K C Chakrabarty: Contemporary issues in banking - reflections on
viewpoints of a bank economist
Remarks by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at a book
release function organised by the Indian Overseas Bank, Chennai, 30 December 2012.
* * *
Dr. M. Narendra, Chairman and Managing Director, Indian Overseas Bank (IOB); Shri
A.K. Bansal and Shri A.D.M. Chavali, Executive Directors of IOB; Shri N. Viswanathan,
Regional Director, RBI; Smt. Indira Padmini and other General Managers of IOB; Shri M.
Ramaswamy, Retired Secretary of Auroville; Shri S. Muthiah, Historian; Shri M.Ct.P.
Chidambaram, grandson of the founder of Indian Overseas Bank; Shri B.J. Krishnan,
Environmentalist; Shri Bhakther Solomon, Chief Executive Officer of Development Promotion
Group; Shri Dharmalingam Venugopal, who is the reason for our assembling here today;
serving and retired members of the banking fraternity, other invited dignitaries whom I have
not specifically named; ladies and gentlemen. It is a matter of great pleasure for me to be
present here today on the occasion of release of Shri D. Venugopal's book "Indian Banking
Reforms and After: A Bank Economist's Take". Based on my interaction with Shri Venugopal
and reading of his articles, my assessment of him is of an individual with an incisive mind
and an ability to dispassionately analyse diverse subjects of concern to the economy.
The book being released today is an anthology of articles written by him in various national
and financial dailies over a period of time. It deals with an impressive array of subjects and
provides a bank economist's perspective on various issues, which certainly makes an
interesting reading. I congratulate Shri Venugopal for the book, of which I had the privilege of
writing the foreword, and hope the book gets all the success and accolades that it, so richly,
deserves.
The first thing that strikes about the collection of articles featured in the book is the wide time
horizon over which the articles were penned. The book succeeds in providing a panoramic
view of issues that have confronted the economy over the last two decades, a period that
has been exciting for the Indian economy with the country moving from the throes of despair
at the beginning of the decade of the 90s to a period of heady growth and further, to the
present, when we are facing multiple challenges. The book deftly captures several major
landmark events/developments in the banking sector with the perspective of the point of time
when these articles were actually written. It is noteworthy that apart from India, Shri
Venugopal has also extensively covered the economic developments in China in his articles.
Shri Venugopal has made a strong pitch for economic cooperation between the two major
Asian markets naming China as the market of the future and stating that India should seek to
get its due share of this market. It is actually a tribute to the vision of the man, as he has
intensively focussed on two economies that have, since, seen a lot of economic prosperity
and have become the cynosure of all in the global market place. As the Indian economy
battles challenges on multiple fronts, Shri Venugopal's articles could provide valuable
insights into these challenges and provide guidance for overcoming them.
The Indian banking system has seen a complete transformation during the last two decades,
in sync with the progress made by the real economy. Almost every aspect of banking
operation has seen significant change during this period as banks sought to reinvent
themselves in an attempt to retain their preeminent position in the financial system. The
period saw banks moving beyond brick and mortar branches to adopt innovative delivery
channels including internet banking, ATMs, call centres, kiosks, Business Correspondents
(BCs), etc. New products such as retail banking gained prominence. Banks have sought to
grow, not just in terms of balance sheet size, but also in terms of greater penetration of
banking services to the hitherto unbanked segments of the population. It is reasonable to say
that banks have succeeded in rising up to the challenges posed by the unique needs of a
transforming economy and have, in no small measure, contributed to the nation's economic
progress during this period.
The growth of the banking system and its pivotal position in the country's financial
architecture implies that the banks cater to a whole host of diverse stakeholders who have
equally diverse expectations. The success of individual banks and of the banking system as
a whole depends on how well these stakeholder expectations are met. Some of the problems
currently facing the banking industry bear their genesis to banks' inability to align their
business operations with stakeholder expectations. In view of the considerable debate (and
sometimes noise) generated by the ills plaguing the banking sector, I thought it appropriate
to briefly flag some random thoughts on steps the Indian banking industry needs to take, in
order to effectively meet the diverse stakeholder expectations and overcome the present
challenges. Some of these thoughts also find resonance in the articles presented in Shri
Venugopal's book.
A) Productivity and efficiency
Banks play the critical role of financial intermediation by performing the task of maturity and
risk transformation, besides providing payment and settlement services. In order to
effectively perform these functions, banks need to ensure that they maintain high levels of
productivity and efficiency in their operations. Two kinds of efficiency are essential for banks:
•
Allocational Efficiency: This requires banks to ensure that the precious societal
resources are allotted to the most productive activities. Besides, while taking
allocation decisions, the interests of the most vulnerable sections of the society
should also be taken into account.
•
Operational Efficiency: Operational Efficiency requires banks to perform the
financial intermediation function in a safe, secure and speedy manner while
ensuring that the cost of performing the intermediation function is minimized. While
profit margins are important for sustaining banking operations, the cost of
operational inefficiencies of banks should not be passed on to customers by way of
higher service charges and fees.
Indian banks need to improve both, allocational and operational efficiency, so that the
financial intermediation function is effectively performed. This would include reengineering of
all critical products and processes by leveraging on innovative technology-based solutions,
while retaining a strong customer-centric focus.
B) Financial consumer protection and its linkage to risk management function
Financial Consumer Protection has emerged as a key area of supervisory focus globally. The
global financial crisis has highlighted the vulnerability of the consumer class, which has been
worst hit in the crisis. The key feature of the exploitation has been the discriminatory, non-
transparent and illogical pricing which has affected the poor and vulnerable consumers most
emphatically. The product innovations have not focused on customer requirements and
have, instead, aimed at serving the interests of the service provider. The basic fact, that the
well-being of the consumer is essential for the sustainability and growth of the service
provider, has been lost sight of. As part of its regulatory reform agenda, G 20 Finance
Ministers and Central Bank Governors have also endorsed a set of High-level Principles on
Financial Consumer Protection, underlining its overall importance for financial stability. The
principles enjoin upon the supervisors and oversight bodies to ensure an equitable and fair
treatment of consumers, disclosure and transparency in product and service offerings along
with promotion of financial education and awareness amongst the consumers.
In this context, I would like to highlight some important aspects of consumer protection and
risk management that banks need to imbibe in their business processes:
•
Pricing of asset and liability products should be transparent and non-discriminatory.
At a minimum, it must be ensured that poor do not subsidize the provision of
banking services to the rich.
•
The business operations of banks should be customer-centric in nature. This should
be reflected in all aspects of banking operations including creation of customized
products and services, pricing of services, delivery channels, etc. Banks should,
inherently, be flexible in their operations so that they have the ability to meet the
evolving stakeholder expectations.
•
Banks should be able to appreciate the risk-return trade-off involved in various
activities. The basic premise that greater return would invariably come from
assumption of higher risk, needs to be appreciated and disseminated, both within
the organization and to banks' customers. Banks need to develop the ability to
discern good risk from bad so that they selectively take on only those risks that are
in alignment with the bank's long term strategic vision.
• The culture of efficient risk management needs to be imbibed in the organization's
ethos so that everyone from the top management to frontline managers in the field
shares a common vision of risk management.
A key related issue is the integrity of MIS in banks. Each bank claims to be oriented towards
its customers. But, I have a simple poser. Are the banks aware of the number of customers
they have? I am not referring to the number of accounts but the actual number of customers
that the bank serves across all business verticals by offering different products. Moreover,
most of the banks do not have a system of working out activity wise costs and returns.
Unless banks know the return on each and every product, they cannot arrive at a truly risk
based pricing.
C) Impaired assets
Another issue which is generating considerable concern and is likely to impact banks' ability
to serve its stakeholders is the rising portfolio of non-performing assets (NPAs) and
restructured loans. While the downturn in business environment globally and in India has
contributed to this rise, we need to reflect on why our risk management practices during
boom time were unable to anticipate future downturns and build up suitable safeguards while
giving loans.
I do believe that the rising impaired assets is a "governance" issue as banks have forgotten
the art of saying "no", except, may be, to small borrowers. Banks need to significantly
improve their risk assessment capability and their ability to price risks, so that they take on
only those risks that they understand and can effectively manage. I believe that this need is
all the more pronounced in the case of public sector banks, which, at times, end up with
assets that have been exited by private sector/ foreign banks on account of inherent
weaknesses.
The ability to manage NPAs is important in order to preserve the strength of bank balance
sheets and to retain the appetite to take on good risks. An attitude of complete risk aversion
would not be appropriate as banks are in the business of taking risks, but with adequate
safeguards. I note that NPAs are a recurrent theme in Shri Venugopal's articles and hope
that they do provide insights into how banks can manage this problem.
Another issue that I would like to bring up before you is the element of discrimination
practiced by the banks in restructuring of loans. Analysis of available data indicates that the
larger borrowers have invariably received the benefit of restructuring of loans, while the
restructuring in case of SME/ agriculture loans has remained abysmally low. I believe that
with timely intervention and support from the banks, this sector would have definitely shown
much lower levels of impaired assets than it presently does.
D) Financial inclusion
Despite several steps having been taken by the Government and the Reserve Bank of India,
the extent of exclusion in the Indian financial system continues to be unacceptably high. The
unbanked masses constitute a unique but important stakeholder group for banks, even
though they may not be bank customers. Meeting the expectations of this group through
financial inclusion efforts presents a huge business opportunity for banks.
While there is no "one-size-fits-all" approach to financial inclusion, it is important that banks
recognize three important prerequisites for maximising the benefits of financial inclusion
efforts. These are:
•
Holistic approach to provision of financial services, not just credit or deposit alone
•
Meeting the needs of small firms
•
Focussing on segments of population excluded by gender or geographical
remoteness
Banks need to focus on leveraging technology to create new business models and delivery
channels that are customized to the needs of the targeted population. Technology has the
potential to act as a force multiplier in our financial inclusion efforts, provided it is
implemented in a planned manner. There is, however, an increasing realization that mere
reliance on technology-enabled non-face to face channels alone would not be sufficient to
meet our goal of creating an inclusive financial system. There is a need for opening more
brick and mortar outlets as delivery points, both as a control mechanism for BCs and to gain
the trust and acceptability of the masses.
Our assessment of the progress in financial inclusion since the introduction of Board
approved Financial Inclusion Plans is that while there has been considerable progress in the
number of accounts opened, the actual number of transactions per account or per BC
continues to be extremely low. This reduces the viability of the financial inclusion efforts and
would, ultimately, results in concerned stakeholders losing interest in the exercise. The low
transaction levels indicate inadequacies on both the demand and supply sides such as
deficiencies in BC operations, non-distribution of smart cards, lack of awareness on the part
of the account holders, etc. Banks need to identify the causes for the low transaction rates
and urgently address them. In order to be successful, sustainable and scalable, financial
inclusion should necessarily be commercially viable for everybody including the bank, the BC
and the technology provider. However, the pricing should not result in exploitation of the
customers.
It is, indeed, very gratifying to note that besides including financial inclusion prominently in
his articles, Shri Venugopal, is also working for the financial inclusion of primitive tribes of the
Nilgiri district. I am also very pleased to note that he is a great friend and protector of nature,
especially the Nilgiris and has been staunchly espousing the cause of the environment
throughout his career. We need more such dedicated persons with a genuine passion for
inclusive and sustainable growth.
Conclusion
As with the economy, the Indian banking system is also at a crossroads with multiple
opportunities and challenges before it. We need to make the right choices now in order to
ensure the future of the banking system as the key pillar upon which the economic prosperity
of the country rests. Banks are the lifeline of any economy and it is the collective
responsibility of all of us to ensure that we have a strong, resilient and inclusive banking
system geared up to face all domestic and global challenges.
Opinions of thought leaders such as Shri Venugopal are important in deciding the right
course of action for taking the banking system forward. The collection of articles in this book
provides insights into how the economy has developed over the last two decades and
provides clues to tackling the current challenges. The narratives are in a very simple
language and the coverage of a diverse set of topics makes the book eminently readable and
useful to most people. I hope the book is the first in a series of many more to follow. I once
again congratulate Shri Venugopal for the book and wish it all success. I also thank
Dr. Narendra and Indian Overseas Bank for this wonderful function.
Thank you.