|
Following is the text of the speech of the Finance Minister at the Banker’s Conference here today:
"The Bankers’ Conference, earlier known as the Bank Economist Conference, has become an important yearly event. It provides an excellent opportunity for a structured dialogue among Bankers, Academicians and Policy-makers. It is a measure of the Indian Banks’ importance in national development that the President himself inaugurated the current years’ Bankers’ Conference yesterday. I see from the schedule of this Conference that a number of topical issues have been chosen for debate. I am sure the exchange of ideas has been fruitful. We, in the Government eagerly look forward to the proceedings of this Conference.
In my brief address, I propose to make some observations about where our Banks stand today, what needs to be done to make them realize their global aspirations and how the Government proposes to support their efforts.
Given the theme of the Conference, i.e. Indian Banking : Realising Global Aspirations, it may be of use to first take a look at the ranking of Indian Banks amongst the global banks. Only twenty Indian Banks are in the list of top 1000 world banks according to the list prepared by "The Banker’ (Financial Times, London) in July, 2004. India’s only entry in the top 25 Asian Banks (excluding Japan), is State Bank of India at No. 10. An encouraging finding of "The Banker’s" analysis is that the twenty Indian Banks in the list of 1000, continue to provide the highest average return on capital amongst the Asian banks, going up to 34.2% compared to an already high 27.1% in the previous year. Where and how do we go from here in terms of realizing global aspirations remains to be seen.
One of the major threats to the health of Indian banking comes from the high level of NPAs. Although the situation has improved overtime, this is largely in terms of net NPAs. The Banking industry in India has fortunately had a sufficiently long period of soft interest rate regime. With large investments in G.secs, banks were able to make substantial profits without much effort. This helped them to make large provisions and show impressive figures in terms of NPAs. Another reason for lower NPAs has been the reluctance on the part of Public Sector Banks to recognize bad loans as NPAs. Instead, they have tended to resort to restructuring or even ‘ever-greening’. Many non-performing loans continue as such on the books of banks. Managers have tried to avoid unpleasant decisions and consequent accountability for decisions which can be questioned later. In such cases, recovery will be an extremely difficult task due to a long lapse of time. Thus the problem of NPAs is in fact more complex then it appears at first sight.
This problem has to be tackled on several fronts. First of all, the Banks will need to improve credit quality. This calls for better skills, better risk management systems and improvements in monitoring and follow up. There are reports of poor documentation and consequently, difficulties in enforcing loan contracts. On the whole, the system of supervision and accountability within Public Sector Banks and many old Private Sector Banks needs to be improved. These are issues that have to be tackled by Bank’s managements themselves. They need to compare their own systems to those of the global banks, in which the quality of credit appraisals is far superior, supervision is strict and penalties for serious mistakes instantaneous.
Government is keen to strengthen the hands of Bank Managements in tackling recoveries. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 conferred powers upon Banks and Financial Institutions to enforce Securities Interest against defaulters without intervention of Courts and DRTs. This was challenged before the Supreme Court and while the constitutional validity of the Act itself has been upheld, sub-section (2) of Section 17 was struck down. This has made certain amendments in the Act essential. These have been finalized and we hope to be able to effect the amendments speedily. The proposed amendments will aim at dissuading the borrowers from adopting dilatory tactics and enabling creditors to make speedy recovery by enforcement of securities.
Along with strengthening of the Securitisation Act, we propose to introduce Credit Information Companies (Regulation) Act, 2004, in the Winter Session of the Parliament. Information is vital for improving the quality of credit appraisals. Availability of required information on borrowers will in course of time, reduce the harassment of borrowers. It will help Banks in making speedy appraisals and credit decisions. A well established system of Credit Information should also minimize financial frauds which can become problematic for certain categories of loans like housing loans. Given the importance of information for improving credit climate, we propose to bring about a Law to provide legal sanction for collection, sharing and regulated dissemination of credit information and setting up of Credit Information Companies. This initiative should enable our Banks to benefit from access to credit information, like Banks in USA, UK, Australia, Newzealand, France, Germany and nearer home in Sri Lanka.
A related issue, however, is that of Lenders’ liability. While developing the database of credit histories of individual borrowers, banks can intrude upon citizens’ privacy. They have, therefore, an equal obligation to ensure proper customer service. They need to follow certain norms in considering, appraising and deciding proposals for credit. They also need to disclose all the information that the borrowers should have. When in genuine difficulty, the honest borrower needs to be given timely help. In many countries of the world, banks are mandated by Law to respect the rights and interests of lenders, depositors and other customers. There is a demand for a similar law in India, which many consider justified. So far, we have agreed to achieve this objective through an Advisory or guidelines and RBI has circulated a Fair Practice Code. I am not sure how far it is adhered to. If Indian banks aspire to be global players, they will have to display greater respect for this Code. If they fail to show sufficient concern for customers, there will soon be a clamour for enacting a Law. It may be difficult to deny such a demand, indefinitely.
Indian Companies doing financial intermediation abroad is something that is yet to happen. Indian manufacturing or software firms sell products worldwide. The Indian Banks do not. It is necessary to diagnose why Indian Finance is not competitive and what should be done about it.
Why is the Indian manufacturing globally competitive? Just 20 years ago, Indian manufacturing was far from competitive. Over the last twenty years, we have substantially closed the gap. Today, Indian software, Indian garments, Indian drugs and Indian Cars are sold all over the world.
What has changed the situation? I think this was partly because the manufacturing sector was prepared to face the competition. It was willing to access the best technology available in the world. It was willing to cut costs and improve productivity. It developed the resolve to grow in size, merge and make acquisitions whenever it made business sense. The exposure to global market place was very hard for many inefficient firms. Many of the giants of 20 or 10 years ago are no longer with us. But the survivors and the new breed of nimble entrants are much stronger.
Since banks are ‘special’ and particularly vulnerable to systemic crises, there is need for a gradual approach to competition. The policy for opening the Indian banking sector will thus have to follow a dual track approach. While providing a Roadmap for opening up to global competition fully, we will have to simultaneously strengthen the national banks so that they are fully prepared to face any competition. While the Indian Banks aspire to become truly global players, they should also be prepared to face the full force of global competition on their homeground.
Preparing for global competition will mean greater attention to regulation. It will be necessary to enhance regulatory capacity to ensure proper surveillance, enforce rules and develop the capacity to block banks and close them down before they become insolvent and make claims on the tax-payers money. From the task of protecting weak banks at the cost of public money, regulation will need to re-focus on such issues.
In introducing Information Technology, our Banks are making impressive progress. The new generation Banks are doing particularly well. An important area where the advantage of Information Technology is to be taken is the Payment and Settlement Systems, because they constitute the life-line of any economy. In order to provide an explicit legal basis for Payment and Settlement Systems and confer the necessary regulatory powers on the Reserve Bank of India, Government proposes to enact a Law on Payment and Settlement Systems. The Government expects to introduce a Bill on the proposed legislation in the Winter Session of the Parliament.
For Indian banks to become globally competitive, it is necessary to adopt the best international practices in Corporate Governance. Government has formulated guidelines in respect of eligibility criteria for appointment of Non-Official Directors on Boards of Public Sector Banks. The objective of these guidelines is to ensure that directors nominated to Banks’ boards bring about a distinct qualitative improvement in corporate governance and help the banks meet the competitive challenges and the risk associated with rapidly changing environment. However, the goal of vastly improved corporate governance will not be achieved by selecting good non-official directors alone. The management of Banks will need to adopt better systems and practices, and to provide necessary information and material to their boards for making sound decisions.
With globalisation, the Indian public sector banks have to compete with new generation private banks and foreign banks. International trends suggest that consolidation has reduced the chances of credit risks. There is a near consensus on the issue that to attain global aspirations and provide greater banking services to rural and hitherto unbanked areas, banks have to consolidate. However, the consolidation has to be addressed not merely to create large behemoths but to benefit from the synergy created by mergers. Their foot prints should cover the most interior rural areas and provide support to far flung sectors which at present face enormous difficulty as small banks find such remote branches unviable. Large banks would be in a position to set up branches in hitherto unknown areas even if these were not totally viable, as these banks would have the long term financial sustainability to be able to cross subsidize. Such large banks would also be able to meet Basel II norms providing comfort to the clients and the stakeholders. The strategy should thus be for public sector banks to analyze consolidation with entities, which maximize synergies and create larger banking entities, able to compete globally. State Bank of India, India’s largest bank having an asset size of $127 bn, is ranked 83rd among the World’s banks according to asset size. This gives an indication of what our banks need to do to have a global presence and thereby maximizing client satisfaction within the country. While consolidating, special care will have to be taken to satisfactorily address HR issues in the overall context of technology introduction and rationalization of branches. The entire process should be market driven and based purely on commercial and economic considerations. It needs also to be emphasized that regional and ethnic considerations have to be built into any proposal for consolidation. Thus, the issues that need to be factored in while considering consolidation should be maximizing synergies in terms of regional balance, network of branches, HR cultures, asset commonality and ensuring that legacy issues are not overlooked.
The profitability performance of Indian Banks in recent years compares well with that of the global benchmark banks primarily because of the higher share of profit on the sale of investments, higher leverage and higher net interest margins of Indian banks. However, many of these drivers of higher profits of Indian banks may not be sustainable. To ensure long-term profitability, Indian banks need to focus on the following parameters and build systemic capability in managing of the same:
Ensure that loans are diversified across several customer segments
Introduce robust risk scoring techniques to ensure better quality of loans, as well as to enable better risk-adjusted returns at the portfolio level
Improve the quality of credit monitoring systems so that slippage in asset quality is minimized
Raise the share of non-fund income by increasing product offerings wherever necessary by better use of technology
Reduce operating expenses by upgrading banking technology,
Improve the management of market risks; and finally
Reduce the impact of operational risks by putting in place appropriate frameworks to measure risks, mitigate them or insuring them.
TELCO looks and behaves like a global car company. Ranbaxy looks and behaves like a global drugs company. Infosys, Wipro & TCS look and behave like Global Software Companies. Indian Banks need to do the same.
A global bank has to have a modern framework on handling credit risk. It does not mechanically use ratings from credit rating agencies. It uses models for evaluating credit risk. It does marking to market of the loan/bond portfolio, based on a prospective view of the NPV of the assets. It routinely buys/sells components of the credit portfolio. It intensively uses credit derivatives. None of these features are found in Indian banks today. These are skills and practices that Indian Banks will need to think about to become global.
There is an interesting advertisement of a major global bank, which many of you may have seen. The message of this advertisement is important. In order to be successful, even a global bank has to be relevant to local needs. It should not only understand the local economy, its opportunities and challenges, but also be sensitive to its culture and customs. Indian Banks having global aspirations would need to do the same. That is indeed a daunting challenge. But before an attempt is made to understand the needs of the Western
Economy or East Asia or the Gulf countries, we need to fully tap the emerging opportunities in our own country. Unless our banks effectively tap these opportunities, their aspirations for success abroad may be not realistic. Huge opportunities lie in agriculture, agri-businesses, small and medium enterprises, non farm activities and infrastructure. Public policies in the past sought to achieve growth in some of these sectors through directed credit. Perhaps, there was time in the past when profitable opportunities in such sectors were not obvious. I am told that the First Deputy Managing Director of IMF, Dr. Anne Krueger in her keynote address yesterday sounded a note of caution against directed credit. We are certainly not attempting to direct credit. My message is that there is potential and opportunity in a variety of sectors within our country. We need to be pro-active; we need to research and develop appropriate skill sets and systems to tap these opportunities. We must not always walk down the trodden path, we must sometimes take a road less travelled, while taking precautions to manage the risks.
Indian Banking has made a vital contribution to the nation’s development. It has progressively matured. It is a measure of its robustness that it is now looking outwards to realize its global aspirations. In this process, it will need to meet many difficult challenges. I have, however, no doubt that Indian Banks will meet these challenges successfully and atleast some of them be counted among global leaders in not too distant a future."
|
