Alternative approaches emerging; easy work is done

G. Srinivasan

New Delhi, Aug. 8

The Bank for International Settlements (BIS) has said that banking reforms in emerging economies, including India and China, appear to have slowed recently, even as the systems in these economies have by and large been transformed by privatisation, consolidation and foreign banks' entry.

In a new tome issued on

The banking system in emerging economies: How much progress has been made?

the world's central bankers' central bank, the Basle-based BIS said that even as bank efficiency and performance have improved presumably in response to a more competitive climate, "reforms appear to have slowed." This, it said, is in part due to the fact that "easy work had been done and because of alternative approaches to reform".

The BIS tome assumes significance as it draws on contributions by senior central bank officials from emerging market economies including India and staff of the BIS.

Market-driven consolidation

Elaborating on this point, it said, rather than engaging in full-scale privatisation, countries such as China and India are only gradually transferring ownership of major state-owned banks to the private sector. As for bank consolidation, it has been market-driven and foreign banks have played a crucial role in central and Eastern Europe and Mexico, while the government has played a larger role in Asia. Interestingly, increased concentration was not seen as a threat to competition and access to bank financing had improved with the growing presence of foreign banks, it added.

Reflecting the growing resentment of domestic bank employees' concern over the creeping privatisation and entry of foreign banks, the BIS said foreign banks raised political concerns "because of perceived high profits and were also difficult to supervise because parent banks' global goals and information flows did not always coincide with the needs of host country supervisors".

Trends in bank credit

On recent trends in bank credit in emerging economies, the BIS said after peaking in the second half of the 1990s, bank credit to the private sector has recently risen in a number of emerging market economies, partly because of stronger demand for loans associated with robust growth and low interest rates, and partly because of greater supply of loans associated with improved bank balance sheets. However, the share of bank credit to the business sector has declined in part because lagging investment spending has curbed corporate loan demand and because of the availability of financing in bond and equity markets. In some countries risk-averse banks have held government securities rather than lend to the corporate private sector, it said without directly alluding to India.

Risk management

On evolution in and management of risks confronting banks, it said macroeconomic vulnerabilities seem to have waned, reflecting a mix of favourable transient phenomena as well as improved policies (higher foreign reserves, more flexible exchange rates, domestic debt market development and improved fiscal policies). But, it said, some central banks were still concerned about vulnerability to certain shocks (example to domestic demand, to increases in oil prices or interest rates or declines in property prices), particularly given the exposure of banks to interest rate or exchange rate risk and the need in some countries for further fiscal consolidation.

Even as banks increasingly relied on systematic risk assessment procedures and quantitative risks management techniques with lending being swayed less by government fiat or special bank relationships with borrowers, the BIS contends that challenges still stemmed from lack of data on local histories for estimating default probabilities and risks related to liquidity and credit risk transfer.

(This article was published in the Business Line print edition dated August 9, 2006)
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