Description
Future of Indian Banks report
What will be the shape of banking after 10 years? Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The pace of transformation has been more significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with Singapore, may have an impact on the shape of the banking industry. Banks will also have to cope with challenges posed by technological innovations in banking. Banks need to prepare for the changes. In this context the need for drawing up a Road Map to the future assumes relevance. “I am confident that India will become a Developed Nation by 2020. Come, let us strive together to turn this resolve into reality” – Atal Bihari Vajpayee “A vision is not a project report or a plan target. It is an articulation of the desired end results in broader terms” - A.P.J.Abdul Kalam Keeping the thoughts of the above two visionary in our mind in order to pursue Planning Commission of India- “Vision India- 2020”, Indian Banking sector will have to contribute a lot to shape their vision into reality. EMERGING ECONOMIC & FINANCIAL SCENE IN COMING TEN YEARS: The traditional banking functions would give way to a system geared to meet all the financial needs of the customer. The world economy is becoming day by day complex and so on the financial transaction. We could see emergence of highly varied financial products, which are tailored to meet specific needs of the customers in the retail as well as corporate segments. The advent of new technologies could see the emergence of new financial players doing financial intermediation. For example, we could see bank cross selling other financial products (even it’s competitor best selling product) in order to generate fee based income as it does not require capital adequacy, risk weightage, product innovation etc. Also in coming days Net interest margin is going to be thin with globalisation of financial sphere. The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor.
International trade is an area where India’s presence is expected to show appreciable increase. Presently, Indian share in the global trade is just about 1.00%. The long term projections for growth in international trade is placed at an average of 6% per annum. With the growth in IT sector and other IT Enabled Services, there is tremendous potential for business opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period ending with 2010. This again will offer enormous scope to Banks in India to increase their forex business and international presence. Globalization would provide opportunities for Indian corporate entities to expand their business in other countries. Banks in India wanting to increase their international presence could naturally be expected to follow these corporate and other trade flows in and out of India. Retail lending will receive greater focus in coming decade. Because of better margin and low risk involve in retail lending, all the commercial Banks will eager to increase their market share. Banks would use multiple delivery channels, innovative products, dedicated relationship baning to HNI to suit their requirements and appetite. While some customers might value on relationship banking (conventional branch banking), others might prefer convenience banking i.e. e-banking, Mobile banking, Tele banking etc. One of the concerns will be quality of bank lending. Experience has shown us that the worst loans are often made in the best of times; this is primarily because of less personal information available of the company or individuals. In ten years time, India Bank will develop systematic and integrated credit report of all existing Bank’s customer. With the help of UID card & PAN cards compulsion in all financial activities and it’s mapping with all population, there will be a information pool of all financial transactions (i.e loan repayment, utility bill payment track, cheque dishonour incidence, credit card default, minimum balance instances etc which will give a scoring based on credit worthiness, financial discipline; past default track record etc. of the consumers). This information will be real time available to all the commercial Bank similar to limited CIBIL report available today. It will help to reduce risk associated to identifying wilful defaulter. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and monitoring as also revamp operating procedures. Corporate lending is already undergoing changes and more and more consortium financing will be done in ten years time. The emphasis in future would be towards more of fee based services rather than lending operations. Banks will compete with each other to provide value added services to their customers. Structure and ownership pattern would undergo changes. There would be greater presence of international players in the Indian financial system. Similarly, some of the Indian banks would become global players eg. SBI, ICICI Bank, BOB. Government is taking steps to reduce its holdings in Public sector banks to 33%. However the indications are that their PSB character may still be retained. Public Sector Banks had, in the past, relied on Government support for capital augmentation & most Banks have approached the capital market for raising resources.
To resolve the capital adequacy position, government will speed the process of consolidation through mergers and acquisitions. We could see the emergence of a few large Indian banks with international character in coming decade. Mergers and acquisitions would gather momentum as managements will strive to meet the expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. As Banks seek niche areas, we could see emergence of some national banks of global scale and a number of regional players. The pressure on capital structure is expected to trigger a phase of consolidation in the banking industry. In recent years, market led mergers between private banks have taken place e.g. CBOP & Bank of Rajasthan’s mergers with ICICI and HDFC Bank respectively. State Bank of Indore & Saurashtra merged with SBI and its other associates Banks are on card. It is expected that this process would gain more momentum in the coming years. Consolidation could take place through strategic alliances / partnerships. Besides helping banks to achieve economy of scale in operations and augment capital base, consolidation could help market players in other ways also to strengthen their competitiveness. The advantage could be in achieving better segmentation in the market. Strategic alliances and collaborative approach, as an alternative to mergers and acquisitions, could be attempted to reduce transaction costs through outsourcing, leverage synergies in operations and avoid problems related to cultural integration.
Corporate governance in banks and financial institutions would assume greater importance in the coming years and this will be reflected in the composition of the Boards of Banks.
Concept of social lending would undergo a change. Rather than being seen as directed lending such lending would be business driven. With SME sector expected to play a greater role in the economy, Banks will give greater overall focus in this area. Changes could be expected in the delivery channels used for lending to small borrowers and agriculturalists and unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as means to reduce transaction costs. TECHNOLOGY IN BANKING: Technology will bring fundamental shift in the functioning of banks. It would not only help them bring improvements in their internal functioning but also enable them to provide better customer service. Technology will break all boundaries and encourage cross border banking business. Banks are already on roll to initiate Business Process Re-Engineering and in 10 years time it will able to tackle issues like: How best to deliver products and services to customers according to their needs? How to create a customer - centric operation model? Integrate the Inter Bank & Intra Bank operations in order to deliver any time anywhere, one shop banking.
how to exploit technology for deriving economies of scale and how to create cost efficiencies There will be paradigm shift from front office banking at Bank’s premises to ATM Banking for their day to day banking transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc. Excessive roll out of E-banking and Internet banking to mass customers will open new avenues in “convenience banking”. Internet banking has also led to reduction in transaction costs for banks to about a tenth of branch banking. Extensive distribution of Debit Cards and credit Cards will help the bank to handle less cash and people will tend to shop cashless with the help of the plastic cards. Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Banks, this would also enable development of appraisal and monitoring tools which would make credit management much more effective. Core Banking Solutions (CBS) enables banks to consolidate their technology platforms across functions and geographies leveraging cost and at the same time acquiring flexibility to adapt fast changing and competitive environment.
Payment and Settlement system is the backbone of any financial market place. The present Payment and Settlement systems such as Structured Financial Messaging System (SFMS), Centralised Funds Management System (CFMS), Centralised Funds Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo further fine-tuning to meet international standards. Needless to add, necessary security checks and controls will have to be in place. In this regard, Institutions such as IDRBT will have a greater role to play. RISK MANAGEMENT: Risk is inherent in any commercial activity and banking is no exception to this rule. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today’s financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that risk takers will survive, effective risk managers will prosper and risk averse are likely to perish. In the regulated banking environment, banks had to primarily deal with credit or default risk. As we move into a perfect market economy, we have to deal with a whole range of market related risks like exchange risks, interest rate risk, etc. Operational risk, which had always existed in the system, would become more pronounced in the coming days as we have technology as a new factor in today’s banking. Traditional risk management techniques become obsolete with the growth of derivatives and off-balance sheet operations, coupled with diversifications. The expansion in E-banking will lead to continuous vigilance and revisions of regulations.
Building up a proper risk management structure would be crucial for the banks in the future. Banks would find the need to develop technology based risk management tools. The complex mathematical models programmed into risk engines would provide the foundation of limit management, risk analysis, computation of risk-adjusted return on capital and active management of banks’ risk portfolio. Measurement of risk exposure is essential for implementing hedging strategies. Under Basel II accord, capital allocation will be based on the risk inherent in the asset. The implementation of Basel II accord will also strengthen the regulatory review process and, with passage of time, the review process will be more and more sophisticated. BASEL II HOW GEARED ARE BANKS??:
Under the existing Basel Capital Accord, allocation of capital follows a one-size-fit-all approach. This would be replaced by a risk based approach to capital allocation. While regulatory minimum capital requirements would still continue to be relevant and an integral part of the three pillar approach under Basel II, the emphasis is on risk based approach relying on external ratings as well as internal rating of each asset and capital charge accordingly. The internal risk based approach would need substantial investments in technology and development of MIS tools.
The 3-Pillar Approach of BASEL II
BASEL II CAPITAL ACCORD
Pillar I pillar II
pillar III
Minimum Capital Requirement
Supervisory Review Process
Market Discipline & Disclosure
Strengthening & safeguarding Financial Systems
ENHANCING COMPETITIVE EQUALITY
Another aspect which is included in Basel II accord is a provision for capital allocation for operational risk. This is a new parameter and even internationally evaluation tools are not yet fully developed. OPEARTIONAL COST AND BUSINESS PROCESS RE-ENGINEERING: With increased competition in the banking Industry, the net interest margin of banks has come down over the last one decade. In a decade horizon, it will see the spreads narrowing further to 1-1.5% as in the case of banks operating in developed countries. Banks will have to more focus on fee-based income to fill the gap in interest income. Product innovations and process re-engineering will be the order of the day. More variety of financial products need to design as per customised needs of customer and will have a thrust on cross selling of peers financial products, which are or may have a good demand. As banks strive to provide value added services to customers, the market will see the emergence of strong investment and merchant banking entities. There will be more and more of tie-ups between banks, corporate clients and their retail outlets to share a common platform to shore up revenue through increased volumes.
All banks will therefore go for rejuvenating their costing and pricing to segregate profitable and nonprofitable business. Service charges will be decided taking into account the costing and what the traffic can bear. From the earlier revenue = cost + profit equation i.e., customers are charged to cover the costs incurred and the profits expected, most banks have already moved into the profit =revenue - cost equation. The new paradigm in the coming years will be cost = revenue - profit.
Banks will look analytically into various processes and practices as these exist today and may make appropriate changes therein to cut costs and delays. Outsourcing and adoption of BPOs will become more and more relevant, especially when Banks go in for larger volumes of retail business. Banks will be judiciously outsourcing only those functions that are not strategic to banks’ business. For instance NPA management or credit appraisal should never be outsourced. REGULATORY AND LEGAL ENVIRONMENT: The legal environment is likely to be more complex in the years to come. Innovative financial products implemented on computers, new risk management software, user interfaces etc., may become patentable. For some banks, this could offer the potential for realizing commercial gains through licensing. The advent of liberalization and globalization has seen a lot of changes in the focus of Reserve Bank of India as a regulator of the banking industry. De-regulation of interest rates and moving away from issuing operational prescriptions have been important changes. The focus has clearly shifted from micro monitoring to macro management. Supervisory role is also shifting more towards off-site surveillance rather than on-site inspections i.e RBI Audit & Statutory audits will become more pragmatic. The focuses of inspection will also shifting from transaction-based exercise to risk-based supervision. In a totally de-regulated and globalised banking scenario, a strong regulatory framework would be needed. The role of regulator would be critical for: Ensuring soundness of the system by fixing benchmark standards for capital adequacy and prudential norms for key performance parameters. Adoption of best practices especially in areas like risk-management, provisioning, disclosures, credit delivery, etc. Adoption of good corporate governance practices. Regulating the entry and exit of banks including cross-border institutions. The integration of various financial services would need a number of legislative changes to be brought about for the system to remain contemporary and competitive. The need for changes in the legislative framework has been felt in several areas and steps have been taken in respect of many of these issues, such as, Introduction of SARFESI Act 2002, which empowers Banks for fast securitization of the Sub standard assets without going into the civil procedure. It also allow Banks to transfer or sell the doubtful assets to specialised recovery or reconstruction companies e.g. Abolition of SICA / BIFR setup and formation of a National Company Law Tribunal to take up industrial re-construction.
Enabling legislation for sharing of credit information about borrowers among lending institutions. While the recent enactments like amendments to Debt Recovery Tribunal (DRT) procedures and passage of SARFAESI Act have helped to improve the climate for recovery of bank dues, their impact is yet to be felt at the ground level. It would be necessary to give further teeth to the legislations, to ensure that recovery of dues by creditors is possible within a reasonable time. The procedure for winding up of companies and sale of assets will also have to be streamlined. In the recent past, Corporate Debt Restructuring has evolved as an effective voluntary mechanism. This has helped the banking system to take timely corrective actions when borrowing corporate face difficulties. With the borrowers gaining confidence in the mechanism, it is expected that CDR setup would gain more prominence making NPA management somewhat easier. It is expected that the issue of giving statutory backing for CDR system will be debated in times to come. In respect of Accounting Practices and disclosures, banks in India are guided by the Reserve Bank of India guidelines issued from time to time. Now these are, by and large, in line with the Accounting Standards of ICAI and other regulatory bodies. The shift to IFRS standards by 2011 with valuation of assets on the basis of current market value rather than historical cost would be achieved by the help of CBS. Now there will be pressure for the Banks to implement USGAAP accounting practise and by ten years down the line, Indian Banks will able to formulate it accounting practise in the line of GAAP as requisite to implement as per BASEL-II guidelines. RURAL AND SOCIAL BANKING ISSUES: Commercial banks have been playing an important role in the socio-economic transformation of rural India. Besides actively implementing Government sponsored lending schemes, Banks have been providing direct and indirect finance to support economic activities. Mandatory lending to the priority sectors has been an important feature of Indian banking. The Narasimham committee had recommended for doing away with the present system of directed lending to priority sectors in line with liberalization in the financial system. The banking system is expected to reorient its approach to rural lending. “Going Rural” could be the new market mantra. Rural market comprises 74% of the population, 41% of Middle class and 58% of disposable income. Consumer growth is taking place at a fast pace in 17113 villages with a population of more than 5000. Of these, 9989 villages are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra, Tamilnadu, Uttar Pradesh and West Bengal. Banks’ approach to the rural lending will be guided mainly by commercial considerations in 10 years time. Barring few commercial banks, the other rural financial institutions have a weak structural base and the issue of their strengthening requires to be taken up on priority. Co-operatives will have to be made viable by infusion of capital by State & Central Government. By 2020, appropriate changes in Banking
Act, RBI will have holistic regulatory control on these co-operatives Banks. It would be desirable if NABARD takes the initiative to consolidate all the RRBs into a strong rural development entity. In the next ten years, SME sector will emerge more competitive and efficient and knowledge-based industries are likely to acquire greater prominence. SMEs will be dominating in industry segments such as Pharmaceuticals, Information Technology and Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy, flow of credit to this sector would go up significantly. Banks will have to sharpen their skills for meeting the financial needs of this segment. Some of the Banks may emerge as niche players in handling SME finance. Flow of credit to this Sector will be guided purely by commercial considerations as Banks will find SMEs as an attractive business proposition. For SMEs, banks should explore the option of E-banking channels to develop web-based relationship banking models, which are customer-driven and more cost-effective. Government is already considering legislation for the development of SME sector to facilitate its orderly growth. In ten years time, SME segment will be the backbone of commercial Bank’s assets. HUMAN RESOURCES MANAGEMENT : The key to the success of any organization lies in how efficiently the organization manages its’ human resources. The principle applies equally and perhaps more aptly to service institutions like banks. The issue is all the more relevant to the public sector banks who are striving hard to keep pace with the technological changes and meet the challenges of globalization. In order to meet the global standards and to remain competitive, banks will have to recruit specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM, etc. in keeping with the segmentation and product innovation. As a complementary measure, fast track merit and performance based promotion from within would have to be institutionalized to inject dynamism and youthfulness in the workforce. Another important ingredient of HR management is reward and compensation which at present do not have any linkage to skills and performance. A system of reward and compensation that attracts, recognizes and retains the talent, and which is commensurate with performance is an urgent need of the industry. By ten years time, PSU Banks will able to introduce appropriate model based on ERP platform to evaluate the genuine performer and will compensate appropriately, which is completely lagging in present system. An equally important issue relevant to HRM is to create a conducive working environment in which the bankers can take commercial decisions judiciously and, at the same time, without fear. Theses require complete revamp of the Bank’s Role & Responsibility Manual and defining the accountability in light of changing banking environment. Training and skill development will, however, continue to be key HR functions. With the age profile of staff undergoing changes, banks will have to focus on leadership development and succession planning. Knowledge management will become a critical issue.
Based on the above assumptions and on the basis of trend analysis in the past, we foresee the below mention performances over a period of 10 years from today. The Banking sector will be on robust growth. (value are in Crores)
Conclusion We may conclude that every aspect of banking will be transformed by new technology by 2020. Customer-friendly products, delivery channels, relationship banking, dependency on IT systems and competitive pricing would be the driving forces, but a pressure-cooker atmosphere cannot be avoided. The most successful institutions will be those that combine visionary technology and very competitive pricing with strong relationships and brands built on trust with previous in-depth experience of the client business. Banks would have adopted the following strategies to move to high-tech banking as a necessity of e-commerce, e-banking, etc.
In the scenario of severe competition and escalating expectation of the customers for newer products and improved alternative delivery channels, the key to survival of banks will of retention of customers loyalty by providing value-added services tailored to their needs, using state-of-the-art technology, instead of relying on outdated practices.
Needless to say, flawless security and seamless integration of operations through untiring efforts of employees and cohesive support from the management would be the key factors that will enable banks to make successful inroads into enabled ‘New Age’ banking.
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Future of Indian Banks report
What will be the shape of banking after 10 years? Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The pace of transformation has been more significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel II. In addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with Singapore, may have an impact on the shape of the banking industry. Banks will also have to cope with challenges posed by technological innovations in banking. Banks need to prepare for the changes. In this context the need for drawing up a Road Map to the future assumes relevance. “I am confident that India will become a Developed Nation by 2020. Come, let us strive together to turn this resolve into reality” – Atal Bihari Vajpayee “A vision is not a project report or a plan target. It is an articulation of the desired end results in broader terms” - A.P.J.Abdul Kalam Keeping the thoughts of the above two visionary in our mind in order to pursue Planning Commission of India- “Vision India- 2020”, Indian Banking sector will have to contribute a lot to shape their vision into reality. EMERGING ECONOMIC & FINANCIAL SCENE IN COMING TEN YEARS: The traditional banking functions would give way to a system geared to meet all the financial needs of the customer. The world economy is becoming day by day complex and so on the financial transaction. We could see emergence of highly varied financial products, which are tailored to meet specific needs of the customers in the retail as well as corporate segments. The advent of new technologies could see the emergence of new financial players doing financial intermediation. For example, we could see bank cross selling other financial products (even it’s competitor best selling product) in order to generate fee based income as it does not require capital adequacy, risk weightage, product innovation etc. Also in coming days Net interest margin is going to be thin with globalisation of financial sphere. The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor.
International trade is an area where India’s presence is expected to show appreciable increase. Presently, Indian share in the global trade is just about 1.00%. The long term projections for growth in international trade is placed at an average of 6% per annum. With the growth in IT sector and other IT Enabled Services, there is tremendous potential for business opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period ending with 2010. This again will offer enormous scope to Banks in India to increase their forex business and international presence. Globalization would provide opportunities for Indian corporate entities to expand their business in other countries. Banks in India wanting to increase their international presence could naturally be expected to follow these corporate and other trade flows in and out of India. Retail lending will receive greater focus in coming decade. Because of better margin and low risk involve in retail lending, all the commercial Banks will eager to increase their market share. Banks would use multiple delivery channels, innovative products, dedicated relationship baning to HNI to suit their requirements and appetite. While some customers might value on relationship banking (conventional branch banking), others might prefer convenience banking i.e. e-banking, Mobile banking, Tele banking etc. One of the concerns will be quality of bank lending. Experience has shown us that the worst loans are often made in the best of times; this is primarily because of less personal information available of the company or individuals. In ten years time, India Bank will develop systematic and integrated credit report of all existing Bank’s customer. With the help of UID card & PAN cards compulsion in all financial activities and it’s mapping with all population, there will be a information pool of all financial transactions (i.e loan repayment, utility bill payment track, cheque dishonour incidence, credit card default, minimum balance instances etc which will give a scoring based on credit worthiness, financial discipline; past default track record etc. of the consumers). This information will be real time available to all the commercial Bank similar to limited CIBIL report available today. It will help to reduce risk associated to identifying wilful defaulter. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and monitoring as also revamp operating procedures. Corporate lending is already undergoing changes and more and more consortium financing will be done in ten years time. The emphasis in future would be towards more of fee based services rather than lending operations. Banks will compete with each other to provide value added services to their customers. Structure and ownership pattern would undergo changes. There would be greater presence of international players in the Indian financial system. Similarly, some of the Indian banks would become global players eg. SBI, ICICI Bank, BOB. Government is taking steps to reduce its holdings in Public sector banks to 33%. However the indications are that their PSB character may still be retained. Public Sector Banks had, in the past, relied on Government support for capital augmentation & most Banks have approached the capital market for raising resources.
To resolve the capital adequacy position, government will speed the process of consolidation through mergers and acquisitions. We could see the emergence of a few large Indian banks with international character in coming decade. Mergers and acquisitions would gather momentum as managements will strive to meet the expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. As Banks seek niche areas, we could see emergence of some national banks of global scale and a number of regional players. The pressure on capital structure is expected to trigger a phase of consolidation in the banking industry. In recent years, market led mergers between private banks have taken place e.g. CBOP & Bank of Rajasthan’s mergers with ICICI and HDFC Bank respectively. State Bank of Indore & Saurashtra merged with SBI and its other associates Banks are on card. It is expected that this process would gain more momentum in the coming years. Consolidation could take place through strategic alliances / partnerships. Besides helping banks to achieve economy of scale in operations and augment capital base, consolidation could help market players in other ways also to strengthen their competitiveness. The advantage could be in achieving better segmentation in the market. Strategic alliances and collaborative approach, as an alternative to mergers and acquisitions, could be attempted to reduce transaction costs through outsourcing, leverage synergies in operations and avoid problems related to cultural integration.
Corporate governance in banks and financial institutions would assume greater importance in the coming years and this will be reflected in the composition of the Boards of Banks.
Concept of social lending would undergo a change. Rather than being seen as directed lending such lending would be business driven. With SME sector expected to play a greater role in the economy, Banks will give greater overall focus in this area. Changes could be expected in the delivery channels used for lending to small borrowers and agriculturalists and unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as means to reduce transaction costs. TECHNOLOGY IN BANKING: Technology will bring fundamental shift in the functioning of banks. It would not only help them bring improvements in their internal functioning but also enable them to provide better customer service. Technology will break all boundaries and encourage cross border banking business. Banks are already on roll to initiate Business Process Re-Engineering and in 10 years time it will able to tackle issues like: How best to deliver products and services to customers according to their needs? How to create a customer - centric operation model? Integrate the Inter Bank & Intra Bank operations in order to deliver any time anywhere, one shop banking.
how to exploit technology for deriving economies of scale and how to create cost efficiencies There will be paradigm shift from front office banking at Bank’s premises to ATM Banking for their day to day banking transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc. Excessive roll out of E-banking and Internet banking to mass customers will open new avenues in “convenience banking”. Internet banking has also led to reduction in transaction costs for banks to about a tenth of branch banking. Extensive distribution of Debit Cards and credit Cards will help the bank to handle less cash and people will tend to shop cashless with the help of the plastic cards. Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Banks, this would also enable development of appraisal and monitoring tools which would make credit management much more effective. Core Banking Solutions (CBS) enables banks to consolidate their technology platforms across functions and geographies leveraging cost and at the same time acquiring flexibility to adapt fast changing and competitive environment.
Payment and Settlement system is the backbone of any financial market place. The present Payment and Settlement systems such as Structured Financial Messaging System (SFMS), Centralised Funds Management System (CFMS), Centralised Funds Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo further fine-tuning to meet international standards. Needless to add, necessary security checks and controls will have to be in place. In this regard, Institutions such as IDRBT will have a greater role to play. RISK MANAGEMENT: Risk is inherent in any commercial activity and banking is no exception to this rule. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have pushed risk management to the forefront of today’s financial landscape. Ability to gauge the risks and take appropriate position will be the key to success. It can be said that risk takers will survive, effective risk managers will prosper and risk averse are likely to perish. In the regulated banking environment, banks had to primarily deal with credit or default risk. As we move into a perfect market economy, we have to deal with a whole range of market related risks like exchange risks, interest rate risk, etc. Operational risk, which had always existed in the system, would become more pronounced in the coming days as we have technology as a new factor in today’s banking. Traditional risk management techniques become obsolete with the growth of derivatives and off-balance sheet operations, coupled with diversifications. The expansion in E-banking will lead to continuous vigilance and revisions of regulations.
Building up a proper risk management structure would be crucial for the banks in the future. Banks would find the need to develop technology based risk management tools. The complex mathematical models programmed into risk engines would provide the foundation of limit management, risk analysis, computation of risk-adjusted return on capital and active management of banks’ risk portfolio. Measurement of risk exposure is essential for implementing hedging strategies. Under Basel II accord, capital allocation will be based on the risk inherent in the asset. The implementation of Basel II accord will also strengthen the regulatory review process and, with passage of time, the review process will be more and more sophisticated. BASEL II HOW GEARED ARE BANKS??:
Under the existing Basel Capital Accord, allocation of capital follows a one-size-fit-all approach. This would be replaced by a risk based approach to capital allocation. While regulatory minimum capital requirements would still continue to be relevant and an integral part of the three pillar approach under Basel II, the emphasis is on risk based approach relying on external ratings as well as internal rating of each asset and capital charge accordingly. The internal risk based approach would need substantial investments in technology and development of MIS tools.
The 3-Pillar Approach of BASEL II
BASEL II CAPITAL ACCORD
Pillar I pillar II
pillar III
Minimum Capital Requirement
Supervisory Review Process
Market Discipline & Disclosure
Strengthening & safeguarding Financial Systems
ENHANCING COMPETITIVE EQUALITY
Another aspect which is included in Basel II accord is a provision for capital allocation for operational risk. This is a new parameter and even internationally evaluation tools are not yet fully developed. OPEARTIONAL COST AND BUSINESS PROCESS RE-ENGINEERING: With increased competition in the banking Industry, the net interest margin of banks has come down over the last one decade. In a decade horizon, it will see the spreads narrowing further to 1-1.5% as in the case of banks operating in developed countries. Banks will have to more focus on fee-based income to fill the gap in interest income. Product innovations and process re-engineering will be the order of the day. More variety of financial products need to design as per customised needs of customer and will have a thrust on cross selling of peers financial products, which are or may have a good demand. As banks strive to provide value added services to customers, the market will see the emergence of strong investment and merchant banking entities. There will be more and more of tie-ups between banks, corporate clients and their retail outlets to share a common platform to shore up revenue through increased volumes.
All banks will therefore go for rejuvenating their costing and pricing to segregate profitable and nonprofitable business. Service charges will be decided taking into account the costing and what the traffic can bear. From the earlier revenue = cost + profit equation i.e., customers are charged to cover the costs incurred and the profits expected, most banks have already moved into the profit =revenue - cost equation. The new paradigm in the coming years will be cost = revenue - profit.
Banks will look analytically into various processes and practices as these exist today and may make appropriate changes therein to cut costs and delays. Outsourcing and adoption of BPOs will become more and more relevant, especially when Banks go in for larger volumes of retail business. Banks will be judiciously outsourcing only those functions that are not strategic to banks’ business. For instance NPA management or credit appraisal should never be outsourced. REGULATORY AND LEGAL ENVIRONMENT: The legal environment is likely to be more complex in the years to come. Innovative financial products implemented on computers, new risk management software, user interfaces etc., may become patentable. For some banks, this could offer the potential for realizing commercial gains through licensing. The advent of liberalization and globalization has seen a lot of changes in the focus of Reserve Bank of India as a regulator of the banking industry. De-regulation of interest rates and moving away from issuing operational prescriptions have been important changes. The focus has clearly shifted from micro monitoring to macro management. Supervisory role is also shifting more towards off-site surveillance rather than on-site inspections i.e RBI Audit & Statutory audits will become more pragmatic. The focuses of inspection will also shifting from transaction-based exercise to risk-based supervision. In a totally de-regulated and globalised banking scenario, a strong regulatory framework would be needed. The role of regulator would be critical for: Ensuring soundness of the system by fixing benchmark standards for capital adequacy and prudential norms for key performance parameters. Adoption of best practices especially in areas like risk-management, provisioning, disclosures, credit delivery, etc. Adoption of good corporate governance practices. Regulating the entry and exit of banks including cross-border institutions. The integration of various financial services would need a number of legislative changes to be brought about for the system to remain contemporary and competitive. The need for changes in the legislative framework has been felt in several areas and steps have been taken in respect of many of these issues, such as, Introduction of SARFESI Act 2002, which empowers Banks for fast securitization of the Sub standard assets without going into the civil procedure. It also allow Banks to transfer or sell the doubtful assets to specialised recovery or reconstruction companies e.g. Abolition of SICA / BIFR setup and formation of a National Company Law Tribunal to take up industrial re-construction.
Enabling legislation for sharing of credit information about borrowers among lending institutions. While the recent enactments like amendments to Debt Recovery Tribunal (DRT) procedures and passage of SARFAESI Act have helped to improve the climate for recovery of bank dues, their impact is yet to be felt at the ground level. It would be necessary to give further teeth to the legislations, to ensure that recovery of dues by creditors is possible within a reasonable time. The procedure for winding up of companies and sale of assets will also have to be streamlined. In the recent past, Corporate Debt Restructuring has evolved as an effective voluntary mechanism. This has helped the banking system to take timely corrective actions when borrowing corporate face difficulties. With the borrowers gaining confidence in the mechanism, it is expected that CDR setup would gain more prominence making NPA management somewhat easier. It is expected that the issue of giving statutory backing for CDR system will be debated in times to come. In respect of Accounting Practices and disclosures, banks in India are guided by the Reserve Bank of India guidelines issued from time to time. Now these are, by and large, in line with the Accounting Standards of ICAI and other regulatory bodies. The shift to IFRS standards by 2011 with valuation of assets on the basis of current market value rather than historical cost would be achieved by the help of CBS. Now there will be pressure for the Banks to implement USGAAP accounting practise and by ten years down the line, Indian Banks will able to formulate it accounting practise in the line of GAAP as requisite to implement as per BASEL-II guidelines. RURAL AND SOCIAL BANKING ISSUES: Commercial banks have been playing an important role in the socio-economic transformation of rural India. Besides actively implementing Government sponsored lending schemes, Banks have been providing direct and indirect finance to support economic activities. Mandatory lending to the priority sectors has been an important feature of Indian banking. The Narasimham committee had recommended for doing away with the present system of directed lending to priority sectors in line with liberalization in the financial system. The banking system is expected to reorient its approach to rural lending. “Going Rural” could be the new market mantra. Rural market comprises 74% of the population, 41% of Middle class and 58% of disposable income. Consumer growth is taking place at a fast pace in 17113 villages with a population of more than 5000. Of these, 9989 villages are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra, Tamilnadu, Uttar Pradesh and West Bengal. Banks’ approach to the rural lending will be guided mainly by commercial considerations in 10 years time. Barring few commercial banks, the other rural financial institutions have a weak structural base and the issue of their strengthening requires to be taken up on priority. Co-operatives will have to be made viable by infusion of capital by State & Central Government. By 2020, appropriate changes in Banking
Act, RBI will have holistic regulatory control on these co-operatives Banks. It would be desirable if NABARD takes the initiative to consolidate all the RRBs into a strong rural development entity. In the next ten years, SME sector will emerge more competitive and efficient and knowledge-based industries are likely to acquire greater prominence. SMEs will be dominating in industry segments such as Pharmaceuticals, Information Technology and Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy, flow of credit to this sector would go up significantly. Banks will have to sharpen their skills for meeting the financial needs of this segment. Some of the Banks may emerge as niche players in handling SME finance. Flow of credit to this Sector will be guided purely by commercial considerations as Banks will find SMEs as an attractive business proposition. For SMEs, banks should explore the option of E-banking channels to develop web-based relationship banking models, which are customer-driven and more cost-effective. Government is already considering legislation for the development of SME sector to facilitate its orderly growth. In ten years time, SME segment will be the backbone of commercial Bank’s assets. HUMAN RESOURCES MANAGEMENT : The key to the success of any organization lies in how efficiently the organization manages its’ human resources. The principle applies equally and perhaps more aptly to service institutions like banks. The issue is all the more relevant to the public sector banks who are striving hard to keep pace with the technological changes and meet the challenges of globalization. In order to meet the global standards and to remain competitive, banks will have to recruit specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM, etc. in keeping with the segmentation and product innovation. As a complementary measure, fast track merit and performance based promotion from within would have to be institutionalized to inject dynamism and youthfulness in the workforce. Another important ingredient of HR management is reward and compensation which at present do not have any linkage to skills and performance. A system of reward and compensation that attracts, recognizes and retains the talent, and which is commensurate with performance is an urgent need of the industry. By ten years time, PSU Banks will able to introduce appropriate model based on ERP platform to evaluate the genuine performer and will compensate appropriately, which is completely lagging in present system. An equally important issue relevant to HRM is to create a conducive working environment in which the bankers can take commercial decisions judiciously and, at the same time, without fear. Theses require complete revamp of the Bank’s Role & Responsibility Manual and defining the accountability in light of changing banking environment. Training and skill development will, however, continue to be key HR functions. With the age profile of staff undergoing changes, banks will have to focus on leadership development and succession planning. Knowledge management will become a critical issue.
Based on the above assumptions and on the basis of trend analysis in the past, we foresee the below mention performances over a period of 10 years from today. The Banking sector will be on robust growth. (value are in Crores)
Conclusion We may conclude that every aspect of banking will be transformed by new technology by 2020. Customer-friendly products, delivery channels, relationship banking, dependency on IT systems and competitive pricing would be the driving forces, but a pressure-cooker atmosphere cannot be avoided. The most successful institutions will be those that combine visionary technology and very competitive pricing with strong relationships and brands built on trust with previous in-depth experience of the client business. Banks would have adopted the following strategies to move to high-tech banking as a necessity of e-commerce, e-banking, etc.
In the scenario of severe competition and escalating expectation of the customers for newer products and improved alternative delivery channels, the key to survival of banks will of retention of customers loyalty by providing value-added services tailored to their needs, using state-of-the-art technology, instead of relying on outdated practices.
Needless to say, flawless security and seamless integration of operations through untiring efforts of employees and cohesive support from the management would be the key factors that will enable banks to make successful inroads into enabled ‘New Age’ banking.
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