Indian banking has been in the process of consolidation since 1961.The Banking Regulation Act 1949 gave powers to RBI to amalgamate weak banks with stronger ones.Majority of bank mergers in India so far have been by way of bail out of weak banks in order to protect the interests of depositors.This also had the objective of protecting the image and reputation of banks.The report of the committee on banking sector reforms [1998-second Narasimham committee report]however discouraged this type of mergers.The committee suggested multi-tier banking system.It suggested creation of 3to 4 global level players by means of mergers.It also suggested that 8 to 10 national level banks be retained and remaining smaller banks can remain as regional banks.In pre-reform era merger of banks was solely with a view to save weak banks from collapse as a result of continued losses and weak capital-base.New Bank Of India was merged with PNB as it was incurring losses continuously in three consecutive years.
Indian banking system has displayed considerable resilience even in times of recent acute global financial down-turn.Strong liquidity is another strength of Indian banks.As per the new policy foreign banks may expand their business in India in the coming years.Indian banks may have to face acute competition from them.The RBI report on currency and finance has opined that mergers may become necessary to face competition of foreign banks.Intermediation cost is very high in respect of Indian banks.This is an indicator of inadequate competitive strength.Hogh level of fragmentation especially among co-operative banks is a defect of Indian banking system.About 100000 small co-operative banks share about 4 percent of banking assets in the economy.Poor product innovation is another problem.Inadequate bank branches in many districts comes in the way of bringing about financial inclusion of the masses.Out of 611 districts in India 375 districts are underbanked.There is urgent need to expand branch network in these districts.According to a study by Ernest and Young India will require about 11600 additional bank branches by 2013 and another 20300 branches by 1018 for achieving desired penetration level of 74 percent and 81.5 percent respectively by 2013 and 2018.
Indian banks are not equipeed to face global competition.They can not competein the international level in terms of mobilisation of resources,funding of projects,investment etc.Lack of global size is a handicap for Indian banks.SBI,the largest Indian bank has only 57th place among top 1000 global banks based on tier-Icapital.In terms of assets SBI has only 70th place.ICICI bank has only 148th place in terms of tier I capital and 150th place in terms of assets.No other Indian bank has a place in the listof top 200 nbanks in the world in terms of tierI capital.SBI has only 8th place among the top 20 Asian banks.Industrial and Commercial Bank of China the biggest Asian bank is 4 times bigger than SBI in terms of tier I capital and assets.The combined assets of 5 largest banks of India namely SBI,ICICI Bank,PNB,Canara Bank,and Bank of Baroda are just about half of the assets size of largest chinese bank,Bank of China which is 3.6times bigger than SBI.
From the above discussion it is clear that consoldation of banks in India is a pressing necessity.
Advantages of Consolidation.
1Bigger banks alone can make huge investments for use of advanced technology.Foreign banks are technologically more advanced in terms of MIS,delivery mechanism,etc.Banks on consolidation can match them in this area by making required investment.
2.Larger banks can easily mobilise required equity because of their balance sheet size,book valueand stronger financials.
3.On consolidation bigger banks can cut costs involved in cetrain infrstructural items and by eliminating duplication .Number of administrative offices can be reduced and man power can be redeployed .Cost efficiency can be improved and profitability will increase.
4.On consolidation larger banks will have better risk bearing capabilities.Enlarged customer base will help impeove volumes of business.Market share will also increase.
5Economies of scale is a clear advantage for larger baks.Improved operational efficiency will be an advanatage.Better pricing of products will be possible.
6 Product innovation is possible for larger banks at lesser cost.
However there are disadvantages like difficulty in integration of technology and working platforms,increase in wage cost and difficulty in integration of heterogeneous work cultures.But the advantages outweigh the disadvantages.Hence consolidation is a must for Indian banking industry.
Sunday, December 6, 2009
Saturday, November 28, 2009
Urban Co-operative Banks
The urban co-operative banks can play an important role in bringing about financial inclusion of people in semi urban and urban areas.In view of their importance the RBI and government must play their promotional role well and effectively to ensure that these banks too grow expand and prosper.About four decades ago when these banks were brought under the Banking Regulation Act1949there were about 1250 urban co-operative banks with deposit and advances base of Rs 150 crores.In 1992 when the RBI on the advice of Marathe Committee opened up this sector the number of UCBs grew rapidly .Also the volume of business of these banks incrased.By March 2003 thre were over 1950 UCBs with deposits of Rs101546 croresand advances of Rs 54328 crores.Thereafter the RBI changrd its policy and focused on consolidation.Now the number of UCBs has come down.
A recent report by a working group of RBI has recommended the setting up of an umbrella organisation to provide capital support to UCBs.It is suggested that this umbrella organisation can provide payment and settlement services also to UCBs.
The report of RBI working group must be taken up for implementation early.It isbetter if these banks are allowed to access the capital market to mobilise equity.A separte co-operative stock exchange can be set up for listing the share of co-operative banksand for trading in these shares.Once this approach is in place these banks can on the basis of their track record of perforamance and value cration for stake-holders approach the public soliciting equity and moblise required capital.
The state governments must not interfere with the functioning of co-operatives.The audit of annual accounts of co-operatives must be got done by professional chartered accountants instead of by bureaucrts of stae governments co-operative departments.
A recent report by a working group of RBI has recommended the setting up of an umbrella organisation to provide capital support to UCBs.It is suggested that this umbrella organisation can provide payment and settlement services also to UCBs.
The report of RBI working group must be taken up for implementation early.It isbetter if these banks are allowed to access the capital market to mobilise equity.A separte co-operative stock exchange can be set up for listing the share of co-operative banksand for trading in these shares.Once this approach is in place these banks can on the basis of their track record of perforamance and value cration for stake-holders approach the public soliciting equity and moblise required capital.
The state governments must not interfere with the functioning of co-operatives.The audit of annual accounts of co-operatives must be got done by professional chartered accountants instead of by bureaucrts of stae governments co-operative departments.
New Kannada Article
A new Kannada article of Dr.K.K.Ammannaya has appeared in Udymadarshi of November 2009.This is on ''Serpadeya Pragatige Neeli Nakashe''
Saturday, October 31, 2009
NOBEL PRIZE IN ECONOMICS--2009
Prof Elinor Ostrom and Oliver Williamson have jointly won the Nobel Prize for economics for the year 2009.Elinor ostrom is the first lady to win Nobel Prize in Economics. Prof Elinor has defied conventional wisdom and has shown through her studies that user-managed property is better run than the standard theories predicted.The previously accepted theory was that common properties are usually very poorly managed and maintained.Prof Williamson through his studies helped explain that economic analysis can shed light on most forms of social organisation.According to Williamson's theory large private corporations exist primarily because they are efficient.They are established because they make owners,workers,suplliers and customers better off than they would be under an alternative arrangement.
Saturday, September 26, 2009
NEW ARTICLE
A new article titled''Grameena Shakha Vistharenege Deergha Kaleena Yojane''written by Dr.K.K.Ammannaya has been published in Udyamadarshi Kannada monthly in its September 2009 issue.
Saturday, September 5, 2009
K.K.Pai National Banking Award-2008-2009
K.K.Pai National Banking Award for 2008-2009 was presented at New Delhi on 28th August 2009 to Sri K. Cherian Varghese Former Chairman and Managing Director of Union Bank of India in recognition of his outstanding contribution to banking development in India
Article on Union Budget
A new article on Union Budget 2009-2010written by K.K.Ammannaya has appeared in Udyamadarshi of August 2009.
Saturday, August 22, 2009
Bank Branches
The recent data on deposits and credit published by RBI give us very useful insight into the distribution of banking business across the country.The number of banked centres as on 31st March 2009 were 34636.These centres are served by bank branches.Vast majority of these centres were single branch cetres being mostly rural or semi-urban centres.At the other extreme there were 61 centres having 100 or more bank branches.This type of concentration of bank branches is not a new development in India.
Indira Gandhi nationalised 14 major banks in 1969 and another six banks in 1980 to achieve more inclusiveness in lending and provision of bank services.In the post reform period emphasis shifetd to profitability and consoldaton and as result banks started opening braches in urban and metropolitan centres having more business potential.The number of rural branches which was 1833 in 1969 rose to 35206by March 1991.By March 2009 the number of rural branches declined to 31489.As on 31st March 2009 top 100 centres arranges according to size of deposits accounted for 69.2 per cent of total deposits while top 100 centres arranges according to size of advances accounted for 78.5 percent of total bank credit
Achievement of total financial inclusion is an indispensible necessity for achieving inclusive growth.Now banks provide internent banking,mobile banking etc to bring about financial inclusion without branch.More over business correspondents are also being considerd by banks as per RBI guidelines.All the same a branch is the most indispensible basic requirement in rural areas to bring more and more people within the banking fold.There is also urgent need to implement the recommendations of Rangarajan Committee on financail inclusion.
Indira Gandhi nationalised 14 major banks in 1969 and another six banks in 1980 to achieve more inclusiveness in lending and provision of bank services.In the post reform period emphasis shifetd to profitability and consoldaton and as result banks started opening braches in urban and metropolitan centres having more business potential.The number of rural branches which was 1833 in 1969 rose to 35206by March 1991.By March 2009 the number of rural branches declined to 31489.As on 31st March 2009 top 100 centres arranges according to size of deposits accounted for 69.2 per cent of total deposits while top 100 centres arranges according to size of advances accounted for 78.5 percent of total bank credit
Achievement of total financial inclusion is an indispensible necessity for achieving inclusive growth.Now banks provide internent banking,mobile banking etc to bring about financial inclusion without branch.More over business correspondents are also being considerd by banks as per RBI guidelines.All the same a branch is the most indispensible basic requirement in rural areas to bring more and more people within the banking fold.There is also urgent need to implement the recommendations of Rangarajan Committee on financail inclusion.
Wednesday, August 5, 2009
ARTICLE ON BUDGET-2009-2010
An article on union budget 2009-2010 written by Dr.K.K.Ammannaya has appeared in the Southern Economist dated 1st August 2009.
Saturday, July 25, 2009
BUDGET LINE -Article of Ammannaya
An article on budget by Dr K.K.Ammannaya was published in Business Line dated 22nd June 2009.Please see page 2 of this issue
NEW Artcle by Ammannaya
A new article titled ''An Alternative Growth Strategy for India''by Dr.K.K.Ammannaya was published in Bhavan's journal of 15th June 2009.Please refer to pages 16 to 23 in this issue.
Monday, July 13, 2009
Union Budget 2009-2010
The union budget 2009-2010 recently presented by Finance Minister Sri Pranab Mukherjee is indeed based on long range vision of growth and with an eye firmly focussed on inclusiveness in the growh process.The budget aims at tackling two major challenges,namely global recession and economic growth.The budget has given top-most priority to the task of reducing the adverse impact of global economic down-turn.The second task sought to be achieved by the budget is to step up the rate of economic growth in order to get the economy back to the 9 percent growth path.
Sunday, June 14, 2009
Consolidation of Banks
Consolidation of banks is very vital from the points of view of building up volumes of business,achieving economies of scale,enlarging capital base,enhancing competitive strength,and creating and enhancing value for stake holders.So far the left parties opposed bank consolidation in India tooth and nail and as result the government could not go ahead with any plans in this regard.The people of India have totally disapproved the stand of the left and marginalised left parties.Now they are very weak and their voice is very feeble.At this stage the government must take up the task of consolidation of banks with all seriousness and go full steam ahead in this regard.
Alongside consolidation of banks there must also be efforts at consolidation of banking laws in India.Banking laws which stand scattered in several Acts must be consolidated and made available at one source through the enactment of a comprehensive banking legislation in India.Let us hope that the UPA government will take up this task with all enthusiasm and seriousness at the earliest.
Alongside consolidation of banks there must also be efforts at consolidation of banking laws in India.Banking laws which stand scattered in several Acts must be consolidated and made available at one source through the enactment of a comprehensive banking legislation in India.Let us hope that the UPA government will take up this task with all enthusiasm and seriousness at the earliest.
Saturday, May 23, 2009
Another New Article in Kannada
Another new article of Dr.K.K.Ammannaya has appeared in Udyamadarshi Kannada magazine,May 2009 issue.
Tuesday, May 5, 2009
Alternative Growth Strategy For India
An article titled'' Alternative Growth Strategy for India''by Dr.K.K.Ammannaya has appeared in the 47th Annual Number of Southern Economist.
Friday, May 1, 2009
Inactive Cards
According to a recent study by Edgar Dunn and Company [EDC]and India Cards Council [IOC]only 26 percent of the debit cards are actively used in India at point of sale.Such active usage of debit cards is 86 percent in USA.About 50 percent of debit and credit cards are inactive in India.There is very low level of debit card usage at points of sale in India when compared to other countries.Even in Australia 45 percent of the debit cards are actively used at the points of sale.In India credit cards are also not very actively used.Only 56 percent of the credit cards are active cards in India as against 80 percent in Australia,and 75 percent in Singapore.Also it was found that debit cards in India are used mostly for ATM operations and ATM withdrawals.
Monday, April 27, 2009
Monitoring Rating Agencies
The move of the RBI to monitor and evaluate the functioning and work of rating agencies is most welcome.Rating agencies have a tendency to give excellent ratings to new issues,new products,new derivatives etc of powerful corporates to enhance their earnings and expand their business.In the U.S rating agencies have caused untold damage to the economy by giving good rating to all sorts of innovative products and derivatives based on which banks in US made investments in derivatives backed by all sorts of loans including sub-prime loans..Such thing should not be replicated in Indian economy.RBI has taken this initiative in order to prevent U.S type of ratings that may misguide and prompt all banks to invest in all sorts of derivatives.This is an excelent preventive measure.Indian banks are stronger and more resilient than those in other countries because of the reforms implemented here.Banks must continue to be strong and healthy and their investments must be healthy too.From this angle the RBI initiative is most welcome.
It is better if the RBI and SEBI take steps to establish a separate regulator for rating agencies in India.
It is better if the RBI and SEBI take steps to establish a separate regulator for rating agencies in India.
Monday, April 6, 2009
BANKING AT ITS BEST THROUGH BEST PRACTICES
Introduction:
Indian Banking sector has undergone a thorough change and remarkable transformation during the last 17-18 years. The banking reforms implemented on the basis of the blue print provided by Narasimhan Committee and other wide ranging supportive measures initiated and implemented by Government of India and RBI have contributed significantly to the enhancement of financial strength intrinsic soundness resilience and operational efficiency of banks. Banks in India have been showing stronger balance sheet footing with better asset quality in post reform period. The post-reform period has also witnessed advent of new players ,product innovations and introduction of new instruments and new approaches to aggressive marketing of such new products . Banks presently operate in an increasingly deregulated and market driven competitive environment of operational flexibility. We are also aware that there has been constant strengthening of financial supervision and prudential regulation over banks in India. With re-inforced strength and stronger financials Indian Banks are now capable of taking advantage of increasing business opportunities both domestic and global .Availment of such expanding opportunities particularly those arising out of expanding financial inclusion as well as those available at the bottom of the pyramid and new global opportunities will facilitate further growth of banks with business diversification.
Indian banks have been able to achieve good results on a wide front in spite of adoption of and adherence to prudential norms relating capital adequacy ,asset classification ,income recognition and provisioning and other regulatory norms and guidelines and implementation of the social objectives of achieving priority sector lending targets and directing credit to weaker and neglected sections of society.
It is indeed gratifying to note that the overall capital adequacy ratio of Indian banks increased to 12.3 per cent towards the end of March 2007 from 10.4 per cent in March 1997. The asset quality as reflected in the reduction in net NPA rate has also improved significantly. The ratio of NPAs to net advances declined to 2 per cent towards the end of March 2007 from 8.1 per cent in March 1997. The profitability of banks as reflected in the rate of return on assets (ROA) increased from 0.7 per cent to about 0.94 per cent in the same period. In a globalised and increasingly integrated world it is essential that our banking system must strictly adhere to global best practices and sound globally recognized performance benchmarks and aim at the achievement of sound financials and other soundness, strength and health indicators used at global level for performance evaluation purposes.
Triple objectives
.Banks must derive value- adding performance to fulfil the expectations of all stake holders It is also necessary to achieve Proper and smooth integration of domestic banking and financial system with global financial system. Also it is important to build up and strengthen financial infrastructure and banking system within the country. These can be considered triple objectives in the present day context . These triple objectives are sought to be achieved by means of observing universally recognized best practices.. Banks can surely show better, stronger sounder enduring and value-adding performance and undertake banking at its best in terms of quality of assets and return on assets return on equity .earnings and profitability financial strength and fundamentals ,minimization of costs ,enhancement of wealth for stake holders etc through adoption and implementation of internationally accepted best banking practices ,standards ,codes and other globally accepted performance bench marks and optimum performance indicators. Banks must give primacy to the achievement of above dual objectives.
Guided by above considerations it is absolutely essential for Indian banks to strictly adhere to global best practices and global performance benchmarks and performance indicators in different areas.
Global best practices refer to global standards bench marks and target performance levels set by international financial institutions and other organizations including Basel Committee on Banking Supervision (BCBS). These best practices have been arrived at after lot of thinking ,discussion and deliberations and based on the evaluation of the weaknesses and deficiencies which brought about financial crisis in the past. These best practices and standards cover certain relevant aspects and areas in the financial system. Their importance emanates from the fact that they contribute significantly to sound and strong financials and solid fundamentals, help strengthen financial regulation and bring about required measure of transparency, apart from contributing to the healthy development of the institution concerned..
Adoption and implementation of best practices in different areas may surely go a long way in reducing vulnerabilities of banks and financial institutions. They also provide a basis for informed decision making in different areas particularly in lending and investments. If properly used they can assist in minimizing risks of of different types... They can play an important role in bringing about uniformity and some sort of standardization of practices among all banks and financial institutions in different countries in the world. They facilitate comparative evaluation and assessment by serving as bases or bench marks with reference to which reviews and assessment can be made.
Risk Management Practices:
Risk management is by far the most important area to be covered under global best practices and standards. In the present complex environment and competitive set up the success of any financial institution depends on its risk management capabilities. Success will come only if we assess risks correctly price them properly and manage them effectively. It is always necessary to restrict or limit losses from different transactions. By means of this strategy every bank has to control and regulate its overall exposure to different areas. What banks need to-day is a strong pro-active risk management strategy which helps avoid high risks and ensures that risks are taken consciously and after perceiving all types of possibilities and with full knowledge of all facts and all aspects of the risk involved.. Basel II gives lot of importance to risk management. It is necessary for banks to clearly understand the nature of risk involved in every area of activity and in all lendings and credit exposures both fund based and non-fund based and also in investments. It is also necessary to adopt systems for measurement of performance not only in accounting terms such as return on assets (ROA) return on equity (ROE) etc, but also, for measuring the shareholder value and shareholder wealth created from time to time. It is therefore, necessary to use measures and yard sticks such as risk adjusted return on capital (RAROC) and other available measures for the purpose of assessment and evaluation..
To facilitate comprehensive evaluation and assessment banks may group or categorise customers into segments or business groups such as corporates, retail trade units ,service sector units ,housing finance companies whole sale,trading units ,manufdacturing units small business professionals and self-employed, SMEs, etc and fix a target for return or maximum return expected from each of such categories .Banks must review performance in terms of return from time to time with reference to the targets fixed for each group . If the review reveals that a particular segment or category has given a return higher than the target originally fixed for the category it is clear that that group has given something to value addition in the form of extra or excess return over the target fixed.. Capital allocation may be done having regard to what each group has given by way its contribution in relation to the target as revealed by the review. Risk adjusted performance measurement and evaluation helps in the matter of alignment of objectives at the level of each category or segment and also at the aggregate level i.e. the overall level in the bank. Adoption of such comprehensive risk management system will help banks in the process of capital allocation to different businesses and activities based on risk adjusted performance and return from each one of them. As Indian banks move progressively towards globally recognised best practices with integration of risk management in to the business process use of the yard sticks like RAOC and other measures of evaluation will greatly help in pricing decisions as well as in measurement of performance of different business segments and capital allocation to various segments and overall capital management. Consequent on the shift from capital adequacy to capital efficiency now banks have got to focus on efficient capital management capital saving and over all balance sheet management.
Best Practices for Combating Terrorism and Customer Risk Assessment
Banks have to adopt globally recognised best practices for combating terrorism and also for evaluating customer risk by adopting and implementing Anti Money Laundering Policy and programme..
. The AML policy to be adopted and implemented must match global standards. In to-day’s globalised environment organised crime groups which generate huge amounts of money through drug trafficing arms smuggling and other financial crimes may project such dirty and illegal money as legally and legitimately acquired money by means of moving the same through financial system and banking channels. Such dirty and illegal money may be transferred from one country to another for being used for terrorist activities. As a part of the global efforts at fighting money laundering and terrorist financing India has enacted Prevention of Money Laundering Act, 2002 which came into force on 1st July 2005 Recently Prevention of Money Laundering[Amendment]Bill 2008 has been adopted and this may become an Act soon. This amendment aims at checking use of illegal money for financing terror .Money changers and ,money transfer service providers are brought within ambit of this law.. India has set up Financial Intelligence Unit – India (FIU – India) in 2005. This unit collects reports regarding cash and suspicious transactions from banks and other reporting organizations analyses them and disseminates the findings and results to various law enforcement agencies for necessary action. This unit also interacts with FIUs of other countries and gathers information regarding best practices and arranges for exchange of information. Hence, every bank has to adopt a suitable AML programme and policy. Every bank must communicate to the staff at all levels the AML standards and procedures that the bank has adopted. The AML policy should also indicate the AM.L operating structure regulatory reporting and recording requirements and inspection and audit and monitoring mechanism that will be employed to ensure strict adherence to AML requirements. International standard setters such as Basel Committee and Financial Action Task Force (FATF) have done lot of work to prescribe comprehensive guidelines regarding opening of accounts, customer identification and know your customer requirements and risk management apart from customers due diligence process for financial institutions.
The Financial Action Task Force has come out with 40 recommendations which provide a comprehensive blue print for action to be taken and strategy to be adopted for preventing the use of the financial system for money laundering. Global best practices for combating money laundering require banks to develop clearly spelt out customer acceptance policies and customer identification procedure, covering description of categories of customers that are likely to pose higher than average and normal risk to banks. By adopting graduated and comprehensive customer acceptance policies and customer identification procedure banks can conduct more extensive and enhanced due diligence for customers with higher risk. The RBI has given freedom to banks to compile their own risk profiles of customers based on relevant parameters. Banks can use parameters such as geographical areas or locations, range of products and services, type of business, manner of funding the account etc for evolving its own risk profile of customers. However, risk profiling needs to be well documented so that the parameters can be well demonstrated to the regulators whenever called upon to do so.
It is necessary for banks to ensure that risk profiles are compiled and preserved for each customer at the time of commencement of relationship.
Inclusive BankingPractices
However, the customer acceptance policies must not be too restrictive resulting in denial of access to banking services to the people, particularly to the weaker and disadvantaged sections of society .Access to financial services is one of the enablers for participation in the efforts at development of the national economy. Restrictive policies may come in the way inclusive banking practices adopted by banks. Hence, adequate care has to be taken to ensure that there are no restrictive clauses in the policy resulting in denial of access to banking products and services to any category of people. Enhanced and quite extensive process of due diligence is required in the case of politicians, high net worth individuals known criminals etc and other categories of high risk customers. Developing and putting in place suitable systems of monitoring is very essential for identification of suspicious transactions throughout the period of relationship with a customer.
Reports regarding cash transactions of over Rs.10 lakhs and suspicious transactions should be generated and sent to concerned authorities. The Prevention of Money Laundering Rules 2005 have provided a definition of what constitutes suspicious activity and the procedure for reporting to the Financial Intelligence Unit (FIU) Government of India. The RBI has issued detailed guidelines to banks incorporating therein best practices in this regard and spelling out how banks have to handle the issue relating to account opening risk management reporting of cash transactions reporting of suspicious transactions to FIU (India) maintenance of records training of staff, etc. RBI has provided certain concessions and relaxations in obtaining documents by banks particularly in rural and semi urban areas. In the case of no-frills accounts KYC requirements are relaxed further to facilitate faster financial inclusion of people in rural areas.
RBI has also stressed the need for customer education regarding the importance of submission of prescribed documents at the time of opening the accounts and commencing the relationship. Banks must do their best in creating public awareness in this regard and educating the customers regarding all aspects of customer identification including submission of required documents.
Corporate Governance Practices:
Another important requirement for banks is adherence to good corporate governance philosophy and practices which must be based on an effective and independent board.. .The recent Satyam episode has shown how failure of corporate governance can cause the decline and downfall of any reputed corporate entity .The corporate governance philosophy of any organization must be based on high standard of universally accepted ethical values and disciplined approach to management .Accountability commitment ,integrity ,transparency justice .,and fairness in all activities must be hall marks of management at board level .Principles of corporate governance have now become some sort of conventional wisdom and banks have to go by this wisdom scrupulously .Corporate governance can be an effective tool for toning up the economic health and intrinsic soundness of any corporate entity .The most important objective of corporate governance is creation and enhancement of value for all stake-holders. Banks have to ensure highest ethical standards in the process of undertaking banking business activity with due diligence. Basel Committee has prescribed some important tenets and principles in this regard. These principles must be carefully adhered to .The corporate governance framework must be adequately flexible to facilitate fast response to changing market dynamics .At the same time it should be firm as regards its values and ethics The corporate governance philosophy must cover not merely regulatory ,statutory and ,legal aspects and requirements but also voluntarily accepted best practices across the world that may help attain high level of business ethics ,and maximization of value and welfare to stake holders..
The Consultative group on corporate governance headed by Dr.A.S.Ganguly has recommended that the boards must be made contemporarily professional by means of adherence to “fit and proper norms” in the matter of nomination of directors. The concerned authorities charged with the task of nominating directors must follow the fit and proper” norms and guidelines of RBI in this regard while nominating directors on the boards of banks Suitability of persons for appointment as directors must be assessed through due diligence The criteria to be followed must include qualification ,expertise track record ,integrity and other relevant fit and proper criteria.. The whole time directors must have sufficiently long period of stay as directors say three to five years to enable them to make some impact of their leadership and professional competence on the ’ performance of the bank concerned. .Directors have a responsibility to gather adequate information regarding the business and performance from time to time .Directors are expected to protect the interests of share holders .In vast majority of cases VIPs, legal luminaries and experts from different fields are inducted in to boards .Such directors must make use of their expertise and contribute significantly to the deliberations in board meetings so that sound decisions emerge on different matters at each meeting Directors must also try to provide a new perspective and new vision to board room. . VIPs and luminaries who are inducted as directors must try to create an impact instead of being directors for decorative purposes.
THRUST AREAS:
Boards of banks must concentrate on strategic planning policy formulation in respect of all vital areas such as credit ,investments ,international banking ,treasury and funds management organizational development human resources development ,issues relating to business expansion ,expansion of branch net work ,issues relating to technology. risk management systems internal control and issues concerning overall governance. These are areas of major thrust requiring prime concentration at board level.. The board must not waste time in discussing routine things and unimportant matters that can be handled at the level of bank executives..
Quality Practices- Attainment of excellence is the ultimate goal of quality practices to be adopted in any bank...
Banks must also observe best quality practices .Each bank must have a separate cell in planning department charged with the job of planning, building and institutionalizing quality across the bank .This cell can be set up in the planning department This cell can concentrate on quality improvements ,dissemination of information regarding quality creation of quality culture building up of knowledge capabilities so necessary for building up and development of quality and implementation of best quality practices .The cell must keep on studying the quality practices being pursued elsewhere and pick up and adopt the relevant and best ones in their respective institutions.
Best Compliance Practices:
Adoption of best compliance practices is another requirement of supreme importance. Compliance function in banks is an important element in the process of corporate governance and hence, there is a need to strengthen compliance management practices in all banks. According to Basel Committee on Banking supervision it is necessary for banks to have different committees such as, audit committee, management committee, risk management committee, remuneration committee, corporate governance and nomination committee, customer service committee . HR committee share transfer committee, committee for monitoring large value frauds, etc
The Audit Committee over sees reviews and provides directions to the internal audit/inspection function in the Bank in order to ensure and enhance effectiveness of audit and inspection functions as strong management tools The Audit Committee must focus on investment portfolio including debt and shares held with a view to finding out deterioration in value if any.. The committee also reviews all the issues raised in the Long Form Audit Reports. It also interacts with external auditors before finalization of Audited Accounts Management committee has the responsibility taking decisions on high value credit compromise and write off proposals etc Risk management committee identifies evaluates monitors and guides the Bank on various categories of risks to which bank is exposed and devices suitable strategies for managing credit market liquidity operational and legal compliance and reputation and other risks of the bank. Remuneration committee is charged with the job of providing oversight of remuneration of top and senior management and other key personnel performance linked incentives etc and ensuring that compensation is consistent with banks objectives, strategy culture and control environment. Nomination committee has to provide evaluation of effectiveness of board. It undertakes the process of due diligence for determining fit and proper status of existing elected directors and persons to be elected as directors compliance function is a vital function and forms part and parcel of governance in banks.
In the case of listed banks capital market related regulatory compliance must also be ensured. Other committees perform the functions relevant to them. The compliance function should ensure that existing prescribed procedures, guidelines system and controls capture the required information and data in order to facilitate discharge of risk management function at the board level. Compliance must start at the top. Compliance can be effective in a corporate culture where board assumes full responsibility for compliance. Bank Boards must ensure that a proper compliance policy is put in place and board should also oversee its implementation. A robust compliance system should be put in place along with a comprehensive compliance policy. Compliance policy must cover compliance philosophy of the bank role of chief compliance officer and compliance department and composition of its staff and their specific responsibilities. The Board may review the policy from time to time. The Board must also review compliance periodically. Bank boards may constitute compliance committee to oversee the compliance of all regulatory and reporting requirements as well as with banking laws, taxation laws, international laws, labour laws, accounting standards, anti-money laundering Act, fiscal Responsibility Act Right to Information Act and so on. Non-compliance of any of the laws will entail financial and reputation risk to the Bank.
Transparency Practices
The next important requirement is transparency and disclosure in financial statements. The data and details given in financial statements must be adequate to ensure adequate measure of transparency. This enables the public at large and customers to evaluate financial position and performance of the bank. The disclosures are useful to the public in assessing and understanding where exactly the bank stands in relation to their expectations and in in making decisions regarding choice of banks for keeping their deposits and also for other banking needs. The users of financial statements are interested in the liquidity and solvency and risk in respect of assets and liabilities figuring in and recognised on the Balance sheet of the bank and also off balance sheet items of the bank.. Banks may do well to explain the way they manage and control risks associated with the operations of the bank. Banks may provide commentary and notes on the financial statements for clarity of understanding. The generally accepted accounting principles and standards must be followed. The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued as many as 35 standards which must be followed.
The next vital requirements is assessment of position with reference to Industry best practices. Assessment of best practices involves analysis of the organisation’s processes, work flow planning process and strategic planning staffing, major areas such as retail delivery sales CRM strategy and CRM operations human resources finance and funds management investments management and accounting. The objective of this assessment is to reduce current operating expenses, improve productivity to avoid future cost increases, increase returns and revenue, improve quality of service delivery and position the bank for continued growth and expansion. Best practices provide bench mark for market participants to operate efficiently. But, their implementation must be suitable to country specific priorities and circumstances.
As rightly stated by Dr Y V Reddy, Past Governor of RBI, “the implementation of standards must fit into a country’s overall strategy for economic and financial sector development taking into account the stage of development, level of institutional capacity and other domestic factors”. The Standing Committee on International Financial Standards and Codes monitors developments in global standards and codes and looks into applicability of these standards to Indian Financial System. The approach of RBI to the adoption and internalisation of global best practices prudential norms and standards and codes in respect of Indian banks is one of slow,steady and gradual shift and convergence with international standards and best practices with apposite and required changes so as to make them relevant to banks in India..
PRACTICE OF DHARMA and Fair Practices.-
All activities ,operations and over all governance must be guided by dharma and tenets of dharma. .Banks must follow the fair practices contained in the code of commitment to customers .The objective of the code is to promote good and fair practices by setting minimum standards in dealing with customers and to provide full information to customers regarding products and ,services so as to enable them to take informed decisions .Enhancement of transparency ,to encourage market forces through competition ,to achieve high operating standards to promote fair and cordial relationship between the bank and customers and to foster confidence in the bank concerned and the banking system in general are other objectives of the code.
The code must apply to all products and services offered by banks .Products and services offered by banks must conform to relevant laws and rules as well as regulations .The dealings of banks with customers must rest on ethical principles of integrity ,and transparency .Banks must help customers by providing regular updates and by keeping them informed about changes in interest rates ,charges or terms and conditions .Banks must rectify mistakes in rates applied or in other calculations promptly and reverse charges applied by mistake if any promptly .Also banks must attend to customer complaints speedily and redress them expeditiously .Banks must practice non-discrimination policy .There must be no discrimination on the basis of religion ,caste creed ,race sex physical disability etc Full transparency regarding rates of interest processing charge and other charges etc must be ensured .Changes in rates of interest and fees payable must be communicated to parties concerned by display of suitable notice on notice board ,or some other means of communication .All advertisements and publicity material must be clear and there must be no ambiguity .All personal information regarding customers must be treated as private and confidential even after cessation of relationship except in cases where information has to be given as per law or by way of duty towards public and in public interest .While granting loans banks must explain repayment process by way of amount ,tenure ,periodicity of payment preclosure penalty if any and representatives authorized to collect repayments must adhere to prescribed guidelines .Privacy of customers must be respected .Interaction with customers must be in very civil manner .During recovery visits decency and decorum must be maintained .Customers must be contacted ordinarily at the place of his or her choice and in the absence of specified place at residence and if unavailable at residence at the place of business .Identity and authority of the person to represent the bank must be made known to the customer .Thus all the fair practices contained in the code must be adhered to by banks .By adhering to code of commitment ,fair practices and tenets of dharma banks can enhance their public image and win customer loyalty and customer commitment which will go a long way in helping banks in business expansion and business performance.
Practice of Adhering to Globally Recognised Performance Indicators and Bench Marks.
It is also necessary for banks to try to achieve global bench marks in diverse areas such as capital adequacy ratio return on assets, net interest margin cost income ratio non-performing loans ratio, provisioning of non-performing loans ratio, capital asset ratio, funding volatility ratio, etc. Banks must on an on-going basis review their performance in attaining the highest ratios with reference to the ratios obtaining in other countries and also with reference to the globally accepted best ratios.
Each bank must institute a system of review of their performance in these areas with reference to the highest ratios in these areas achieved by banks in India as well as other developed countries and also with reference to the overall global position. On the basis of reviews from time to time banks must initiate necessary measures to improve the performance in the areas where performance is found inadequate in relation to global ratios performance indicators and bench marks. These reviews must be made at the highest level in management including the board level.
Simultaneous Achievement:
Indian banks must continue to perform well and continue to give excellent financial results while simultaneously contributing substantially by way of value to stake holders. At the same time, they have to discharge the social obligations cast upon them and fulfil the expectations of society. All these can be simultaneously achieved only by means of strict adherence to global best practices, global standards and codes and global bench marks and other performance and soundness indicators explained earlier. Best practices may keep on changing and evolving over time across the world and banks must be constantly alive to the changes and developments in this regard from time to time. It will always be prudent for banks to adopt a pro-active approach in the matter of adoption of best practices. Each bank may create a global best practices cell in the corporate office for the purpose of studying the developments and evolution of best practices elsewhere for the purpose of facilitating adoption of a pro-active approach apart from implementing the guidelines ,and directions issued from time to time by RBI regarding best practices to be observed.
The above cell can be charged with the job of studying the domestic developments as well as developments across the world in the area of best practices. It should also evaluate the performance of the bank in achieving global bench marks in different areas and other performance and soundness indicators with reference to the attainments in the concerned areas in other advanced countries and at global level and place the results and findings of the review before the top management and the Board of directors. Based on such reviews banks can take required steps for fine tuning the implementation of best practices, strategies, processes and other aspects of functioning with a view to achieving better operational and financial results and higher value for stakeholders. Banks have thus got to aim at banking at its best in terms of quality of service to customers ,maximization of earnings ,and profits and creation and enhancement and maximization of value for the stake holders minimization of risks to the lowest level possible implementation of norms standards ,and regulatory requirements to the satisfaction of regulators fulfillment of social objectives and fulfillment of the expectations of society. All these can be achieved only by means of strict adherence to and observance of best practices.
Indian Banking sector has undergone a thorough change and remarkable transformation during the last 17-18 years. The banking reforms implemented on the basis of the blue print provided by Narasimhan Committee and other wide ranging supportive measures initiated and implemented by Government of India and RBI have contributed significantly to the enhancement of financial strength intrinsic soundness resilience and operational efficiency of banks. Banks in India have been showing stronger balance sheet footing with better asset quality in post reform period. The post-reform period has also witnessed advent of new players ,product innovations and introduction of new instruments and new approaches to aggressive marketing of such new products . Banks presently operate in an increasingly deregulated and market driven competitive environment of operational flexibility. We are also aware that there has been constant strengthening of financial supervision and prudential regulation over banks in India. With re-inforced strength and stronger financials Indian Banks are now capable of taking advantage of increasing business opportunities both domestic and global .Availment of such expanding opportunities particularly those arising out of expanding financial inclusion as well as those available at the bottom of the pyramid and new global opportunities will facilitate further growth of banks with business diversification.
Indian banks have been able to achieve good results on a wide front in spite of adoption of and adherence to prudential norms relating capital adequacy ,asset classification ,income recognition and provisioning and other regulatory norms and guidelines and implementation of the social objectives of achieving priority sector lending targets and directing credit to weaker and neglected sections of society.
It is indeed gratifying to note that the overall capital adequacy ratio of Indian banks increased to 12.3 per cent towards the end of March 2007 from 10.4 per cent in March 1997. The asset quality as reflected in the reduction in net NPA rate has also improved significantly. The ratio of NPAs to net advances declined to 2 per cent towards the end of March 2007 from 8.1 per cent in March 1997. The profitability of banks as reflected in the rate of return on assets (ROA) increased from 0.7 per cent to about 0.94 per cent in the same period. In a globalised and increasingly integrated world it is essential that our banking system must strictly adhere to global best practices and sound globally recognized performance benchmarks and aim at the achievement of sound financials and other soundness, strength and health indicators used at global level for performance evaluation purposes.
Triple objectives
.Banks must derive value- adding performance to fulfil the expectations of all stake holders It is also necessary to achieve Proper and smooth integration of domestic banking and financial system with global financial system. Also it is important to build up and strengthen financial infrastructure and banking system within the country. These can be considered triple objectives in the present day context . These triple objectives are sought to be achieved by means of observing universally recognized best practices.. Banks can surely show better, stronger sounder enduring and value-adding performance and undertake banking at its best in terms of quality of assets and return on assets return on equity .earnings and profitability financial strength and fundamentals ,minimization of costs ,enhancement of wealth for stake holders etc through adoption and implementation of internationally accepted best banking practices ,standards ,codes and other globally accepted performance bench marks and optimum performance indicators. Banks must give primacy to the achievement of above dual objectives.
Guided by above considerations it is absolutely essential for Indian banks to strictly adhere to global best practices and global performance benchmarks and performance indicators in different areas.
Global best practices refer to global standards bench marks and target performance levels set by international financial institutions and other organizations including Basel Committee on Banking Supervision (BCBS). These best practices have been arrived at after lot of thinking ,discussion and deliberations and based on the evaluation of the weaknesses and deficiencies which brought about financial crisis in the past. These best practices and standards cover certain relevant aspects and areas in the financial system. Their importance emanates from the fact that they contribute significantly to sound and strong financials and solid fundamentals, help strengthen financial regulation and bring about required measure of transparency, apart from contributing to the healthy development of the institution concerned..
Adoption and implementation of best practices in different areas may surely go a long way in reducing vulnerabilities of banks and financial institutions. They also provide a basis for informed decision making in different areas particularly in lending and investments. If properly used they can assist in minimizing risks of of different types... They can play an important role in bringing about uniformity and some sort of standardization of practices among all banks and financial institutions in different countries in the world. They facilitate comparative evaluation and assessment by serving as bases or bench marks with reference to which reviews and assessment can be made.
Risk Management Practices:
Risk management is by far the most important area to be covered under global best practices and standards. In the present complex environment and competitive set up the success of any financial institution depends on its risk management capabilities. Success will come only if we assess risks correctly price them properly and manage them effectively. It is always necessary to restrict or limit losses from different transactions. By means of this strategy every bank has to control and regulate its overall exposure to different areas. What banks need to-day is a strong pro-active risk management strategy which helps avoid high risks and ensures that risks are taken consciously and after perceiving all types of possibilities and with full knowledge of all facts and all aspects of the risk involved.. Basel II gives lot of importance to risk management. It is necessary for banks to clearly understand the nature of risk involved in every area of activity and in all lendings and credit exposures both fund based and non-fund based and also in investments. It is also necessary to adopt systems for measurement of performance not only in accounting terms such as return on assets (ROA) return on equity (ROE) etc, but also, for measuring the shareholder value and shareholder wealth created from time to time. It is therefore, necessary to use measures and yard sticks such as risk adjusted return on capital (RAROC) and other available measures for the purpose of assessment and evaluation..
To facilitate comprehensive evaluation and assessment banks may group or categorise customers into segments or business groups such as corporates, retail trade units ,service sector units ,housing finance companies whole sale,trading units ,manufdacturing units small business professionals and self-employed, SMEs, etc and fix a target for return or maximum return expected from each of such categories .Banks must review performance in terms of return from time to time with reference to the targets fixed for each group . If the review reveals that a particular segment or category has given a return higher than the target originally fixed for the category it is clear that that group has given something to value addition in the form of extra or excess return over the target fixed.. Capital allocation may be done having regard to what each group has given by way its contribution in relation to the target as revealed by the review. Risk adjusted performance measurement and evaluation helps in the matter of alignment of objectives at the level of each category or segment and also at the aggregate level i.e. the overall level in the bank. Adoption of such comprehensive risk management system will help banks in the process of capital allocation to different businesses and activities based on risk adjusted performance and return from each one of them. As Indian banks move progressively towards globally recognised best practices with integration of risk management in to the business process use of the yard sticks like RAOC and other measures of evaluation will greatly help in pricing decisions as well as in measurement of performance of different business segments and capital allocation to various segments and overall capital management. Consequent on the shift from capital adequacy to capital efficiency now banks have got to focus on efficient capital management capital saving and over all balance sheet management.
Best Practices for Combating Terrorism and Customer Risk Assessment
Banks have to adopt globally recognised best practices for combating terrorism and also for evaluating customer risk by adopting and implementing Anti Money Laundering Policy and programme..
. The AML policy to be adopted and implemented must match global standards. In to-day’s globalised environment organised crime groups which generate huge amounts of money through drug trafficing arms smuggling and other financial crimes may project such dirty and illegal money as legally and legitimately acquired money by means of moving the same through financial system and banking channels. Such dirty and illegal money may be transferred from one country to another for being used for terrorist activities. As a part of the global efforts at fighting money laundering and terrorist financing India has enacted Prevention of Money Laundering Act, 2002 which came into force on 1st July 2005 Recently Prevention of Money Laundering[Amendment]Bill 2008 has been adopted and this may become an Act soon. This amendment aims at checking use of illegal money for financing terror .Money changers and ,money transfer service providers are brought within ambit of this law.. India has set up Financial Intelligence Unit – India (FIU – India) in 2005. This unit collects reports regarding cash and suspicious transactions from banks and other reporting organizations analyses them and disseminates the findings and results to various law enforcement agencies for necessary action. This unit also interacts with FIUs of other countries and gathers information regarding best practices and arranges for exchange of information. Hence, every bank has to adopt a suitable AML programme and policy. Every bank must communicate to the staff at all levels the AML standards and procedures that the bank has adopted. The AML policy should also indicate the AM.L operating structure regulatory reporting and recording requirements and inspection and audit and monitoring mechanism that will be employed to ensure strict adherence to AML requirements. International standard setters such as Basel Committee and Financial Action Task Force (FATF) have done lot of work to prescribe comprehensive guidelines regarding opening of accounts, customer identification and know your customer requirements and risk management apart from customers due diligence process for financial institutions.
The Financial Action Task Force has come out with 40 recommendations which provide a comprehensive blue print for action to be taken and strategy to be adopted for preventing the use of the financial system for money laundering. Global best practices for combating money laundering require banks to develop clearly spelt out customer acceptance policies and customer identification procedure, covering description of categories of customers that are likely to pose higher than average and normal risk to banks. By adopting graduated and comprehensive customer acceptance policies and customer identification procedure banks can conduct more extensive and enhanced due diligence for customers with higher risk. The RBI has given freedom to banks to compile their own risk profiles of customers based on relevant parameters. Banks can use parameters such as geographical areas or locations, range of products and services, type of business, manner of funding the account etc for evolving its own risk profile of customers. However, risk profiling needs to be well documented so that the parameters can be well demonstrated to the regulators whenever called upon to do so.
It is necessary for banks to ensure that risk profiles are compiled and preserved for each customer at the time of commencement of relationship.
Inclusive BankingPractices
However, the customer acceptance policies must not be too restrictive resulting in denial of access to banking services to the people, particularly to the weaker and disadvantaged sections of society .Access to financial services is one of the enablers for participation in the efforts at development of the national economy. Restrictive policies may come in the way inclusive banking practices adopted by banks. Hence, adequate care has to be taken to ensure that there are no restrictive clauses in the policy resulting in denial of access to banking products and services to any category of people. Enhanced and quite extensive process of due diligence is required in the case of politicians, high net worth individuals known criminals etc and other categories of high risk customers. Developing and putting in place suitable systems of monitoring is very essential for identification of suspicious transactions throughout the period of relationship with a customer.
Reports regarding cash transactions of over Rs.10 lakhs and suspicious transactions should be generated and sent to concerned authorities. The Prevention of Money Laundering Rules 2005 have provided a definition of what constitutes suspicious activity and the procedure for reporting to the Financial Intelligence Unit (FIU) Government of India. The RBI has issued detailed guidelines to banks incorporating therein best practices in this regard and spelling out how banks have to handle the issue relating to account opening risk management reporting of cash transactions reporting of suspicious transactions to FIU (India) maintenance of records training of staff, etc. RBI has provided certain concessions and relaxations in obtaining documents by banks particularly in rural and semi urban areas. In the case of no-frills accounts KYC requirements are relaxed further to facilitate faster financial inclusion of people in rural areas.
RBI has also stressed the need for customer education regarding the importance of submission of prescribed documents at the time of opening the accounts and commencing the relationship. Banks must do their best in creating public awareness in this regard and educating the customers regarding all aspects of customer identification including submission of required documents.
Corporate Governance Practices:
Another important requirement for banks is adherence to good corporate governance philosophy and practices which must be based on an effective and independent board.. .The recent Satyam episode has shown how failure of corporate governance can cause the decline and downfall of any reputed corporate entity .The corporate governance philosophy of any organization must be based on high standard of universally accepted ethical values and disciplined approach to management .Accountability commitment ,integrity ,transparency justice .,and fairness in all activities must be hall marks of management at board level .Principles of corporate governance have now become some sort of conventional wisdom and banks have to go by this wisdom scrupulously .Corporate governance can be an effective tool for toning up the economic health and intrinsic soundness of any corporate entity .The most important objective of corporate governance is creation and enhancement of value for all stake-holders. Banks have to ensure highest ethical standards in the process of undertaking banking business activity with due diligence. Basel Committee has prescribed some important tenets and principles in this regard. These principles must be carefully adhered to .The corporate governance framework must be adequately flexible to facilitate fast response to changing market dynamics .At the same time it should be firm as regards its values and ethics The corporate governance philosophy must cover not merely regulatory ,statutory and ,legal aspects and requirements but also voluntarily accepted best practices across the world that may help attain high level of business ethics ,and maximization of value and welfare to stake holders..
The Consultative group on corporate governance headed by Dr.A.S.Ganguly has recommended that the boards must be made contemporarily professional by means of adherence to “fit and proper norms” in the matter of nomination of directors. The concerned authorities charged with the task of nominating directors must follow the fit and proper” norms and guidelines of RBI in this regard while nominating directors on the boards of banks Suitability of persons for appointment as directors must be assessed through due diligence The criteria to be followed must include qualification ,expertise track record ,integrity and other relevant fit and proper criteria.. The whole time directors must have sufficiently long period of stay as directors say three to five years to enable them to make some impact of their leadership and professional competence on the ’ performance of the bank concerned. .Directors have a responsibility to gather adequate information regarding the business and performance from time to time .Directors are expected to protect the interests of share holders .In vast majority of cases VIPs, legal luminaries and experts from different fields are inducted in to boards .Such directors must make use of their expertise and contribute significantly to the deliberations in board meetings so that sound decisions emerge on different matters at each meeting Directors must also try to provide a new perspective and new vision to board room. . VIPs and luminaries who are inducted as directors must try to create an impact instead of being directors for decorative purposes.
THRUST AREAS:
Boards of banks must concentrate on strategic planning policy formulation in respect of all vital areas such as credit ,investments ,international banking ,treasury and funds management organizational development human resources development ,issues relating to business expansion ,expansion of branch net work ,issues relating to technology. risk management systems internal control and issues concerning overall governance. These are areas of major thrust requiring prime concentration at board level.. The board must not waste time in discussing routine things and unimportant matters that can be handled at the level of bank executives..
Quality Practices- Attainment of excellence is the ultimate goal of quality practices to be adopted in any bank...
Banks must also observe best quality practices .Each bank must have a separate cell in planning department charged with the job of planning, building and institutionalizing quality across the bank .This cell can be set up in the planning department This cell can concentrate on quality improvements ,dissemination of information regarding quality creation of quality culture building up of knowledge capabilities so necessary for building up and development of quality and implementation of best quality practices .The cell must keep on studying the quality practices being pursued elsewhere and pick up and adopt the relevant and best ones in their respective institutions.
Best Compliance Practices:
Adoption of best compliance practices is another requirement of supreme importance. Compliance function in banks is an important element in the process of corporate governance and hence, there is a need to strengthen compliance management practices in all banks. According to Basel Committee on Banking supervision it is necessary for banks to have different committees such as, audit committee, management committee, risk management committee, remuneration committee, corporate governance and nomination committee, customer service committee . HR committee share transfer committee, committee for monitoring large value frauds, etc
The Audit Committee over sees reviews and provides directions to the internal audit/inspection function in the Bank in order to ensure and enhance effectiveness of audit and inspection functions as strong management tools The Audit Committee must focus on investment portfolio including debt and shares held with a view to finding out deterioration in value if any.. The committee also reviews all the issues raised in the Long Form Audit Reports. It also interacts with external auditors before finalization of Audited Accounts Management committee has the responsibility taking decisions on high value credit compromise and write off proposals etc Risk management committee identifies evaluates monitors and guides the Bank on various categories of risks to which bank is exposed and devices suitable strategies for managing credit market liquidity operational and legal compliance and reputation and other risks of the bank. Remuneration committee is charged with the job of providing oversight of remuneration of top and senior management and other key personnel performance linked incentives etc and ensuring that compensation is consistent with banks objectives, strategy culture and control environment. Nomination committee has to provide evaluation of effectiveness of board. It undertakes the process of due diligence for determining fit and proper status of existing elected directors and persons to be elected as directors compliance function is a vital function and forms part and parcel of governance in banks.
In the case of listed banks capital market related regulatory compliance must also be ensured. Other committees perform the functions relevant to them. The compliance function should ensure that existing prescribed procedures, guidelines system and controls capture the required information and data in order to facilitate discharge of risk management function at the board level. Compliance must start at the top. Compliance can be effective in a corporate culture where board assumes full responsibility for compliance. Bank Boards must ensure that a proper compliance policy is put in place and board should also oversee its implementation. A robust compliance system should be put in place along with a comprehensive compliance policy. Compliance policy must cover compliance philosophy of the bank role of chief compliance officer and compliance department and composition of its staff and their specific responsibilities. The Board may review the policy from time to time. The Board must also review compliance periodically. Bank boards may constitute compliance committee to oversee the compliance of all regulatory and reporting requirements as well as with banking laws, taxation laws, international laws, labour laws, accounting standards, anti-money laundering Act, fiscal Responsibility Act Right to Information Act and so on. Non-compliance of any of the laws will entail financial and reputation risk to the Bank.
Transparency Practices
The next important requirement is transparency and disclosure in financial statements. The data and details given in financial statements must be adequate to ensure adequate measure of transparency. This enables the public at large and customers to evaluate financial position and performance of the bank. The disclosures are useful to the public in assessing and understanding where exactly the bank stands in relation to their expectations and in in making decisions regarding choice of banks for keeping their deposits and also for other banking needs. The users of financial statements are interested in the liquidity and solvency and risk in respect of assets and liabilities figuring in and recognised on the Balance sheet of the bank and also off balance sheet items of the bank.. Banks may do well to explain the way they manage and control risks associated with the operations of the bank. Banks may provide commentary and notes on the financial statements for clarity of understanding. The generally accepted accounting principles and standards must be followed. The Auditing and Assurance Standards Board of the Institute of Chartered Accountants of India has issued as many as 35 standards which must be followed.
The next vital requirements is assessment of position with reference to Industry best practices. Assessment of best practices involves analysis of the organisation’s processes, work flow planning process and strategic planning staffing, major areas such as retail delivery sales CRM strategy and CRM operations human resources finance and funds management investments management and accounting. The objective of this assessment is to reduce current operating expenses, improve productivity to avoid future cost increases, increase returns and revenue, improve quality of service delivery and position the bank for continued growth and expansion. Best practices provide bench mark for market participants to operate efficiently. But, their implementation must be suitable to country specific priorities and circumstances.
As rightly stated by Dr Y V Reddy, Past Governor of RBI, “the implementation of standards must fit into a country’s overall strategy for economic and financial sector development taking into account the stage of development, level of institutional capacity and other domestic factors”. The Standing Committee on International Financial Standards and Codes monitors developments in global standards and codes and looks into applicability of these standards to Indian Financial System. The approach of RBI to the adoption and internalisation of global best practices prudential norms and standards and codes in respect of Indian banks is one of slow,steady and gradual shift and convergence with international standards and best practices with apposite and required changes so as to make them relevant to banks in India..
PRACTICE OF DHARMA and Fair Practices.-
All activities ,operations and over all governance must be guided by dharma and tenets of dharma. .Banks must follow the fair practices contained in the code of commitment to customers .The objective of the code is to promote good and fair practices by setting minimum standards in dealing with customers and to provide full information to customers regarding products and ,services so as to enable them to take informed decisions .Enhancement of transparency ,to encourage market forces through competition ,to achieve high operating standards to promote fair and cordial relationship between the bank and customers and to foster confidence in the bank concerned and the banking system in general are other objectives of the code.
The code must apply to all products and services offered by banks .Products and services offered by banks must conform to relevant laws and rules as well as regulations .The dealings of banks with customers must rest on ethical principles of integrity ,and transparency .Banks must help customers by providing regular updates and by keeping them informed about changes in interest rates ,charges or terms and conditions .Banks must rectify mistakes in rates applied or in other calculations promptly and reverse charges applied by mistake if any promptly .Also banks must attend to customer complaints speedily and redress them expeditiously .Banks must practice non-discrimination policy .There must be no discrimination on the basis of religion ,caste creed ,race sex physical disability etc Full transparency regarding rates of interest processing charge and other charges etc must be ensured .Changes in rates of interest and fees payable must be communicated to parties concerned by display of suitable notice on notice board ,or some other means of communication .All advertisements and publicity material must be clear and there must be no ambiguity .All personal information regarding customers must be treated as private and confidential even after cessation of relationship except in cases where information has to be given as per law or by way of duty towards public and in public interest .While granting loans banks must explain repayment process by way of amount ,tenure ,periodicity of payment preclosure penalty if any and representatives authorized to collect repayments must adhere to prescribed guidelines .Privacy of customers must be respected .Interaction with customers must be in very civil manner .During recovery visits decency and decorum must be maintained .Customers must be contacted ordinarily at the place of his or her choice and in the absence of specified place at residence and if unavailable at residence at the place of business .Identity and authority of the person to represent the bank must be made known to the customer .Thus all the fair practices contained in the code must be adhered to by banks .By adhering to code of commitment ,fair practices and tenets of dharma banks can enhance their public image and win customer loyalty and customer commitment which will go a long way in helping banks in business expansion and business performance.
Practice of Adhering to Globally Recognised Performance Indicators and Bench Marks.
It is also necessary for banks to try to achieve global bench marks in diverse areas such as capital adequacy ratio return on assets, net interest margin cost income ratio non-performing loans ratio, provisioning of non-performing loans ratio, capital asset ratio, funding volatility ratio, etc. Banks must on an on-going basis review their performance in attaining the highest ratios with reference to the ratios obtaining in other countries and also with reference to the globally accepted best ratios.
Each bank must institute a system of review of their performance in these areas with reference to the highest ratios in these areas achieved by banks in India as well as other developed countries and also with reference to the overall global position. On the basis of reviews from time to time banks must initiate necessary measures to improve the performance in the areas where performance is found inadequate in relation to global ratios performance indicators and bench marks. These reviews must be made at the highest level in management including the board level.
Simultaneous Achievement:
Indian banks must continue to perform well and continue to give excellent financial results while simultaneously contributing substantially by way of value to stake holders. At the same time, they have to discharge the social obligations cast upon them and fulfil the expectations of society. All these can be simultaneously achieved only by means of strict adherence to global best practices, global standards and codes and global bench marks and other performance and soundness indicators explained earlier. Best practices may keep on changing and evolving over time across the world and banks must be constantly alive to the changes and developments in this regard from time to time. It will always be prudent for banks to adopt a pro-active approach in the matter of adoption of best practices. Each bank may create a global best practices cell in the corporate office for the purpose of studying the developments and evolution of best practices elsewhere for the purpose of facilitating adoption of a pro-active approach apart from implementing the guidelines ,and directions issued from time to time by RBI regarding best practices to be observed.
The above cell can be charged with the job of studying the domestic developments as well as developments across the world in the area of best practices. It should also evaluate the performance of the bank in achieving global bench marks in different areas and other performance and soundness indicators with reference to the attainments in the concerned areas in other advanced countries and at global level and place the results and findings of the review before the top management and the Board of directors. Based on such reviews banks can take required steps for fine tuning the implementation of best practices, strategies, processes and other aspects of functioning with a view to achieving better operational and financial results and higher value for stakeholders. Banks have thus got to aim at banking at its best in terms of quality of service to customers ,maximization of earnings ,and profits and creation and enhancement and maximization of value for the stake holders minimization of risks to the lowest level possible implementation of norms standards ,and regulatory requirements to the satisfaction of regulators fulfillment of social objectives and fulfillment of the expectations of society. All these can be achieved only by means of strict adherence to and observance of best practices.
Saturday, March 28, 2009
ABHINAVA BHISHMA K.K.PAI.
An article titled '' ABHINAVA BHISHMA K.K.PAI''Has been published in the Bhavan's Journal dated March 31,2009.This has been published as one of the main articles on page 71.
Saturday, March 21, 2009
Article on Union Interim Budget
Article of Dr.K.K.Ammannaya on the above subject has appeared in Udymadarshi of March-April 2009.
Saturday, March 14, 2009
Third Way for Growth
Dr.K.K.Ammannaya has presented a paper''Third Way for Growth''at a state level seminar held at the Durga Parameshwari First Grade college Kateel on 7th March 2009.
Saturday, February 28, 2009
New Growth Strategy
In view of the failure of consumption-driven growth strategy and in view of the weaknesses of capitalism and its internal contradictions India must devise and adopt a new growth strategy.It must be a production driven and employment driven strategy.
Sunday, February 22, 2009
Kannada Article on K.K.Pai
A Kannada article on K.K.Pai was published by Dr.K.K.Ammannaya in Udayavani of January 27,2009.Title of the article is-
''Shikshana Kshetrada Bhishma Banking Rangada Diggaja K.K.Pai''
''Shikshana Kshetrada Bhishma Banking Rangada Diggaja K.K.Pai''
Saturday, February 7, 2009
Model Scheme for Credit Counselling Centres
RBI has unveiled model scheme for Credit Counselling Centres.As per RBI guidelines credit counselling centres must not act as advice centres or marketing centres for products of banks and counsellors must not encourage investments in the promoter bank's products.RBI has announced a scheme for Financail Literacy and Credit Counselling Centres[FLCC]Bank supported FLCCs must be in confrmity with the model scheme as stated by RBI.
Explaining the rationale behind the model scheme RBI said at present most of the centres were manned by bank staff who were acting as counsellors which often led to conflict of interest .The centres were found to be promoting the bank's products and arm's length distance with the parent bank was not maintained by some centres which often gave an impression that they were an integral part of the bank.As per the model scheme counselling centres must maintain arm's length relationship with parent bank and preferably should not be located in bank's premises.This is to avoid any impression that such centres are a part of bank itself.
Banks must offer advice that is specific to different categories of borrowers rather than broad based general advice as per RBI guidelines.For instance the centres in rural areas and semi uraban centres could focus on counselling farmers and centres in urban areas can focus on individuals with overdues in credit cards,personal loans housing loans etc.The counselling service may be provided free of charge.
Broadly the model content can include the need for savings,budgeting advantages of banking with formal financial institutions,concept of risk and rewards,and time value of money various products offered by banks etc.
Explaining the rationale behind the model scheme RBI said at present most of the centres were manned by bank staff who were acting as counsellors which often led to conflict of interest .The centres were found to be promoting the bank's products and arm's length distance with the parent bank was not maintained by some centres which often gave an impression that they were an integral part of the bank.As per the model scheme counselling centres must maintain arm's length relationship with parent bank and preferably should not be located in bank's premises.This is to avoid any impression that such centres are a part of bank itself.
Banks must offer advice that is specific to different categories of borrowers rather than broad based general advice as per RBI guidelines.For instance the centres in rural areas and semi uraban centres could focus on counselling farmers and centres in urban areas can focus on individuals with overdues in credit cards,personal loans housing loans etc.The counselling service may be provided free of charge.
Broadly the model content can include the need for savings,budgeting advantages of banking with formal financial institutions,concept of risk and rewards,and time value of money various products offered by banks etc.
Saturday, January 31, 2009
Utilisation of RTGS Facility
The utilisation of RTGS Facility in India leaves much to be desired.The facility stands extended to 53000 branches at present.But increase in utilisation of the facility has not shown any commensurate increase.
RTGS is a funds transfer mechanism whereunder transfer of money takes place from one account in one bank to another account in any bank on a real time and on gross basis.Transaction stands settled on one to one basis without buching with any other transaction.This is by far the fastest money transfer system through the banking channel.
The new RTGS cut off timings would be -from monday to friday.The customer transaction timings will be from 9 hours to 16.30 hours.For inter bank transactions the timings will be from 9 hours to 18 hours.On saturdays timings for customer and interbank transactions are from 9 hours to 12.30 hours and from 9 hours to 14.30 hours respectively.
RBI has asked banks to popularise the use of RTGS facility.RBI has advised banks to create a user-friendly atmosphere at branch level in order to increase RTGS usage.Banks have been asked to identify branches having potential to increase RTGS usage.RBI has directed banks to make their entire branch net work RTGS enabled and also expedite providing RTGS facility to the customers of RRBs sponsored by respective banks.
RTGS is meant for large -value transactions involving amounts of Rs one lakh and above.
RTGS is a funds transfer mechanism whereunder transfer of money takes place from one account in one bank to another account in any bank on a real time and on gross basis.Transaction stands settled on one to one basis without buching with any other transaction.This is by far the fastest money transfer system through the banking channel.
The new RTGS cut off timings would be -from monday to friday.The customer transaction timings will be from 9 hours to 16.30 hours.For inter bank transactions the timings will be from 9 hours to 18 hours.On saturdays timings for customer and interbank transactions are from 9 hours to 12.30 hours and from 9 hours to 14.30 hours respectively.
RBI has asked banks to popularise the use of RTGS facility.RBI has advised banks to create a user-friendly atmosphere at branch level in order to increase RTGS usage.Banks have been asked to identify branches having potential to increase RTGS usage.RBI has directed banks to make their entire branch net work RTGS enabled and also expedite providing RTGS facility to the customers of RRBs sponsored by respective banks.
RTGS is meant for large -value transactions involving amounts of Rs one lakh and above.
Thursday, January 29, 2009
Shikshana Kshetrada Bhishma,K.K.Pai
An article titled''Shikshana Kshetrada Bhishma ,Banking Rangada Diggaja,K.K.Pai was published in Udayavani Kannada daily dated 27th January 2009.The author of this article was Dr.K.K.Ammannaya
Saturday, January 24, 2009
K.K.Pai National Banking Award
K.K.Pai National Banking Award for 2008-2009 has gone to Sri.K.Cheraian Verghese former Chairman and Managing Director of Union Bank Of India.This award is in recognition of the significant contribution made by him to the Indian banking sector.
Books on K.K.Pai
Important books on K.K.Pai are-
1.K.K.Pai-Life and Achievements[English]
2.K.K.Pi-Jeevana Mathu Sadhane[Kannada]
3Kaushalyadethida Kai K.K.Pai[Kannada]
1.K.K.Pai-Life and Achievements[English]
2.K.K.Pi-Jeevana Mathu Sadhane[Kannada]
3Kaushalyadethida Kai K.K.Pai[Kannada]
Monday, January 19, 2009
Implementation of Basel II--Issues and Challenges
An article titled''Implementation of BaselII--Issues and Challenges''by Dr.K.K.Ammannaya has appeared in Southern Economist dated 15th January 2009.
Sunday, January 18, 2009
First article of Dr.K.K.Ammannaya on K.K.Pai
The first article of Dr.K.K.Ammannaya on K.K.Pai was published in February 1977 issue of BANKER ,a monthly banking journal being published from New Delhi.The title of the article was -''K.K.Pai-Profile of Meritorious Service''
IMMORTAL K.K.PAI
Dr.K.K.Ammannaya has written an article titled''Immortal K.K.Pai''K.K.Pai has made significant contribution in the fields of education,banking,management education,and many other areas.He was an embodiment of serviceto people particularly the weaker and neglected sections of society..The large gathering of people on January 15, 2009 and the long queues of people to have the last darshan of the moratl remains of Pai clearly showed the lofty place he occupied in the hearts of people.K.K.Pai breathed his last on 14th January,Makara Sankranthi day like Bhishma who renounced his body on Makara Sankranthi day to enter swarga.K.K.Pai was a real Bhishma in the field of education and Paryaya Puttige swamaiji conferred the title''Abhinava Bhishma''on K.K.Pai posthumously.K.K.Pai has amassed enormous fame and name which will remain for ever although he is not physically with us today.His great ideas and ideals will live to posterity.K.K.Pai is immortal.
Sunday, January 11, 2009
INDIAN BANKING-BETTER PERFORMANCE THROUGH BEST PRACTICES
Dr.K.K.Ammannaya's another latest article is on-
'' Indian Banking--Better Performance Through Best Practices''
'' Indian Banking--Better Performance Through Best Practices''
Customer Relationship Management In Banks
The latest article of Ammannaya is on Customer Relationship Management [CRM] in Banks.
Wednesday, January 7, 2009
One Country , One Bank Account
It will be really woderful if the concept of one country one account becomes a reality. Under this concept an individual customer with a unique account number can go to any bank for transacting banking business.Technology holds the key in its implementation.The retail payments hub being set up under the aegis of the National Payments Corporation of India [NPCI]would help link all banks ,ATMs,point of sale[POS]terminals,mobile service providers etc as an aggregator for enabling seamless payment and settlement.Once India Pay becomes operational all ATM and POS transactions would be settled in India.At present these transactions are routed through international payments gateways of Mastercard or Visa.It is learnt that the NPCI which has an authorised capital of Rs 300 crores has engaged the services of a global HR search firm to zero in on a CEO and key operations personnel.NPCI's promoters are SBI,Punjab National Bank,Canara Bank,Bank Of Baroda,Union Bank Of India,ICICI Bank,HDFC Bank,Citi Bank and HSBC.
Saturday, January 3, 2009
GDP growth Rates in India
GDP growth rates in India were as under--
1998-99-6.7 percent.
1999-2000-6.4 percent.
2000-2001-4.4 percent.
2001-2002-5.8 percent.
2002-2003-3.8 per cent.
2003-2004-8.5 percent.
2004-2005-7.5 percent.
2005-2006-9.4 percent.
2006-2007-9.6 percent.
2007-2008-9 percent.
April-June -QI
2007-2008-9.2 percent.
2008-2009-7.9 percent.
1998-99-6.7 percent.
1999-2000-6.4 percent.
2000-2001-4.4 percent.
2001-2002-5.8 percent.
2002-2003-3.8 per cent.
2003-2004-8.5 percent.
2004-2005-7.5 percent.
2005-2006-9.4 percent.
2006-2007-9.6 percent.
2007-2008-9 percent.
April-June -QI
2007-2008-9.2 percent.
2008-2009-7.9 percent.
CRR and Repo Rate
After recent revisions CRR,Repo rate and reverse repo rates are as under-
1CRR was cut by 0.5 percent.Present CRR is 5 per cent.
2.Repo Rate was reduced by 1 percent.The present Repo rate is 5.5 percent.
3.Reverse rep rate was reduced by 1 percent.Present reverse repo rate is 4 percent.
1CRR was cut by 0.5 percent.Present CRR is 5 per cent.
2.Repo Rate was reduced by 1 percent.The present Repo rate is 5.5 percent.
3.Reverse rep rate was reduced by 1 percent.Present reverse repo rate is 4 percent.
Kannada Article
A new Kannada article of Dr.K.K.Ammannaya has been published in Udyamadarshi of December 2008 .The articles is--
'' Krugman Mathu Vyapara Siddantha''
'' Krugman Mathu Vyapara Siddantha''
Limited Liability Partnership
The introduction of limited liability partnership as an alternative business structure provides for a business format that would combine the flexibility of partnership form of business enterprise with the advantages of limited liability of a company at a low compliance cost.
Limited liability partnership will foster growth of services sector and provide a platform to SMEs and professional firms to carry on their business with best global practices.
Limited liability partnership will foster growth of services sector and provide a platform to SMEs and professional firms to carry on their business with best global practices.
Two New Articles
Two NEW Articles Of Dr.K.K.Ammannaya in this week are --
1.Implementation Of Basel II-Issues,Concerns and Challenges.
2.CRM and CRM Operations in Indian Banks.
1.Implementation Of Basel II-Issues,Concerns and Challenges.
2.CRM and CRM Operations in Indian Banks.
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