“Banks will move towards customer acquisitions more innovatively. Banks will have to be more transparent with products, services, prices. And banks will have to continuously explore ways to augment capital and, more importantly, preserve it.” He finds it sobering that these themes continue to be important.

With financial inclusion being pushed at by banks and the Government due to a happy mix of reasons — business expanding beyond Tier-1 and 2 cities and fetching a new set of customers, and inclusive growth that brings unbanked areas into the banking fold — financial literacy becomes imperative, explains Mr Roy.

As for the second continuing theme of transparency, he reasons that with many complaints to the banking Ombudsman and consumer courts on issues such asl ‘hidden charges,’ interest calculation methods and service quality, banks are now required to dedicate more resources on post-sales servicing despite increased use of IT (information technology.

“The commoditisation of retail banking products is being reviewed, as a smarter set of consumers seek better products.”

And, on the third aspect, Mr Roy reminds that Basel II (there is now serious thought of Basel III) is virtually asking banks to prepare for a more capital-intensive regime, particularly under Pillar II (wherein the regulator can ask for more capital).

While the three core themes, therefore, remain more or less intact, he identifies the following four more areas as likely to stand out in 2009:

Banks would need to revisit their cost structures and stick to core banking;

Wealth management activities would be repositioned from wealth creation to wealth preservation;

Business intelligence (some might call it customer intelligence) would be sought by bank’s marketing teams to spend the marketing rupees well and feed customer data into risk models;

More than exotic risk models, a combination of strong corporate governance and adherence to processes would help manage risks better;

Excerpts from the interview:

On the financial turmoil.

The recent financial tsunami that has relegated many a ‘successful’ bank to the bins of history, compelled governments to step in to recapitalise many of them, and raised soul-searching questions about risk management, leaving in its wake more answers than questions.

Venerable names epitomising trust among depositors, had to eat humble pie as they couldn’t read the impending storm and hid their heads like an ostrich, praying that asset contagion would spread somewhere else! Like some bad dream of a karmic circle, an exuberant credit decision always comes back and haunts the bank.

In the book Whom the Gods Failed, the author dwells at length on how blind faith in the markets has nearly cost us the future. In one of the chapters, the story of rise and fall of Northern Rock, (a pure mortgage player in the UK) is narrated breathtakingly and the morbid results of impaired liquidity and slow regulatory action captured in awesome detail.

If all the warning signals are ignored continuously, the after-effects are a sense of déjÀ vu. Imagine, running a long tenor loan book without a sustainable resource base and everyday being a nightmare for the treasurer. The regulator, always dreading systemic risks (like a run on banks), finally, nationalising the mortgage player to prevent any contagion effects. So much for laissez faire market policies.

On the metrics that matter.

A simple indicator like CAR (capital adequacy ratio) can be the key differentiator between reckless leveraging (borrowing/ lending multiple times the equity base) and tempered asset build up. The legendary business growth of I-banks, wherein there were no regulatory constraints for leveraging their balance sheet, resulted in a series of securities being issued like the long tail of a comet. But all comets ultimately burn themselves out leaving a trail of destruction.

Commercial banks, on the other hand, with a large part of their ‘lendable’ resources pre-empted by their regulators, had a cap on how aggressively they could build their asset (loan) book. The result was the bottoming of markets and asset prices, with gaping holes in the levels of capital due to increased marked-to-market provisioning.