts from the interview:

Is the Indian banking system prepared enough to meet risk management and the Basel II norms?

Banks are increasingly using technology platforms to adopt risk management practices. They are creating the capacity to build on volumes, especially for the retail and the SME (small and medium enterprises) sectors, and also monitoring various elements of risk through the system.

Basel II might have been the more intense trigger to adopt better risk management practices. More importantly, banks too are beginning to realise that risk management can by itself be a competitive weapon.

Basel II guidelines are evolutionary and thus banks are in different stages on the continuum of risk management practices. Ultimately, the internal performance management practices must also reflect risk-determined return on capital.

How is the financial services sector gearing up to meet the challenges from untapped sectors such as the SMEs?

Given increasing disintermediation in the large corporate segment, SME is the emerging focus of Indian banking. To help, the RBI has put institutional mechanisms in place, i.e., guidelines to banks to step up credit to the SME sector, institutionalisation of SME-dedicated CDR (corporate debt restructuring) platform, and setting up of SMIRA, an SME dedicated rating agency.

Also, together with increasing use of technology platform to manage risks, banks are strengthening their distribution channels to expand their reach and take up the role of trusted advisor.

Has the Indian financial services industry been able to leverage the use of technology to the fullest?

Almost all the public sector banks use CBS (core banking solution), with centralised databases; and they are creating the base for CRM (customer relationship management) and BI (business intelligence) tools. However, it is felt that from a usage perspective, only 50-60 per cent of CBS possibilities are being leveraged.

Core banking solutions have many modules, including financial, retail banking and core banking. However, banks are using the solutions primarily for transaction settlement and as accounting packages. Data on transactions, etc., being captured can be a rich source for building CRM architecture, credit modelling and card products.

Another problem is that with multiple packages for functions such as treasury, trade finance and retail loans being adopted and then integrated into the CBS, it is often a challenge to get a one-customer view.

What have been the recent trends in the financial services sector? How is India poised to meet the challenges of globalisation in the financial services industry?

The past few years have seen substantial growth together with significant improvements on the regulatory front, across various segments of the financial services sector, that is, banking and capital markets, insurance and investment management. Many new products have also been launched in the Indian markets.

However, Indian financial services players are fragmented and small when compared to international players. Further, there is a large investment requirement to set up risk management systems and other internationally acceptable practices.

Maintaining balance between business opportunity in India — tier II towns and rural areas — and business opportunities overseas is also a key challenge.

What are the specific hurdles faced by the financial sector in India?

Fragmentation and small size across various financial services sectors.

Availability of skilled manpower.

Access to cost effective capital, especially in public sector banks.

Absence of integration and regulation; inconsistency across the various financial services sectors.

On the developments in pensions and insurance to increase finance for long-term investments, including infrastructure.

There is an increasing recognition that pension/insurance companies can fund long-term requirements, including infrastructure projects.

The private sector is active in the Indian insurance sector; new pension scheme envisages involvement of professional fund managers and investment of employees’ funds into equity-related instruments, at employees’ option.

The Government has set up a dedicated vehicle (India Infrastructure Finance Company Ltd) for financing of infrastructure projects. These developments are expected to facilitate long-term funding.

How is the financial community addressing the ‘information’ problem?

Given the increasing competition, margin pressure and greater disintermediation trend at the corporate level, banks have started looking at lending to small and individual businessmen, that is, borrowers with limited documentation. Reliance on alternative documentation and intensive transaction monitoring are the two main tools being used by banks these days.

It would be relevant to distinguish these borrowers from sub-prime borrowers (in the developed countries), who are those with default track record or with limited ability to repay. In India, banks are willing to lend to borrowers who do not have the required documentation, but at the same time, these borrowers have small business operations that can support their borrowings.

Is the Indian financial sector insulated against events like the US real estate lending crisis?

Largely yes, as Indian financial services players have limited investments in international capital markets. Over the years, Indian financial markets have become more integrated with the global financial markets and many international players have significant investments in Indian markets. A financial crisis in their international operations has potential, therefore, to affect liquidity in India.

Are Indian consumers getting enough protection against the frauds?

This is an area where enough is never adequate. Combined with systemic triggers for any “unusual transaction” patterns especially under AML (anti money laundering) initiatives, the consumer should also be made aware continuously of best practices regarding usage of technology and banking channels.

Banks are getting ready for operational risk management now, having reached some degree of maturity in credit risk management and a high degree of maturity in market risk management.

Frauds and other examples of operational risks need to be looked at as part of the BIS (Bank of International Settlements) framework for identifying and managing operational risks — ‘people (corporate culture), process (best practices), and technology’ — and not seen in isolation.

How is consolidation shaping up in the banking industry? Also, has the private sector performed better than the public sector, in banking?

Consolidation in the Indian banking industry has largely involved takeover of a weak or failed bank by a public sector bank (PSB). There are limited instances of market-driven mergers, such as that of Lord Krishna Bank and Bank of Punjab.

Given that about 75 per cent of banking sector assets is in the public sector, a strong initiative is required from the Government, the largest shareholder in PSBs.

PSBs still control the bulk of the banking sector, supported by strong technology platforms, but in comparison, the new private sector banks have captured a higher market share of retail banking and have been able to earn better profit on their assets, especially in the last couple of years.

Are our banks becoming increasingly professional?

Possibly, yes. Over the years, there has been a paradigm change in the banking sector. The banking industry is becoming a buyers industry with new-generation private sector banks giving strong competition to public sector banks (PSBs).

Meanwhile, the shareholding structure of PSBs has become diversified, opening them to regular scrutiny of the Indian capital markets and benchmarking with the private sector cousins on key operating parameters.

Growing competition, market pressures and accountability to capital markets, and proactive regulatory steps such as the Ombudsman scheme and the Right to Information (RTI) Act have driven the banks to becoming more professional.

On the manpower situation in public and private sector banks.

In the years after the dotcom bust, at the turn of the millennium, banks, especially the public sector ones, made serious efforts to reduce manpower and had the VRS (voluntary retirement scheme) rounds together with limited recruitment. In contrast, private sector banks, especially the new-generation ones, adopted a balanced approach towards technology and manpower.

Significant business growth over the past 2-3 years has stretched the manpower resource in the banking sector. Growth in retail business has led to a significant demand for people at the operational levels, and many banks are also facing crunch at senior levels, as the existing resources would be retiring in the next few years, even as there is a limited availability of staff at the middle management level.

How is the NPA scene in the Indian banking system?

High treasury profits in the early 2000s and tax benefit in the case of provisions against NPAs (non-performing assets) coupled with economic turnaround in basic industries have helped the lenders’ and the Government’s efforts to contain NPAs.

While the NPAs on the consumer lending side are of concern for the banks that grew this business aggressively, the reported overall net NPAs of the banking system are at an acceptable level, within the generally accepted parameter of 2 per cent for emerging market economies.

Bio: Mr Ashwani Puri, leader for ‘advisory services’ in PricewaterhouseCoopers India, also heads the ‘crisis management practice’, which includes ‘dispute analysis and investigation services’. A fellow member of the Institute of Chartered Accounts of India and the Chartered Institute of Management Accountants, London, his association with the firm has been for about three decades.

Mr Puri has been the project leader in many forensic and fraud investigations carried out by the firm, as also in investigations pertaining to banking frauds. In the recent past, he participated in the investigations carried out on Indian subsidiaries of multinational companies, under the Foreign Corrupt Practices Act of the US. He has been the engagement partner on investigations of allegations involving the senior management of companies in question.

Mr Puri also deals with a broad range of business valuation, business/financial restructuring matters and NPL-resolution related issues. He has assisted companies in putting together their case for international arbitration, apart from assisting and representing organisations in disputes. He has been a mediator and conciliator in a family dispute and settlement matter of a large business house in India.

D. MURALI
V. R. VINOD KUMAR

http://InterviewsInsights.blogspot.com

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