The Hindu Business Line : The challenges ahead

This year the conference theme of “Towards global best practices” signifies an attempt by Indian banks
to raise the bar for themselves and reach the standards that the best in the world have.

"Who said, ’Neither a lender nor a borrower be...’ ?"

"It’s been like this for a while! First, they ask for our deposit rates, and then, they ask for the nearest route to the stock market!"

N.S.Vageesh

Conference themes are about capturing the mood of the times. “Towards Global Best Practices” is a sign of these times when India and its booming economy is the toast of the world. And conferences are about articulating an industry’s viewpoint about itself, the problems that confront it and the surrounding environment and its response to those problems — to the rest of the world. BANCON, the annual gathering of bankers — earlier bank economists , serves the purpose of providing a platform for bankers to talk on the issues of concern that dominate the day and network with each other.

Last year, it was the topic of “Financial Inclusion”, evangelised by the Reserve Bank of India and the Government of the day, that talked of making growth more inclusive. While it was pleasant to have an 8.5-9 per cent GDP growth, it would have to make a difference to vast sections of people who are completely cut off from these developments.

The tone that dominated the conference last year was that banks, as instruments of financial empowerment, had to sensitise themselves to ensuring that growth does not happen in islands.

This year the conference theme of “Towards global best practices” signifies an attempt by Indian banks to raise the bar for themselves and reach the standards that the best in the world have. Coming as it does against the backdrop of a number of top banks in the world caught in a sub-prime mess, there is a whiff of irony here. Banks that were held as models for others to follow with regard to risk management practices or corporate governance have now been forced to throw their chief executive officers (CEOs) out.

GLOBAL BEST PRACTICES

So what are global best practices? Is there one right way of doing things? Do the failures of some of these top banks detract others from the intrinsic merit of having and following best practices?

Should the failures of some banks or bankers discredit the philosophy itself?

A best practice is an attempt to create a process that will deliver a service efficiently and effectively – without relying only on a well-meaning individual’s inclinations. It is about developing standards, documenting them, implementing them and monitoring them.

Above all, it reflects an attempt by an organisation or institution to improve itself and keep learning.

It is about being willing to learn from peers and contemporaries – and not necessarily even from those in the same industry.

As the organisers of this conference have pointed out and demonstrated by their inviting experts from non-banking industries, it is necessary to look outside – at other industries, and other countries to see what they have done right and draw the lessons from their experience. The process of learning is of course two-way.

Let it be acknowledged that Indian industry has taught something to others too. Praise for the country’s low-cost manufacturing capability has come from the likes of Mr Carlos Ghosn, President and CEO of automobile majors, Nissan and Renault.

He said a couple of months ago, “Indian companies could show companies from the developed markets the way with their frugality in manufacturing and management. On average, the cost of components manufactured in India is about 30 per cent cheaper than similar parts made in Europe or in Japan.”

Complimenting the capabilities found here, he said, that it is very difficult to develop a global low-cost, frugally manufactured passenger car platform without getting into an association with an Indian company.

In due course, the banking sector too needs to reach that level of excellence. It must also be said that in any comparisons about India and China, our country seems to lag behind.

It is perhaps only in the strength of its banking sector that India is ahead. Already, a few Indian banks say confidently that their transaction costs are a fraction of those found at the world’s top banks. As competition gets tougher with greater opening up of the economy to foreign money, the emphasis on efficiency and competitiveness will have to percolate to all banks in the system. There is some distance to go even as Indian banks have come a long way on the path of renewal and growth.

SEA CHANGE IN A DECADE

Wind the clock back and take a look at how the sector was a decade ago. The Indian banking sector was on the throes of a crisis in the immediate aftermath of the currency meltdown in South-East Asia.

Although the economy here did not face the kind of buffeting that others did, there was definitely an air of suspicion and uneasiness about the strength of our banking system and its ability to withstand shocks then – especially the public sector banks.

The problems seem endless and daunting even from hindsight! There was, of course, the ever present and stifling government control of banks, a lack of autonomy in their functioning, very little computerisation, a huge staff strength, a wide and unwieldy branch network, no flexibility in pay matters, a continuous exodus of talent to the private sector.

NPA problem

Combine this with a poor legal enforcement framework, a huge non-performing asset problem, poor disclosures and a lack of transparency and you can guess why the stock market never thought much of public sector banks – except as a token exposure to the economy. When you also remember that the economy went through a slowdown in the early part of the new millennium, and there was a problem of credit crunch, there was a fear about lending as officers feared a vigilance harassment for loans that went bad, the problems seemed almost too overwhelming.

It was almost taken for granted that the economy would grow at between 4 and 5 per cent annually, while deposits and loans would grow at between 10 and 15 per cent annually. That all these parameters would double soon thereafter is now recent history. For banks that have grown at a robust pace during the past four years, the current year is proving a shade turbulent. The first half has seen a slight slowdown in loan growth that has affected their income in the recent quarter.

The sharp hikes in interest rates during the past year have also shaken the confidence of some customers who were led to believe that rates would only go down.

With a busy season under way and an expected revival in credit offtake, many banks are lining up huge capital raising plans. ICICI Bank has raised Rs 20,500 crore earlier this year while SBI plans to raise about Rs 15,000 crore.

Other banks have also announced proportionately high fund raising plans.

The money is required to provide for credit growth as well as for the requirements of BASEL-II, a global standard that prescribes standards for capital adequacy and risk management.

Among other things, banks will require money for their insurance joint ventures (a number of them have been announced recently), for providing for retirement benefits under the new accounting standard, for providing for possible non-performing assets as well as for their IT spending. There are regulatory and ownership issues that require to be sorted out in the process.

Raising capital

As markets turn volatile, raising capital at lower costs will be a challenge. Getting a handle on this, on the need to retain good talent, improve risk management, getting a good bang for the buck with regard to spends on IT, while also seizing growth opportunities and not lose customers – these are among the dominant issues that will be discussed at the conference.

Some of these issues have been around for a while. They are not going to disappear soon.

Perhaps the organisers may look into a suggestion offered by a retired banker who said:

“So many papers are presented at BECON/BANCON in which different themes are presented each year. A nice book is prepared consisting of all the papers presented. What is the action taken on various suggestions made? Is IBA presenting a ‘Action-taken’ report? Or are all the papers presented only of academic value to be kept in the libraries of training colleges?” That is something for IBA to introspect on.