The Hindu Business Line : The survival of the fittest

The annual bankers’ conference – BANCON (earlier known as the Bank Economists’ Conference) is one of the India’s most popular conferences for discussing key issues affecting Indian banking industry. The theme of this year’s conference is ‘Indian banking – Towards global best practices’.

In the post-WTO era of increasing globalisation, creation of globally competitive banks assumes critical significance. The conference, thereby, would aptly cover the topics such as assessing the global competitiveness of Indian banks, formulating strategies and relevant business models to build high performing banking organisations, which can deliver superior customer experience, strategies to retain and develop best human talent, management of liquidity and risks, operational effectiveness and deployment of IT solutions to maximise the value for all the stakeholders.

The unique feature of this year’s BANCON is the knowledge partnership with McKinsey & Company, which has studied in depth the core capabilities of Indian banking sector in meeting the challenges of global best practices. The McKinsey & Company would provide a “first of its kind” fact base which will form the basis of discussions and debates during the conference. The topics of the conference cited above are highly relevant today, as post-April 2009 there will be greater access and operational freedom to foreign banks operating in India.

Indian banking sector is at the threshold of exponential growth at this stage. Fifteen years of reforms have overhauled our banks in the most effective manner. There has been considerable improvement in asset quality, capital adequacy, return on assets and equity for all scheduled commercial banks, including the public sector banks.

The ratio “Banking sector assets as per cent of GDP” has improved from 67.1 per cent in FY01 to 86.9 per cent in FY06. The scheduled commercial banks’ (SCBs) CRAR stood at the healthy level of 12.3 per cent at end-FY07 – much above the internationally accepted level of nine per cent.

The banking sector is a dominant intermediary in India and during last six years the SCBs’ credit-deposit ratio has improved from 53.1 per cent in FY01 to 74 per cent in FY07.

The SCBs’ “net profit as per cent of total assets” too has improved from 0.49 per cent in FY01 to 0.88 per cent in FY06.

The ratio “Gross NPLs as per cent of advances” has sharply declined from 11.4 per cent in FY01 to 2.7 per cent in FY07. For capital market operators also, while the returns on overall index (Nifty) stood at 40.2 per cent in the calendar year 2007 so far (i.e., up to 21st Nov), the returns on bank stocks (Bank-Nifty) stood at a huge 47 per cent.

‘Stable’ outlook

Indian banking industry enjoys “stable” outlook and ratings from all major global ratings agencies. For instance, the Moody’s Report (July 2007) says “stable rating outlook for Indian banks reflects the country’s robust credit growth against the backdrop of a favourable economic milieu, as well as improvements in banks’ overall financial metrics and strong deposit franchises.”

Even though Indian banking sector is stronger than ever before, challenges abound. In the broader context, the challenges originate from volatile economic environment, increasing inflows of portfolio capital and consequent monetary tightening measures, cross currency movements, oil price shocks, etc. Only those banks that have robust risk management capabilities and sufficiency of capital will be able to survive in the long-run.

In more specific terms, the challenges stem from increasing doses of competition, retention of customers and skilled manpower, shrinking margins and excessive but sticky expenditures on technology.

It is increasingly evident that banks focusing on extracting maximum value from technology, skilled manpower and operating systems would emerge as winners.

Capital and technology are necessary but not sufficient conditions to ensure success.

Consolidation

Gradually, a case for merger between stronger banks is also gaining ground in India. With the liberalisation of entry norms for foreign banks post-April, 2009, “consolidation” will gather significant momentum in our banking sector. This will have a significant impact on the business models and operational strategies of Indian banks.

The purpose of this year’s conference is to undertake a holistic assessment of Indian banking sector in terms of its achievements in increasing shareholder value, providing superior customer experience, management of operational efficiency and most importantly, its contribution to systemic stability. The idea is to compare the performance of Indian banks with global best practices in a scientific manner. The list of participants includes senior executives from banking, policymaking, academic, IT and manufacturing fields who are involved in some way in making decisions about operations, regulations, strategies, technology, product offerings, etc. within banks.

The conference is designed to provide an intensive learning opportunity for bankers to understand trends in global best practices that will define the direction of Indian banking in the years ahead.

(The author is a Chief Economist, Bank of Baroda)