Banking in 2014: New year, old challenges

At the very outset let us have a glance at the silver lining. India’s banking sector has been forging ahead. The McKinsey & Company — the world-renowned consultancy firm — findings are very pertinent on this score: in technology, the best banks in India are among the most efficient in the world, Indian banks compared favourably against global credit and risk management practices, and these banks provided high returns to shareholders over the last few years, healthy contribution to the GDP and good employment prospects.

Actually, at this juncture the entire banking sector looked at the ultimate outcome of Basel III, expecting that it could be able to guide so that one becomes more prepared for countering risks. In fact, Basel III is changing the way banks address the management of risk and finance, and the new regime seeks much greater integration of the finance and risk management functions, which, in turn, could drive the convergence of the responsibilities of the bank management in delivering the strategic objectives of the business.

However, the adoption of a more rigorous regulatory stance might be hampered by a reliance on multiple data silos and by a separation of powers between those who are responsible for finance and those who manage risks. The new emphasis on risk management that is inherent in Basel III requires the introduction or evolution of a risk management framework that is as robust as the existing finance management infrastructure. Being a regulatory regime, Basel III in many ways provides a framework for true enterprise risk management, which involves covering all risks to the business — as rightly opined by Moody’s Analytics.

At the same time, the study has not failed to point out that the cost of intermediation in India has been on the higher side. Global comparisons indicate that India’s banking sector meets its objectives but is polarized. Attackers are new private and foreign banks; incumbents are old private and public sector banks. The attackers, characterized by superior organization and performance attributes, are taking over business from the incumbents.

That is to say that while the ongoing reforms have strengthened the banking sector considerably as reflected by the comparatively falling tendency of NPAs (non-performing assets), quantum high technology utilization, innovative offerings and a move towards universal banking, the whole industry has still been facing big challenges in the arena of human resources utilization, information technology, risk management practices and consolidation. 

Undeniably, changes now are so rapid that adaptability is posing a serious challenge. The spreads between long-term and short-term interest rates have reduced, and volatility has increased, which in turn calls for enhanced approach to assets — liability management. Treasury is fast becoming significant because of large investment portfolio due to regulatory requirements, accounting for as much as 30 per cent of the net profit for several Indian banks. No doubt, this is larger than most of the emerging markets. There is need for adopting a comprehensive approach towards the compliance of the forthcoming Basel III norms.

As things stand now, the banking industry in many countries, including that of ours, at present does not have adequate processes for adequately capturing risks.

(To be contd)

(The writer is a management economist and can be reached at