The Issues facing heads of Banks

THROUGH THE PRISM DR. N. A. MUJUMDAR

What are the current issues facing heads of banks? The Indian Institute of Banking and Finance has put together responses of 14 banks 13 public sector banks ( PSB) and one private sector bank

– to the Institutes questionnaire on the subject.

The issues discussed include regulatory capital risk measurement, base rate system, customer service banking utility and agricultural finance, role of rating agencies. Dr. R. Bhaskaran, CEO of the Institute deserves to be commended on collecting the views of heads of banks and putting them in the public domain by publishing them in the Institutes journal Bank Quest ( January- March 2011 issue). It is important to highlight the issues that bankers have spoken about and the issues that they have chosen not to speak about. This response reflects the priority that heads of banks attach to various issues.

In fact the bankers responses need to be analysed in conjunction with the Reserve Bank of Indias ( RBI) Financial Stability Report released in June 2011, which we discussed earlier in this column ( Financial Stability and Economic Growth, July 5, 2011). This Report reflects the policy makerspriorities. In the ultimate analysis, RBIs policies are to be implemented by banks and hence bankspriorities and commitment are crucial. We would seek to show that priorities of banks seem to differ from priorities of RBI. One general comment on bankersperception of the future growth of the banking industry is that Bankers seemed to be Basel obsessed. India- specific issues seem to have taken a backseat, in the minds of bankers. This is a hang- over the financial sector reforms introduced since 1991. The concept of regulatory capital on a standarised basis, i. e.: Basel- I was implemented in 1992. The implementation of Basel- II which defined capital charge in more sophisticated terms started in 2005. In response to the global financial crisis of 2008, BIS has now proposed Basel- III measures that call for higher regulatory capital in due course of time; implementation of this proposal, in phases, will start from January 2013. The heads of banks seem to be comfortable with these higher capital requirements, although it would limit business expansion of banks. While private banks are able to access equity market for augmenting capital, public sector bank are hopeful of capital infusion by Government of India.

Again, take risk management Measurement of risk is an important aspect of risk management. Heeds of banks agree that the goal of advanced measurement approach needs to be reached, despite there being many challenges. In this context, it is necessary to remind bankers, that blind adoption of Basle norms or measurement tools may lead to distortions, as it did in the case of interest rates. While a triple A rated corporate entity could raise money from banks at 6 per cent, the small farmer was made to pay 12 per cent. This resulted in the emergence of inequitable interest rate structure in which small borrowers subsidised large borrowers.

The Reserve Bank was honest enough to admit the distortion and replaced Benchmark Prime Lending Rates System ( BPLRs) with the Base Rate system.

But it took two decades to correct the distortion.

The adoption of Basel ( norms) techniques should be tempered by Indian realities.

RBIs stability Report has highlighted the major concerns of commercial banks: increased reliance on market borrowings to fund assets, increasing imbalances in the maturity profile of assets and liabilities, and potential additions to asset impairment. Strangely enough bankers responses do not discuss any of these issues.

The most conspicuous omission by the bankers is the subject of financial inclusion and associated issues. Both Government of India and RBI are pursuing this objective with a missionary zeal and therefore one thought it would be on top of the agenda of bankers.

This is not so. Public sector banks are expected to cover some 73,000 additional villagers by Marc