COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES

Risk management, fine balance between sound banking and profitable banking, needed for 1999, say experts

Indian banks were in the throes of financial sector deregulation during the year 1998 as the Reserve Bank of India pressed for further reforms in operation of banks in line with the second Narasimham Committee Report.

The process is going to be more painful as the banks, mostly in public sector, are yet to get rid of the government's financing programme involving huge manpower liabilities and social obligations.

The inability and indifferent attitude of the authorities to bring in adequate reforms in fiscal management, labour laws, legal system for recovery of money and exit policy to match the financial sector reforms had put the Indian banks in a state of ''confusion and uncertainty'', leading bankers said.

They said the majority banks who had shown profits in the previous year, would show lower profits during the year due to slow down of economy, increase of non-performing assets or the NPAs, rising operational costs and intense competition from foreign and private banks. Last year, banks had recorded higher profits by writing back the depreciation on their investment in government securities and trading operations.

Bank analysts were pessimistic that Indian banks may find it difficult to maintain a strong bottomline as they predicted a higher interest regime in the coming year, following higher rate of government borrowing coupled with increasing amount of bad loans in the corporate sector.

According to one estimate, the net government borrowing for the next financial year will be around 23 per cent higher than the net borrowings in 1998-99 as the fiscal deficit as a percentage of gross domestic products would go up to 6.5 per cent from six per cent at Rs 1.19 trillion.

Bankers are in a dilemma as to how to implement the Reserve Bank's time-bound recommendations based on the Narasimham Committee Report to improve the quality of asset portfolio and enhancing the financial soundness of banks, particularly when the legal procedures remained the same, making recovery of loans or writting off bad debts very difficult.

In its second-half policy measures in October, the RBI asked the banks to provide provisioning requirements for standard assets, government approved securities and government guarantee advances with effect from March 31, 2000.

The minimum capital to risk asset ratio is being raised from the current eight to nine per cent with effect from March 31, 2000. The provisions on existing and old government guaranteed advances which would consequently become NPAs are to be fully provided for over a period of four years beginning March 31, 1999.

While banks were advised to introduce effective risk management systems to cover credit risk, market risk and operational risk on a priority basis, bankers became very cautious in their lending to commercial sector mainly due to growing culture of investigative procedures and risk-averse attitudes.

In the words of former RBI governor S Venkitaramanan, Indian Bank executives live in constant dread of the midnight Knock -- regulators and investigators look at fine print of process, not the outcome. The executives are afraid that at some future date regulatory inspection might hold them responsible for failures of credits for no fault of theirs, except perhaps lack of clairvoyance.

In fact, many public sector banks' chief executives who do not want to be named said that there was very slow progress in bringing changes in legal and labour laws in India and as a result, there was a piling up of NPAs over the years in banks and also growing cost of wages and maintenance in banking sector.

While the Narasimham Committee underlined the need to reduce the average level of net NPAs for all banks to three per cent by the year 2002 and to zero thereafter, still a large number of public sector banks have net NPAs ranging from 10 to 20 per cent of net advances.

Similarly, a comparative cost analysis indicated that while the average operating cost of banks as a percentage of assets was about 2.3 per cent in India during the period between 1990-91 to 1995-96, it was low at 1.1 per cent in China, 1.6 per cent in Malaysia, 1.9 per cent in Thailand and one per cent in Japan.

This reflected the uneconomical banking operations in India which adversely affected the financial intermediation and growth in the economy, bankers said.

They felt that without gaining sufficient advantage in areas of labour productivity, technology, transparency in rules and organisational effectiveness, it would be difficult to think of a significant improvement in Indian banking system in future.

The ratio of wage bill to total income of the public sector banks is very high as compared to the banks in the private sector and this needs to be brought down to improve banks' profitability.

The public sector banks which as a whole had been suffering losses till 1993-94, got out of the red in 1994-95 posting a net profit of Rs 11.16 billion. In the year ended March 1998, these banks posted a net profit of Rs 50.27 billion and this trend gained momentum in their first half operations.

However, in the last quarter of the year, banks witnessed growing pressures on their earnings, following narrowing of interest spread and growing demand for innovative fundings of long-term infrastructure projects.

Financial analysts felt that even the concept of credit risk in banks has undergone a radical change as the borrowers in industrial, agricultural and commercial sectors are exposed to greater internal and external competition with continuation and intensification of liberalisation measures.

The forces of competition, deregulation and technology were the three major environmental factors which would leave a lasting imprint on the banking sector in the years to come, they said.

They felt that the winning strategy in such an environment would not be risk aversion which would be an obvious recipe for facing extinction but of managing risk in such a manner so as to book profit from them.

Banks would have to strike a fine balance between sound banking and profitable banking and evolve appropriate risk management strategies through sound capital base and developing operational skills, they added.

In fact, at the recent Banks Economists Conference in Bangalore, RBI deputy governor S P Talwar asked the public sector banks to examine measures such as introduction of voluntary retirement scheme, reduction of deposit interest rates and closure of loss-making units in order to get rid of the troubles caused by the highly competitive environment and further deregulations.

UNI

Business news