EMERGING ISSUES IN BANKING SECTOR -CHALLENGES AHEAD

(Address at UGC sponsored State Level Seminar
held on 22.10.2008 at Chamarajanagar)

I am extremely happy to be in your midst this morning as a participant in the UGC sponsored State Level Seminar on “Emerging Issues in Banking Sector – Challenges Ahead”. The theme chosen has lot of relevance & importance to-day, particularly in the context of the global financial melt down and the convulsive developments in the US financial sector & also in the financial sector in Europe. The sub themes viz consolidation of banks, product and activity diversification & micro finance are also of supreme importance and are fundamental for banking success. I hope the deliberations on these themes will unfold lot of new ideas that may form inputs in future strategic planning. It is important to remember that we have assembled here to deliberate on these vital issues at a time when financial sectors in US & Europe are in the midst of a crisis. The financial crisis in US & Europe are bound to take the discussions to the crisis proper and crisis related issues – issue of management of banks during crisis & slow down periods, issue of conformity – conformity to time tested canons of lending & investment issue of adherence to sound banking principles and best banking practices. The most important issues that have now emerged are the issues of credit operations in a manner conforming to prescribed norms and sound canons of lending and investment, the issue professionalism & the issue of regulation and governance.

Collapse of 158 year old American Investment Bank, Lehman Brothers, acquisition of Merril Lynch by Bank of America & financial Crisis of AIG (American International Group) have shaken, critically shaken the entire financial world. India is presently having relative freedom from the panic and crisis that followed the collapse of banking institutions such as, Fortis in Europe, Merril Lynch Lehman Bros & Washington Mutual in US. British Government has brought shares worth $ 250 billion in British banks & US Government in buying shares worth $ 700 billion in US banks.

PRUDENT POLICY BASE

As recently stated by our Prime Minister – Dr Manamohan Singh, India too is not insulated but Indian economy is not that vulnerable. Indian banks are relatively free from the crisis because of the prudent & judicious policies adopted by RBI & Government of India. Prudent Policy-base has been a great strength for Indian banking.

Dr Singh implemented 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 & effective supervision. RBI has started implementing Basel II too Indian model did not permit investment banking on the lines of American investment banking model. In India, product innovation was also on sound lines and the same did not degenerate to the level of innovation that obtained in US. Also, India did not allow full capital account convertibility. If it was done India would have been exposed to much greater adverse impact & contagion from the current crisis in US and Europe. India proceeded with economic and banking reforms not with boldness but with extreme caution. All the same, some impact is inevitable and some adverse impact is bound to be there on India in this globalised environment. India has started experiencing ripple effects of global financial melt down.


SURVIVAL STRATEGY

Indian banking system, particularly the main line banking system comprising SBI group and PSU banks have withstood the crisis so far and they are sure withstand the crisis in the days to come. The way to survive and also to continue to survive is to stay focussed on the fundamentals. From a fundamental perspective India’s financial system has strength has resilience and it has lot of going for it. To-day, what is Worrisome is the al-round irrational pessimism as against the irrational optimism that prevailed earlier. Once this gets evaporated global investors will come back to India to invest and earn in view of the soundness and robustness of the system. However, banks in India have to draw and adopt suitable lessons from the US financial crisis. Leaving everything to markets without adequate regulation with utter disregard to accepted banking principles and sound canons of lending will only dilute lending standards and banking standards and bring about degeneration of banking. This is what has happened in US Sub-prime lending i.e. giving credit to those who are not credit worthy spurred acute competition in US among banks and financial institutions which resulted in unsafe, un-principled and indiscriminate lending. These sub-prime loans were securitised into innovative products and derivatives commercial banks and investment banks aggressively invested in such derivates. Many futures transactions in US had no asset banking or asset base. Rating agencies liberally gave good rating to such products and auditors too did not find fault with banks either for sub-prime lending or for investments in the derivatives having base in such sub-prime loans while we can be proud of ourselves for escaping the full Trauma of Newyork, London & Berlin, we must always remember to adhere to the sound canons of lending and investment and best banking practices. Utmost professionalism is vital in banking as we use money of others in the business.

REMARKABLE TRANSFORMATION

Indian banking has seen a thorough change total change a remarkable transformation in post-reform era. Shift of emphasis to risk based management acute competition as between banks for amassing business, change in efficiency parameters, product diversification, clear trend towards universal banking, accent on consolidation, IT initiatives including CBS, shift of focus to concerns from size related issues, new HRD initiatives etc are the changes that we have been observing in post-reform era.

The reform measures implemented on the basis of recommendations of Narasimhan Committee included progressive reduction of statutory liquidity ratio and cash reserve ratio, prescription of uniform accounting norms with regard to classification of assets recognition of income and provisioning enactment of an Act of Parliament providing for setting up of tribunals for expeditious adjudication and recovery of bank loans establishment of separate board for financial supervision of banks, permission for the entry of new private banks to inject an element of competition between public and private sector banks rationalization and deregulation of interest rates, enactment of SARFAESI Act implementation of capital adequacy norms and re-capitalisation of banks, revision of balance sheet format to ensure increased transparency, permission to banks to access capital market for mobilizing additional equity, introduction of Prime Lending Rate (PLR), New branch licensing and New bank licensing policy, banking ombudsman scheme, etc.

Classification of Reforms:

Reform measures can be classified into six categories namely a) measures meant for promotion of competition (b) measures meant for strengthening role of the market (c) prudential measures (d) legal measures (e) measures meant for strengthening supervision or supervisory measures and (f) measures relating technology. Some of the reform measures were meant for strengthening of competition. They included grant of some operational autonomy to public sector banks, reduction of government stake to 51 per cent of the total equity and permission to mobilize equity to the extent of 49 per cent from the market, adoption of transparent norms for the entry of private sector, foreign and joint venture banks, permission for foreign investment in the financial sector in the form of FDI as well as port-folio investment, permission to public sector banks to diversify product port-folio and business activities, road map for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks and NBFCs with banks, issue of guidelines on ownership and governance in private sector banks, etc. Reform measures initiated to strengthen the role of market forces included progressive reduction in SLR and CRR, market determined pricing of government securities, deregulation of interest rates with a few exceptions and increased transparency and disclosure standards to facilitate market discipline introduction of pure call money market, auction based repo-reverse repos for short term liquidity requirement, introduction of improved payment and settlement systems, etc. Prudential measures which have been implemented, covered, fulfillment of capital adequacy norms, new accounting, income recognition, provisioning and exposure norms. Measures initiated to strengthen risk management included assignment of risk weights to different categories of assets, norms on connected lending, credit concentration norms, application of market-to-market principle for investment port-folio and fixation of limits for deployment of funds in sensitive sectors and activities.

In addition, KYC guidelines, anti-money laundering standards, introduction of capital charge for market risk, higher graded provisioning for NPAs etc were adopted for implementation. Institutional and legal measures introduced by way of supportives to banks to improve their performance in the area of recovery and asset quality up-gradation included setting up of Lok Adalats, debt recovery tribunals asset reconstruction companies, settlement advisory committees, corporate debt restructuring mechanism, etc Enactment of SARFAESI Act was another important measure initiated by the government. Setting up of CIBIL for the purpose of sharing credit information and establishment of clearing corporation of India (CCIL) to act as central counter party for facilitating payments and settlements systems relating to fixed income securities and money market instruments were also supportives extended to banks. Certain supervisory measures were also initiated in the reform period. They were establishment of separate Board for Financial Supervision in RBI introduction of CAMELS supervisory rating system, recasting of the role of statutory auditors and increased internal control through strengthening of internal audit, strengthening of corporate governance etc. The technology related measures implemented were setting up of INFINET as the communication back bone for the financial sector introduction of negotiated dealing system for screen based trading in government securities and Real Time Gross Settlement System (RTGS).

Changes Galore:

Reforms have made significant impact on banks and their functioning. The following are the details of the banking transformation that took place as a result of impact of reforms:-

1. Risk based management: There are various types of risk such as interest rate risk, credit risk, liquidity risk, market risk, operational risk, etc. Banks have started to give attention to all types of risks in their risk management strategies. The RBI has also shifted its focus to risk based supervision. Banks have adopted comprehensive risk management systems. Risk management systems spells out internationally accepted methods of risk measurement for various types of risks to calculate capital charge required for meeting prescribed capital adequacy ratio. Banks have set up separate risk management departments charged with the task of risk management. Risk management involves many challenges. These challenges include compliance with risk adjusted capital and capital ratios, as a key regulatory and supervisory tool, ensuring risk assessment by line of business, product or even individual customer for making risk profile comprehensive adoption of risk adjusted return on capital and return on risk adjusted capital for efficient port-folio management arranging for adequate IT initiatives for enabling comprehensive MIS and better risk based decision – support, adoption and implementation of better and prudent ALM system that would conform to the dictums of risk based supervisory system.

2. Acute competition: In post-reform era, competition between banks is constantly on the increase. The market for bank services and products has now became a buyers’ market in respect of some products and services and the same will become a completely and universally buyers’ market in the years to come. Competition has become acute consequent on the birth of new generation private sector banks. Because of competition now there is need to lay greater focus on product innovation backed by IT advancement and thrust on customization process of such products. There is also need for greater focus on R&D initiatives and efforts. There is now increased focus on customer-orientation in all activities of banks. Because of competition banks are now giving greater attention to marketing of various products and services. Increase in competition may bring about further change in marketing strategy of banks, involving simulative analysis for clients, products and market segments with the help of sophisticated quantitative tools.

3. Change in Efficiency Parameters: In post-reform period, we find a complete change in efficiency parameters. To-day, what is important is strength of Balance Sheet. Return on assets, return on risk adjusted capital net interest margin, quality of assets, NPA percentage per employee business, per employee profit and overall per employee productivity proportion of low cost deposits are considered important to-day. Because of change in efficiency parameters there is now added emphasis on professionalism on the part of bank officers and staff and also on good corporate governance to increase customer satisfaction and enhance shareholder value. Banks will have to assume still tougher posture to recover NPAs and further reduce NPA percentage.

4. Universal Banking: As a result of reforms, the trend has been clearly towards universal banking. Now banks market credit cards, insurance products, mutual funds and even provide demat accounts and trading platform. There is no takers for narrow banking.

5. Mergers and Acquisitions: In post-reform era, we have seen many mergers and acquisitions. New Bank of India, a nationalized bank and Negungadi Bank Ltd were merged with Punjab National Bank. Kashinath Seth Bank was merged with SBI in 1995-96. Barelley Corp bank and South Gujarat Local Area Bank were merged with Bank of Baroda. Times Bank and Centurion Bank of Punjab have been merged with HDFC Bank. Bank of Madura, ICICI Ltd and Sangli Bank have been merged with ICICI Bank. Sikkim Bank was merged with Union Bank of India in 1999-2000. Global Trust Bank was merged with Oriental Bank of Commerce, United Western Bank was merged with IDBI Bank. Ganesh Bank of Kuruvalwad was merged with Federal Bank in 2006. Lord Krishna Bank and Bank of Muscat SAOG were merged with Centurion Bank of Punjab. Government of India encourages mergers as there is need for mergers to create larger and stronger banks and to bring about a new banking order. Mergers may be synergy-based mergers to derive economies of scale, market-driven mergers and mergers between banks and financial institutions including NBFCs in the interests of furthering universal banking. Mergers of public sector banks can also be done to create global banking institutions. Through the process of mergers, it is better to create 4 to 5 global banks, 10 to 15 national level players and remaining banks can be institutions, having regional character. We have seen even mergers of RRBs. State-wise and sponsor-bankwise mergers have brought about reduction in the number of RRBs from 196 to 98. Merger of South Gujarat Local Area Bank with Bank of Baroda has taken place in 2004.

Consolidation through mergers may take a back seat for the time being because of the present global crisis. For the present accent should be on consolidation of each bank in terms of its financial strength and volume of quality business and in terms of productivity and profitability enhancement of value for stake holders and overall Balance Sheet strength.

6. IT Initiatives: In post-reform era there have been significant IT initiatives. In every bank, there has been stress on increased IT application and efforts are on to absorb latest technology in respect of all branches for greater customer conveniences right sizing manpower better MIS and internal control improved risk management, better ALM etc. Banks are striving hard to expand CBS to all branches in a phased manner. Strategic alliance among banks in areas like, ATM sharing and funds transfer, etc have been new developments in post-reform era. Computerisation of all branches including rural branches establishment of rural ATMs etc are expected in the days to come.

7. Focus on Concerns: Another development in post-reform period has been a shift in focus from size related issues to concerns in respect of productivity, efficiency profitability return on capital net interest margin return on assets etc. In the days to come, there will be greater stress on these concerns. This will result in adoption of still better and more prudent risk management system, better and more effective management of spreads and net interest margin through cost cutting product innovation product-wise and business-line-wise cost, income and profitability analysis steps at augmentation of fee-based income etc.

8. Towards Partial Privatisation: Moving towards partial privatisation was a trend observed in port-reform period. Government stake in public sector bank stands reduced at 51 per cent from the original 100 per cent. It is possible that any new government coming to power in future may reduce stake to 33 per cent if there is adequate support for the same. When BIP led government was in power there was such a move, but the same was given up because of opposition from the left.

9. HRD Initiatives: In post-reform era there have been lot of human resource development initiatives. There is stress on objective manpower planning, adoption of scientific methods for evaluating the contributions of staff etc. Out-sourcing of certain items of work, is also a development in post-reform period. Fresh recruitment of staff including specialists is taking place in all banks. Performance linked reward system may also be implemented in public sector banks in the years ahead. Average age of staff in some public sector banks is high and this must be reduced by shedding of excessive inefficient staff aged beyond 50 and younger boys and girls with good educational background and IT skills must be recruited in their place. There should be special courses for preparing bankers for to-morrow. National Institute of Bank Management (NIBM) has launched a post graduate programme in banking. This is meant for preparing bank officers. NIBM alone cannot meet the requirements of such trained officers in all banks. Hence, all management institutes may also start suitably designed post graduate programmes for preparing bank officers for to-morrow. MBA (finance) candidates coming out from management institutes have to be given training by banks in job specific skills. If management institutes launch programmes on the lines of the programme launched by NIBM, banks can recruit them and straight away put them on the job. This will save lot of time taken in providing job – specific training in banks.

Increased strength: On account of banking reforms, Indian banks have become relatively much stronger vis-à-vis their counterparts in other Asian countries in terms of range of loan products and services, range of deposit products, capital adequacy ratio, quality of assets, profitability and productivity and overall balance sheet strength. But, the banking sector will have to encounter new challenges particularly in the context Basel II norms that are being implemented and the creation of global brands, anti-money laundering standards and entry of foreign and new players. Standard and poor’s analysis has shown that
Indian banking is ahead of China. Indonesia, Philippines and Vietnam. But, the banking sectors of Australia, New Zealand, Singapore, Hongkong, Japan, South Korea and Thailand are ahead of Indian banks. The study undertaken by Moody’s Investor Services has revealed that Indian banking is qualitatively better than its counterparts even in developed countries like, Japan, Singapore and Australia. Indian banks have posted the highest return on equity compared to their Asian counter parts during the last four years. There has been a distinctly discernible improvement in the performance of Indian banks on various fronts. But, the acquisition of a globally competitive size for Indian banks is a major challenge. Banks in other Asian countries, particularly in China are large in size compared to Indian banks. There will be a severe strain on capital on account of implementation of Basel II norms. The RBI has recently issued guidelines to banks on Pillar 2 of Basel II Framework. Pillar 2 deals with supervisory review process the objective of which is to ensure that banks have adequate capital to support all risks and also to encourage them to develop and use better risk management techniques for monitoring and managing their risks. The RBI guidelines listed some risks that banks are generally exposed to, but which are not fully captured in the regulatory Capital to Risk Asset Ratio (CRAR), such as interest rate risk, credit concentration risk, liquidity risk, settlement risk and reputational risk among others. The RBI has asked banks to develop an Internal Capital Adequacy Assessment Process (ICAAP) commensurate with their size, level of complexity, risk profile and scope of operations. This would be in addition to calculation of regulatory capital requirement under Pillar I. The implementation of new norms and guidelines involves a new challenge for banks.

Acquisition of competitive advantage: The vision for a strong vibrant and globally competitive banking sector in India is based on achievement of competitive advantage the acquisition of which is possible only through stress on efficiency increase in productivity and improvement in profitability, up-scaling of technological upgradation and continued improvement of overall balance sheet strength of banks. This would also require adoption of globally recognised best practices on the part of banks. Facing the challenge of change in terms of range of products, delivery channels, process, culture, structure and overall capabilities would require key structural changes such as consolidation full implementation of Basel II norms, implementation of real time gross settlement system at all branches, greater efficiency and higher productivity most effective risk management practices better credit management techniques to ensure improved credit quality good corporate governance better technology effective customer relationship management, focus on non-interest income improvement in human resource capabilities and increase in professionalism at all levels. Concentrated attention on these vital aspects can alone fetch competitive advantage.

Productivity: Business per employee of Indian banks increased from Rs.5-4 million in 1992 to Rs.16.3 million in 2004 and profit per employee rose from Rs.20,000/- to Rs.1,50,000/- in the same period. Also, business per branch increased from Rs.109.9 million to Rs.254.5 million in the above period. Measures of profitability i.e. return on assets and operating profit ratio and efficiency measures of net interest margin, operating profit to staff expense, operating cost ratio and staff expense ratio have to be improved. There is therefore need to increase business volumes by leveraging technology and down-sizing of staff strength to reduce cost of intermediation. All controllable costs must be reduced by banks.
Retail Banking: This must continue to be an area of focus. Core banking solution must be expanded by all banks to cover all of their branches. Measuring and managing risk across a range of diverse business activities through integrated risk management requires devising a comprehensive integrated risk management framework. This requires urgent attention by all banks.

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 inspections are in fact, a post-mortem and the findings emerging there-from are only after the transactions are over. Also audit and inspections may not cover all transactions and many may go un-noticed. They are rarely able to check all transactions in a detailed manner for controls compliance. Therefore, there is a risk of even frauds remaining undetected. To assist in the efficient capture and evaluation of data sophisticated software tools need to be used for evaluation of disclosure controls and procedures and internal controls and supervision over financial reporting.

Corporate Governance: corporate governance is of crucial importance for banks. The corporate governance philosophy of banks has to be based on the pursuit of sound business ethics and strong professionalism that aligns the interests of all stakeholders and the society at large. It is therefore necessary to constantly strengthen corporate governance mechanism in all banks.

Disclosure of reliable information facilitates market discipline, strengthens confidence and reduces the chances for rumours and creation of atmosphere of suspicion and misleading information that may bring about market instability. Indian accounting standards still lag behind global practices in many respects. This has to be addressed effectively at the earliest.

Innovative business Model: The introduction of innovative business models and financial technologies the world over has received an impetus through slashing operating cost through higher labour productivity innovation and business process re-engineering, further reduction of NPAs, micro planning, branch-centric profit planning, effective implementation of plans and monitoring of results CBS and market centric HRM policies and manpower planning. Very high average age of staff, requirement of new skills and talents, working in a computerised environment, foray into new and emerging areas require recruitment of new staff and specialists, extensive training etc. Although 86 per cent of PSBs are fully computerised only 44 per cent are actually functioning under CBS platform. Covering all branches in all banks under CBS will be a challenge for banks.

Increased customer-orientation and customer focus, product innovation, greater use of multiple channels like ATMs internet and mobile banking, etc efficient credit delivery besides building up sound financials are vital for banks for facing emerging challenges and obstacles.

Revamping of Human Resource Management: Staff in banks irrespective of their functional domain need to add value to acquire extra cutting edge. Human resources policies and Human resource management should be revamped so as to convert human resource management from a support function to a strategic partner to the banking business. This must happen in all banks. It is, therefore, necessary to develop a proper recruitment strategy and ensure that it dovetails with identified objectives of banks and helps attract and retain talent through flexible compensation packages and an institutional mechanism of recognition and reward.

Financial Inclusion: There are abundant opportunities for intermediation and mobilisation of savings and extension of bank credit at the bottom of the pyramid. About 60 to 70 per cent of enterprises and individuals do not have access to basic financial services such as savings and credit. Hence, increased financial inclusion of all those who presently stand excluded is of paramount importance. Bank linkage with SHGs, financing of SMEs, rural artisans, rural non-farm activities, etc will be great business opportunities for banks. Emphasis on volume-led growth to competitive balance sheet size, shift of focus from interest income to non-interest income and from capital adequacy to capital efficiency, etc are vital from the point of view of maintaining benchmarks of return on assets, return on owned funds, net NPAs, capital adequacy, cost to income ratio, net interest margin and intermediation cost. Micro finance is vital for accelerating financial inclusion.

Micro finance is now recognised as a key strategy for addressing issues of poverty alleviation and inclusive growth through more and more inclusiveness in credit allocation and disbursement. Banks may adopt appropriate linkage models of micro credit, particularly, micro credit model of SHGs.

Financial inclusion should not get reduced to the ritual of opening no-frills accounts at the rate of one account per household. It should become real and meaningful financial inclusion and the same should bring about empowerment of the financially included.

In bracing for to-morrow a paradigm shift in bank financing through innovative mechanism such as, templates for assessing customer risk and pricing products and services credit scoring, ensuring availability and use of information etc are absolutely essential. Retail banking requires product development and differentiation innovation and business process re-engineering micro-planning marketing prudent pricing customisation technology upgradation home, electronic and mobile banking cost-reduction and cross selling. All these must be given adequate attention. Banking success requires imaginative strategic planning organisational restructuring streamlining and revamping of human resources management, etc
Developing Immunity: Banks have to adopt and implement strategies to ensure immunity of their balance sheets from interest rate fluctuations by paying greater attention to non-interest income. Growing services sector and financial markets have created new avenues for fee based income. Merchant banking international trade, funds transfer, payment and settlements, consultancy services financial derivatives utility services etc opened up new income sources for banks. But, what is required is a total transition from branch banking to virtual banking, market segmentation to customer segmentation and product planning to customer-profitability and these are real challenges for banks. Many new challenges may also crop up in the years ahead.

An important issue that has cropped up from the U S financial crisis is the issue of conformity – Conformity to rules and time tested norms of lending and sound banking principles and best banking practices and the issue of development of professionalism in lending and investment.

Indian banks must draw appropriate lessons from the U S and global financial crisis. The financial crisis in the U S is the cumulative result of many questionable practices, adopted by banks over the years. Aggressive lending to those who were ineligible for credit and had no capacity to repay by way of sub-prime lending, securitisation of such loans by way of new products and derivatives and reckless investment in such derivatives by investment banks and other banks, failure of auditors to un-earth and report the failure in adhering to credit norms and defaults in repayment in time, failure of rating agencies to rate the newly innovated products correctly and assignment by them of excellent ratings to all such products, etc brought about a comprehensive failure of governance in banking and financial institutions in U S Banks in U S totally ignored accepted norms of lending and best banking practices. Banks in U S and Europe will have to go back to basics. 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 has thus stressed the importance of adhering to best banking practices and prudent lending norms. Indian Banks must draw suitable lessons from the global financial crisis that resulted in the collapse of giants such as Lehman Brothers. Banks in India must go by sound banking principles accepted lending standards and best banking practices. Professionalism in lending must be given primacy and it has to be ensured that there is no dilution in lending standards. In India, credit card defaults and defaults in personal loans may become problem areas in course of time if adequate care is not taken now. Utmost care must be taken while issuing cards and it must be ensured that credit cards are issued only to those who are eligible and who have capacity to honour their commitments under the credit card. Banks should also step up their level of disclosures on their credit cards personal loans, etc.

Areas of continued challenge: The areas of continued challenge for banks would be risk management, full implementation of Basel II norms, achievement of full and meaningful financial inclusion and availment of rural business opportunities and opportunities at the bottom of the pyramid, rural credit delivery system, enhancing customer satisfaction, technology upgradation on a continual basis, expansion of CBS platform to all branches including rural branches, further reduction of NPAs reducing intermediation cost increasing non-interest income and fee based income for improving profitability staff involvement in all bank functions, revamping of human resource management – increasing volumes of business despite competition from other banks and other dis-intermediation sources and participative and strategic planning.

As all the existing and future challenges have to be faced through staff banks have to give top priority to revamping of human resources management and development of human resources. Development of human resources through training, inducing participation and full involvement of all staff in bank functions and activities etc are very vital. Streamlining of audit and inspection, strict internal control and house-keeping, improved risk management, increasing capital efficiency and mobilisation of fresh equity from time to time, asset-liability management and balance sheet management are real challenges, requiring utmost attention.

Ensuring optimum performance: Developing concern for results and performance on the part of entire personnel in banks is a vital requirement. This too will be a challenge. Future of banks will depend on their alertness, operational and capital efficiency, customer orientation and standard of service creation of larger and larger volumes of performing assets, attainment of optimum levels of productivity profitability and overall performance. Future of banks hinges on these and also on their ability to build up large volumes of quality assets with lesser capital charge thereon that perform on an enduring basis. Ensuring optimum performance by each Manager, officer and staff will be crucial. Only those banks which are pro-active and which respond quickly to changing customer needs and changing environment and which give adequate attention to the above issues alone can successfully face the future challenges, perform well and grow as strong, vibrant, efficient and sound financial institutions.

Further reforms in banking sector may be necessary, may be a little later. The Committee headed by Raghurama Rajan former counsellor of IMF and Professor of Chickago Business School has submitted its report. This report contains lot of good reform ideas. India must examine this report and recommendations contained therein. We definitely require a new generation of reforms in the financial and banking sector and the same must be taken up once the situation improves.

Further, reforms are necessary to make the Indian financial system stronger and more resilient and also with a view to making the system a true partner in economic expansion and growth.