Ammannaya's article on Union Budget 2012-13 has appeared in the Udyamadarshi of May-June 2012
Sunday, July 29, 2012
Taranga Weekly
Taranga Kannada weekly 31st December 1995 issue contains an article covering the interview of Dr K.K.Ammannaya
INDIAN BANKING – DRAWING LESSONS FROM U S FINANCIAL CRISIS
The Bank of International Settlements (BIS) located at Basel in Switzerland which is the bank for Central Banks of all the countries in the world has been reminding about the dangers of un-restricted credit expansion and asset price inflation. Its views on the global financial crisis incorporated in its annual report released in the past provide lot of insight in to t global financial crisis that cropped up in 2008-2009. In its report the Bank has stated – “the current, market turmoil on the world’s main financial centres is without a precedent in the post war period...................Along with the resurgent inflation there are fears that the world economy might be at some kind of tipping point”. The BIS report has also made an allusion to the genesis of the crisis. The report has stated “loans of increasingly poor quality have been made and then sold to the gullible and the greedy, the latter often relying on leverage and short term funding to further increase their profits. This alone is a source of vulnerability. Worse the opacity of the process implies that the ultimate location of the exposure is not always evident”.
GENESIS OF THE CRISIS
The BIS report has thus succinctly brought out how and why the crisis has occurred. It is a little over a year since the US Financial crisis became a global concern. Starting with home loan sector American banks and lending institutions lent recklessly to borrowers who were not credit worthy and who had no repayment capacity, based on their income levels. In the U S everything was left to markets without adequate regulation and with utter disregard to accepted banking principles and sound canons of lending and investment. Sub prime lending spurred, acute competition among banks and other lending institutions which resulted in unsafe unprincipled and indiscriminate lending. This type of lending resulted in dilution of lending standards and brought about total degeneration of banking. These sub prime loans were securitised into innovative products and derivatives. Commercial banks and investment banks aggressively invested in such derivatives. The sub prime loan assets were sold far and wide through securitisation.
It was not clear in many cases who was owning them and how much they were worth. Many future transactions in U S had no asset-base. Rating agencies liberally gave good rating to such derivative products. Auditors also did not find fault with banks either for lending to those who had no capacity to repay or for investments in securitised sub prime loans. The BIS has attributed the long period of easy money and lax supervision as being principal reasons for the crisis. Collapse of 158 year old American Investment Bank Lehman Brothers acquisition of Merril Lynch by Bank of America and financial crisis of AIG (American International Group) have shaken, critically shaken the entire financial world. The U S financial crisis has pushed the U S economy to the brink of a recession. The collapse of banking institutions such as Fortis in Europe, Merril Lynch Lehman Brothers & Washington Mutual in U S has compelled the governments to come out with rescue plans. British government has bought shares worth $ 250 billion in British Banks and US government is buying shares worth $ 700 billion in US banks. US Government has also decided to inject capital to two giant housing loan companies Fannie Mac and Freddie Mac. Rescuing troubled financial institutions has thus ceased to be an un-orthodox strategy even in U S Financial analysts opine that adventurous financial engineering has been the main reason for the crisis in the US.
PRUDENT POLICY BASE
As recently stated by our Prime Minister – Dr Manamohan Singh, India is not insulated from the global financial crisis, but Indian economy is not that vulnerable. Indian banks are relatively free from the crisis because of the prudent and judicious policies adopted and implemented by Government of India and RBI. Prudent policy base provided relative immunity to Indian banks from the major adverse effects of global financial crisis.
Dr Singh in his capacity as Finance Minister implemented financial sector and banking reforms in 1990s on the basis of the blue print provided by Narasimham Committee. Narasimham Model was based on adequate capitalisation, sound provisioning norms and effective supervision.
RBI has now started implementation of Basel II also. Indian model did not permit investment banking on the lines of American investment banking model. In India product innovation was on sound lines and the same did not degenerate to the level of innovation that obtained in US. Another important factor was that India did not allow full capital account convertibility of the rupee. If it was done India would have been exposed to much greater adverse impact and contagion from the crisis prevailing in US and Europe. India proceeded with economic and banking reforms not with boldness but with extreme caution. The risks emanating from the global crisis will continue for some time. Although India is relatively free from the major adverse effects of the crisis, India will surely face some adverse effects. India has already started experiencing ripple effects of the global financial melt down. As indicated by Prime Minister, India too is bound to feel the pain.
Indian banking system particularly the main line banking system comprising SBI group and PSU banks have been able to withstand the crisis so far. It is necessary to limit the impact of the crisis by adopting appropriate strategies.
DRAWING LESSONS
Banks in India have to draw and adopt suitable lessons from the US financial crisis. The BIS report has some useful messages for India. The seriousness of US financial crisis can never be down played in India. Capital flows out of US have started seeking safer sanctuaries. Emerging markets including India do not figure high in the list of preferred destinations. Coping with the consequences of the on-going re-pricing risks is one of the challenges in India and other developing countries.
On the basis of the lessons drawn from the US financial crisis Indian banking sector must adopt a suitable survival strategy. The path to survive to-day and continue to survive in the days to come, is to stay focussed on fundamentals. From a fundamental perspective India’s financial system has strength, has resilience and it has lot of going for it. Banks must focus on leveraging their existing strength and consolidate themselves in terms of financial strength, quality of assets profitability and productively, enhancement of value for stakeholders and overall balance sheet strength. Focussing on quality rather than volumes will be an important basis for success in the present scenario. Banks must remember that leaving everything to markets without adequate regulation and without adherence to accepted banking principles and sound canons of lending will only dilute lending standards and banking standards and make them vulnerable to any crisis. Dilution of lending standards will bring about degeneration of banking.
Therefore, it is necessary for banks during these days of global financial crisis is to ensure strict adherence to accepted norms and canons of lending and investment. Utmost professionalism in credit appraisal and loan approvals is of crucial importance from the point of view of avoiding loan defaults and eliminating fresh additions to the list of non-performing loan accounts. Norms relating to security and value thereof, quality of security, margin and LTV (loan to value ratio), income norm, etc must scrupulously adhered to. Retention of higher margin and restricting loan amount to a lesser percentage of the value of security say 60 to 65 per cent as against 70 to 85 per cent allowed earlier will be a prudent approach in the present scenario. Property prices have either started declining or threatening to fall in many major cities in India. Banks have to exercise utmost care while lending against house properties and immovable properties. Loan amounts must be determined based on careful and comprehensive credit appraisal and having regard to the realistic value of the house property or other immovable property.
COMPREHENSIVE FAILURE
The financial crisis in US is the cumulative result of many questionable practices adopted by banks over the years. Aggressive lending to those who were ineligible for credit based on income norms and repayment capacity securitisation of such loans by way of new products and derivatives and reckless investment in such derivatives by banks failure of auditors to unearth and report the failure of banks to adhere to credit norms and default in repayments by borrowers failure of rating agencies to rate newly innovated products and derivatives correctly and assignment by them of excellent ratings to all such products, etc brought about a comprehensive failure of governance in banks in USA. Banks in India should draw a lesson from this and ensure good governance at all times. Banking is dealing in others money and utmost care and professionalism must be shown in this business. Recently while addressing the north-eastern states banking summit at New Delhi, the Finance Minister – Sri P Chidambaram has stressed the need for banks to function as banks. He stressed the importance of adhering to best banking practices and prudent lending norms.
Professionalism in lending must be given primacy and it has to be ensured that there is no dilution in lending standards.
The traditional canons of lending and investment viz liquidity, safety and profitability hold good even to-day particularly in the context of convulsive developments in the US financial sector. Liquidity through inflow of funds by way of payment of interest and repayment of instalments by borrowers can be ensured by lending only to those who are creditworthy and who can repay the loans. Safety of loans can be ensured by taking adequate security with required margin along with easily realisable collaterals and with other safeguards. Profitability can be ensured by giving quality loans. Banks must put in place an effective follow up mechanism to ensure that loans given continue to be performing standard assets. Also, in the process of lending adequate net interest margin must be ensured through proper and prudent pricing. In the present scenario, it is necessary to adhere to these canons of lending and investment.
In India, credit card defaults and defaults in personal loans may become problem areas in the days to come if adequate care is not taken now. Utmost care must be taken while issuing cards and banks must strictly adhere to the norms and guidelines in this regard. It must be ensured that credit cards are issued only to those who are eligible and who have capacity to honour their commitments under credit card. Banks should also step up their level of disclosures on their credit cards, personal loans, etc.
The financial sector especially, being at the centre of the storm is grappling with plenty of uncertainties. In the US inter-bank lines of credit have all ceased to exist as banks are wary of lending to one another.
SAVING CAPITAL
The stock market crash has made it almost impossible for banks to enter the market for mobilising additional equity at present for meeting the capital adequacy requirement under Basel II. As panic has over taken analytical thinking there are only sellers in the market at present. In this scenario, it will be difficult for banks to come out with IPOs or follow on issues to augment their equity levels. Banks must in the present scenario focus on increasing their capital efficiency. By restricting their lending to borrowers having lower risk weights banks can have lot of saving in capital. Thus, by saving capital to the maximum extent in each lending banks can achieve substantial savings in capital.
Under the Basel II framework, banks will need to provide capital based on the risk associated with their loan port-folios. If a bank has high quality credit exposures, it will save capital on account of lower credit risk. Conversely a bank with relatively lower rated credit exposures will need to provide more capital. Additionally banks will have to provide incremental capital for market risk and operational risk. Capital for operational risk was not part of the previous regulatory framework.
In view of the difficulty in raising fresh capital from the market through public issues and also in view of the fact that government cannot go on infusing capital as and when required banks must spare no efforts in saving capital in the process of their lendings and credit allocations. Thus, ensuring capital efficiency is a vital requirement in managing banks in present turbulent times.
ACCENT ON RECOVERIES
In US even smaller banks and regional lenders which have been suffering from the housing slump are now getting hit by raising loan delinquencies as the economic down turn deepens. The 19 number standard and poor’s 500 Banks index has lost half its value in the past year. The US is now preparing to take stakes in a number of regional banks in order to revive lines of credit to businesses and households. Drawing a lesson from this, banks in India must keep a close watch on all loan accounts and see that no standard asset slips to the category of sub standard assets. Simultaneously efforts at recovery of arrears in existing non-performing loans must be intensified and maximum number of sub-standard accounts must be upgraded as standard assets.
One time settlements and closure of non-performing accounts, rephasement of instalments and reschedulement of accounts etc can also be tried wherever possible. Banks must also make use of the SARFAESI Act wherever possible to accelerate recoveries and closure of NPA accounts. Speedy recycling of funds through recoveries and closure of NPA accounts must be given primacy by all banks. This will help in two ways. Speedier recycling of funds through recoveries will help increase liquidity. Recovery and closure of non-performing loans will significantly contribute to the increase in profitability of banks.
The US economic slow down will cause a deceleration in world economic growth, a factor already noted by the world bank IMF and other global institutions. To-day we observe all round irrational pessimism as against the irrational optimism that existed earlier. This pessimism may bring about reduction in the economic activities. It may take lot of time for global investors to come back to India to invest. Foreign institutional investors have always been net settlers in Indian stock markets for the last several months. Having regard to these developments banks must adopt a cautious approach and restrict their lendings only to those who have strong repayment capacity. It is better to make use of credit information available with CIBIL in the case of every loan applicant and applicants having poor credit scores as per CIBIL data must be avoided. Only applicants having satisfactory credit habits and good track record of repayment may be sanctioned loans.
Banks must also religiously adhere to exposure limits prescribed for loans and investments. Capital market exposure must also be restricted to the minimum level. Banks must adopt enhanced appraisal for issue of fresh credit cards. There are individuals who have five to six cards each issued by different banks. Because of too many credit cards, many of such card holders are not in a position to monitor their dues under different credit cards and make payments. Banks may do well not to issue credit cards to those who possess two or more cards issued by other banks. By means of issuing credit cards to the individuals already having two or more cards banks will be promoting financial indiscipline and dilution of credit standards. This must be avoided. The RBI Governor D Subba Rao has allayed fears of a recession in India and maintained that growth story would continue despite slight-deceleration. He has pegged GDP growth for FY09 at 7.5 to 8 per cent.
STRESS ON PROFESSIONALISM
According to RBI Governor as India’s growth was mainly driven by domestic demand and consumption, the country would be less affected by global financial turmoil but it would not go completely unscathed. RBI has adopted a cautious credit policy. Banks will do well to adopt a cautionary stance in credit expansion, restricting credit only to the credit worthy . Utmost professionalism must guide their credit decisions and approach in the matter of credit expansion.
It is learnt that adventurous financial engineering and product innovation accelerated the financial crisis in US Indian banks have so far adopted a prudent approach to product innovation. In India product innovation has been on sound lines and earlier innovations did not degenerate to the level of innovation that obtained in US Indian banks must continue their present approach to product innovation. Adventurous financial engineering must be avoided at all times.
AUDIT & INSPECTION
Another issue requiring utmost attention in the present scenario is audit and inspection. Banks to-day find it difficult to maintain the minimum required controls expected of them in a new complex and increasingly regulated business environment. The traditional audit and inspection provide assurance that control systems are adequate and function satisfactorily. But, audit and inspection are in fact a post-mortem and findings emerging there from are only after days and months after the transactions are over. Moreover audit and inspection fail to cover all transactions to the extent of 100 per cent. It is possible that audit and inspections may skip several transactions. Many of such skipped transactions may be irregular ones and some among them may be transactions causing financial loss to banks. Audit and inspections are rarely able to check all transactions in a detailed manner for controls compliance. Therefore, there is risk of even frauds remaining undetected. To assist in the efficient capture and evaluation of data sophisticated software tools need to be adopted and used for evaluation of disclosure controls and procedures and internal controls and supervision over financial reporting. It is also necessary to increase the frequency of inspection to ensure that only fewer transactions that have taken place during the immediately preceding period are pending to be checked. This will facilitate checking of majority of transactions and the chances of several transactions going unchecked and unnoticed can be eliminated.
DEPOSIT MOBILISATION
The Prime Minister – Dr Manamohan Singh’s recent assurance on the safety of bank deposit in India will go a long way in helping banks in the task of deposit mobilisation. Banks must make sincere and serious efforts to mobilise smaller deposits of the public to increase liquidity. The on-going efforts at financial inclusion and opening of new accounts including no-frills accounts must be converted as new opportunities for canvassing small retail deposits. Smaller retail deposits will lend more stability to the deposit portfolios of banks and withdrawals if any of such small deposits will not cause any sudden fluctuations in the deposit position of banks. Banks must as a matter of strategy, focus on small deposits in the present scenario.
High cost bulk deposits must be avoided as far as possible and small deposits of individual customers must be preferred to such bulk deposits. Present global financial crisis may not have much adverse impact on small and micro enterprises. It is better for banks to focus on micro finance. Micro finance is nothing but small financial assistance provided to small entrepreneurs for undertaking productive activities. Micro credit has potential to become an effective instrument for alleviation of poverty.
GOOD GOVERNANCE
A vital requirement during periods of financial crisis like this is to focus on good corporate governance. The corporate governance philosophy of banks has to be based on pursuit of sound business ethics and strong professionalism that aligns the interests of all stake holders and the society at large. Strengthening of public confidence in banks is a vital requirement. Disclosure of reliable information facilitates market discipline strengthens confidence and reduces chances for rumors and creation of an atmosphere of suspicion and misleading information that may bring about market instability. Banks must give primacy to enhanced corporate governance in crisis periods like this and creation and enhancement of value for stake-holders should be an area of focus in corporate governance.
All banking challenges in a period of crisis like this can be met resolutely and with confidence only if all the branch managers, officers and staff in banks join hands in the task. Therefore, what is most essential is full involvement and participation of the entire personnel in all bank functions particularly in mobilisation of deposits, recovery of arrears in respect of all irregular loan accounts and up-gradation of loan accounts from sub-standard to standard categories and closure of bad loans and non-performing loan accounts. Ensuring optimum performance by each branch manager, officer and staff member will be crucial in this period of trial.
Thus, Indian banks can surely withstand the adverse effects of global financial crisis and survive on an enduring basis if they draw appropriate lessons from the US financial crisis and adopt suitable strategies in the light thereof. Staying focussed to fundamentals, adoption of utmost professionalism and conformity to prescribed norms of lending and investment and adherence to sound banking principles and ensuring optimum capital efficiency are vital for success and continued survival of banks.
GENESIS OF THE CRISIS
The BIS report has thus succinctly brought out how and why the crisis has occurred. It is a little over a year since the US Financial crisis became a global concern. Starting with home loan sector American banks and lending institutions lent recklessly to borrowers who were not credit worthy and who had no repayment capacity, based on their income levels. In the U S everything was left to markets without adequate regulation and with utter disregard to accepted banking principles and sound canons of lending and investment. Sub prime lending spurred, acute competition among banks and other lending institutions which resulted in unsafe unprincipled and indiscriminate lending. This type of lending resulted in dilution of lending standards and brought about total degeneration of banking. These sub prime loans were securitised into innovative products and derivatives. Commercial banks and investment banks aggressively invested in such derivatives. The sub prime loan assets were sold far and wide through securitisation.
It was not clear in many cases who was owning them and how much they were worth. Many future transactions in U S had no asset-base. Rating agencies liberally gave good rating to such derivative products. Auditors also did not find fault with banks either for lending to those who had no capacity to repay or for investments in securitised sub prime loans. The BIS has attributed the long period of easy money and lax supervision as being principal reasons for the crisis. Collapse of 158 year old American Investment Bank Lehman Brothers acquisition of Merril Lynch by Bank of America and financial crisis of AIG (American International Group) have shaken, critically shaken the entire financial world. The U S financial crisis has pushed the U S economy to the brink of a recession. The collapse of banking institutions such as Fortis in Europe, Merril Lynch Lehman Brothers & Washington Mutual in U S has compelled the governments to come out with rescue plans. British government has bought shares worth $ 250 billion in British Banks and US government is buying shares worth $ 700 billion in US banks. US Government has also decided to inject capital to two giant housing loan companies Fannie Mac and Freddie Mac. Rescuing troubled financial institutions has thus ceased to be an un-orthodox strategy even in U S Financial analysts opine that adventurous financial engineering has been the main reason for the crisis in the US.
PRUDENT POLICY BASE
As recently stated by our Prime Minister – Dr Manamohan Singh, India is not insulated from the global financial crisis, but Indian economy is not that vulnerable. Indian banks are relatively free from the crisis because of the prudent and judicious policies adopted and implemented by Government of India and RBI. Prudent policy base provided relative immunity to Indian banks from the major adverse effects of global financial crisis.
Dr Singh in his capacity as Finance Minister implemented financial sector and banking reforms in 1990s on the basis of the blue print provided by Narasimham Committee. Narasimham Model was based on adequate capitalisation, sound provisioning norms and effective supervision.
RBI has now started implementation of Basel II also. Indian model did not permit investment banking on the lines of American investment banking model. In India product innovation was on sound lines and the same did not degenerate to the level of innovation that obtained in US. Another important factor was that India did not allow full capital account convertibility of the rupee. If it was done India would have been exposed to much greater adverse impact and contagion from the crisis prevailing in US and Europe. India proceeded with economic and banking reforms not with boldness but with extreme caution. The risks emanating from the global crisis will continue for some time. Although India is relatively free from the major adverse effects of the crisis, India will surely face some adverse effects. India has already started experiencing ripple effects of the global financial melt down. As indicated by Prime Minister, India too is bound to feel the pain.
Indian banking system particularly the main line banking system comprising SBI group and PSU banks have been able to withstand the crisis so far. It is necessary to limit the impact of the crisis by adopting appropriate strategies.
DRAWING LESSONS
Banks in India have to draw and adopt suitable lessons from the US financial crisis. The BIS report has some useful messages for India. The seriousness of US financial crisis can never be down played in India. Capital flows out of US have started seeking safer sanctuaries. Emerging markets including India do not figure high in the list of preferred destinations. Coping with the consequences of the on-going re-pricing risks is one of the challenges in India and other developing countries.
On the basis of the lessons drawn from the US financial crisis Indian banking sector must adopt a suitable survival strategy. The path to survive to-day and continue to survive in the days to come, is to stay focussed on fundamentals. From a fundamental perspective India’s financial system has strength, has resilience and it has lot of going for it. Banks must focus on leveraging their existing strength and consolidate themselves in terms of financial strength, quality of assets profitability and productively, enhancement of value for stakeholders and overall balance sheet strength. Focussing on quality rather than volumes will be an important basis for success in the present scenario. Banks must remember that leaving everything to markets without adequate regulation and without adherence to accepted banking principles and sound canons of lending will only dilute lending standards and banking standards and make them vulnerable to any crisis. Dilution of lending standards will bring about degeneration of banking.
Therefore, it is necessary for banks during these days of global financial crisis is to ensure strict adherence to accepted norms and canons of lending and investment. Utmost professionalism in credit appraisal and loan approvals is of crucial importance from the point of view of avoiding loan defaults and eliminating fresh additions to the list of non-performing loan accounts. Norms relating to security and value thereof, quality of security, margin and LTV (loan to value ratio), income norm, etc must scrupulously adhered to. Retention of higher margin and restricting loan amount to a lesser percentage of the value of security say 60 to 65 per cent as against 70 to 85 per cent allowed earlier will be a prudent approach in the present scenario. Property prices have either started declining or threatening to fall in many major cities in India. Banks have to exercise utmost care while lending against house properties and immovable properties. Loan amounts must be determined based on careful and comprehensive credit appraisal and having regard to the realistic value of the house property or other immovable property.
COMPREHENSIVE FAILURE
The financial crisis in US is the cumulative result of many questionable practices adopted by banks over the years. Aggressive lending to those who were ineligible for credit based on income norms and repayment capacity securitisation of such loans by way of new products and derivatives and reckless investment in such derivatives by banks failure of auditors to unearth and report the failure of banks to adhere to credit norms and default in repayments by borrowers failure of rating agencies to rate newly innovated products and derivatives correctly and assignment by them of excellent ratings to all such products, etc brought about a comprehensive failure of governance in banks in USA. Banks in India should draw a lesson from this and ensure good governance at all times. Banking is dealing in others money and utmost care and professionalism must be shown in this business. Recently while addressing the north-eastern states banking summit at New Delhi, the Finance Minister – Sri P Chidambaram has stressed the need for banks to function as banks. He stressed the importance of adhering to best banking practices and prudent lending norms.
Professionalism in lending must be given primacy and it has to be ensured that there is no dilution in lending standards.
The traditional canons of lending and investment viz liquidity, safety and profitability hold good even to-day particularly in the context of convulsive developments in the US financial sector. Liquidity through inflow of funds by way of payment of interest and repayment of instalments by borrowers can be ensured by lending only to those who are creditworthy and who can repay the loans. Safety of loans can be ensured by taking adequate security with required margin along with easily realisable collaterals and with other safeguards. Profitability can be ensured by giving quality loans. Banks must put in place an effective follow up mechanism to ensure that loans given continue to be performing standard assets. Also, in the process of lending adequate net interest margin must be ensured through proper and prudent pricing. In the present scenario, it is necessary to adhere to these canons of lending and investment.
In India, credit card defaults and defaults in personal loans may become problem areas in the days to come if adequate care is not taken now. Utmost care must be taken while issuing cards and banks must strictly adhere to the norms and guidelines in this regard. It must be ensured that credit cards are issued only to those who are eligible and who have capacity to honour their commitments under credit card. Banks should also step up their level of disclosures on their credit cards, personal loans, etc.
The financial sector especially, being at the centre of the storm is grappling with plenty of uncertainties. In the US inter-bank lines of credit have all ceased to exist as banks are wary of lending to one another.
SAVING CAPITAL
The stock market crash has made it almost impossible for banks to enter the market for mobilising additional equity at present for meeting the capital adequacy requirement under Basel II. As panic has over taken analytical thinking there are only sellers in the market at present. In this scenario, it will be difficult for banks to come out with IPOs or follow on issues to augment their equity levels. Banks must in the present scenario focus on increasing their capital efficiency. By restricting their lending to borrowers having lower risk weights banks can have lot of saving in capital. Thus, by saving capital to the maximum extent in each lending banks can achieve substantial savings in capital.
Under the Basel II framework, banks will need to provide capital based on the risk associated with their loan port-folios. If a bank has high quality credit exposures, it will save capital on account of lower credit risk. Conversely a bank with relatively lower rated credit exposures will need to provide more capital. Additionally banks will have to provide incremental capital for market risk and operational risk. Capital for operational risk was not part of the previous regulatory framework.
In view of the difficulty in raising fresh capital from the market through public issues and also in view of the fact that government cannot go on infusing capital as and when required banks must spare no efforts in saving capital in the process of their lendings and credit allocations. Thus, ensuring capital efficiency is a vital requirement in managing banks in present turbulent times.
ACCENT ON RECOVERIES
In US even smaller banks and regional lenders which have been suffering from the housing slump are now getting hit by raising loan delinquencies as the economic down turn deepens. The 19 number standard and poor’s 500 Banks index has lost half its value in the past year. The US is now preparing to take stakes in a number of regional banks in order to revive lines of credit to businesses and households. Drawing a lesson from this, banks in India must keep a close watch on all loan accounts and see that no standard asset slips to the category of sub standard assets. Simultaneously efforts at recovery of arrears in existing non-performing loans must be intensified and maximum number of sub-standard accounts must be upgraded as standard assets.
One time settlements and closure of non-performing accounts, rephasement of instalments and reschedulement of accounts etc can also be tried wherever possible. Banks must also make use of the SARFAESI Act wherever possible to accelerate recoveries and closure of NPA accounts. Speedy recycling of funds through recoveries and closure of NPA accounts must be given primacy by all banks. This will help in two ways. Speedier recycling of funds through recoveries will help increase liquidity. Recovery and closure of non-performing loans will significantly contribute to the increase in profitability of banks.
The US economic slow down will cause a deceleration in world economic growth, a factor already noted by the world bank IMF and other global institutions. To-day we observe all round irrational pessimism as against the irrational optimism that existed earlier. This pessimism may bring about reduction in the economic activities. It may take lot of time for global investors to come back to India to invest. Foreign institutional investors have always been net settlers in Indian stock markets for the last several months. Having regard to these developments banks must adopt a cautious approach and restrict their lendings only to those who have strong repayment capacity. It is better to make use of credit information available with CIBIL in the case of every loan applicant and applicants having poor credit scores as per CIBIL data must be avoided. Only applicants having satisfactory credit habits and good track record of repayment may be sanctioned loans.
Banks must also religiously adhere to exposure limits prescribed for loans and investments. Capital market exposure must also be restricted to the minimum level. Banks must adopt enhanced appraisal for issue of fresh credit cards. There are individuals who have five to six cards each issued by different banks. Because of too many credit cards, many of such card holders are not in a position to monitor their dues under different credit cards and make payments. Banks may do well not to issue credit cards to those who possess two or more cards issued by other banks. By means of issuing credit cards to the individuals already having two or more cards banks will be promoting financial indiscipline and dilution of credit standards. This must be avoided. The RBI Governor D Subba Rao has allayed fears of a recession in India and maintained that growth story would continue despite slight-deceleration. He has pegged GDP growth for FY09 at 7.5 to 8 per cent.
STRESS ON PROFESSIONALISM
According to RBI Governor as India’s growth was mainly driven by domestic demand and consumption, the country would be less affected by global financial turmoil but it would not go completely unscathed. RBI has adopted a cautious credit policy. Banks will do well to adopt a cautionary stance in credit expansion, restricting credit only to the credit worthy . Utmost professionalism must guide their credit decisions and approach in the matter of credit expansion.
It is learnt that adventurous financial engineering and product innovation accelerated the financial crisis in US Indian banks have so far adopted a prudent approach to product innovation. In India product innovation has been on sound lines and earlier innovations did not degenerate to the level of innovation that obtained in US Indian banks must continue their present approach to product innovation. Adventurous financial engineering must be avoided at all times.
AUDIT & INSPECTION
Another issue requiring utmost attention in the present scenario is audit and inspection. Banks to-day find it difficult to maintain the minimum required controls expected of them in a new complex and increasingly regulated business environment. The traditional audit and inspection provide assurance that control systems are adequate and function satisfactorily. But, audit and inspection are in fact a post-mortem and findings emerging there from are only after days and months after the transactions are over. Moreover audit and inspection fail to cover all transactions to the extent of 100 per cent. It is possible that audit and inspections may skip several transactions. Many of such skipped transactions may be irregular ones and some among them may be transactions causing financial loss to banks. Audit and inspections are rarely able to check all transactions in a detailed manner for controls compliance. Therefore, there is risk of even frauds remaining undetected. To assist in the efficient capture and evaluation of data sophisticated software tools need to be adopted and used for evaluation of disclosure controls and procedures and internal controls and supervision over financial reporting. It is also necessary to increase the frequency of inspection to ensure that only fewer transactions that have taken place during the immediately preceding period are pending to be checked. This will facilitate checking of majority of transactions and the chances of several transactions going unchecked and unnoticed can be eliminated.
DEPOSIT MOBILISATION
The Prime Minister – Dr Manamohan Singh’s recent assurance on the safety of bank deposit in India will go a long way in helping banks in the task of deposit mobilisation. Banks must make sincere and serious efforts to mobilise smaller deposits of the public to increase liquidity. The on-going efforts at financial inclusion and opening of new accounts including no-frills accounts must be converted as new opportunities for canvassing small retail deposits. Smaller retail deposits will lend more stability to the deposit portfolios of banks and withdrawals if any of such small deposits will not cause any sudden fluctuations in the deposit position of banks. Banks must as a matter of strategy, focus on small deposits in the present scenario.
High cost bulk deposits must be avoided as far as possible and small deposits of individual customers must be preferred to such bulk deposits. Present global financial crisis may not have much adverse impact on small and micro enterprises. It is better for banks to focus on micro finance. Micro finance is nothing but small financial assistance provided to small entrepreneurs for undertaking productive activities. Micro credit has potential to become an effective instrument for alleviation of poverty.
GOOD GOVERNANCE
A vital requirement during periods of financial crisis like this is to focus on good corporate governance. The corporate governance philosophy of banks has to be based on pursuit of sound business ethics and strong professionalism that aligns the interests of all stake holders and the society at large. Strengthening of public confidence in banks is a vital requirement. Disclosure of reliable information facilitates market discipline strengthens confidence and reduces chances for rumors and creation of an atmosphere of suspicion and misleading information that may bring about market instability. Banks must give primacy to enhanced corporate governance in crisis periods like this and creation and enhancement of value for stake-holders should be an area of focus in corporate governance.
All banking challenges in a period of crisis like this can be met resolutely and with confidence only if all the branch managers, officers and staff in banks join hands in the task. Therefore, what is most essential is full involvement and participation of the entire personnel in all bank functions particularly in mobilisation of deposits, recovery of arrears in respect of all irregular loan accounts and up-gradation of loan accounts from sub-standard to standard categories and closure of bad loans and non-performing loan accounts. Ensuring optimum performance by each branch manager, officer and staff member will be crucial in this period of trial.
Thus, Indian banks can surely withstand the adverse effects of global financial crisis and survive on an enduring basis if they draw appropriate lessons from the US financial crisis and adopt suitable strategies in the light thereof. Staying focussed to fundamentals, adoption of utmost professionalism and conformity to prescribed norms of lending and investment and adherence to sound banking principles and ensuring optimum capital efficiency are vital for success and continued survival of banks.
EVER GREEN REVOLUTION
The idea of ever green revolution mooted by Dr.M.S.Swaminathan noted agricultural scientist and architect of first green revolution deserves to be taken up by all including the government with all seriousness.We should work towards an ''ever green revolution''in oreder to achieve food security on an enduring basis.
K.K.Pai Award to K.V.Kamath
Sri K.V Kamath Chairman ICICI Bank has been selected for this year'sK.K.Pai National Banking Award.This award will be presented to Sri Kamath in a public function later this year
Saturday, January 21, 2012
Banking Growth In Karnataka
Ammannaya's article on Banking Growth in Karnataka has appeared in Southern Economist Dated October 1,2011
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