Bancon2012 in a nutshell

The last weekend of November saw the men in black – bankers in their formal best, troop into Mariott Pune for BANCON 2012, to review, reform, and rethink banking. Bank of Maharashtra had the privilege of hosting it in partnership with Indian Banks Association (IBA). Day 1 witnessed a flurry of activity with the Hon’ble Finance Minister, Shri P Chidambaram, inaugurating the meet with the traditional lighting of the lamp, releasing a report by McKinsey & Co, launching the Ru-Pay card and presenting it to five farmers and also a single number for financial assistance. Ru-Pay jointly with NABARD gives farmers the opportunity of financial inclusion and its catch jingle, Chal pade gaon, toh chal pade India aptly summed up its theme. *99# will empower users through mobile banking. The minister began his impressive speech by comparing the financial system as the lifeline of any economy, with banks being the heart in a body. He spoke about farmers, students and women as good customers for their repayment record. His interesting observations included how people in non-metros want to borrow amounts as small as 10,000 to upgrade their set-up. He urged banks to channelize this demand and regional banks to maintain their own distinct flavor; even after consolidation of top banks, when India becomes the third largest economy.

Post-lunch, when Chief Minister, Shri Prithviraj Chavan took to the dais, he also shared interesting nuggets like the scope for voice-input technology and how credit to farming increased by 47% due to commercial banking. Many speakers lauded NABARD for its phenomenal work. A cultural programme was lined up for the evening consisting of the fisherfolk song amongst others by the Gandharva troupe and popular Bollywood numbers belted by Sa Re Ga Ma Pa participants.

Day 2 was action packed with parallel sessions. Granularity as a way of thinking was the focus and how standardization by banks works against it. Dr Subir Gokarn, DG, RBI, enthralled the audience by reflecting the reality about India’s skyrocketing demand for gold and how Gold Accumulation Plan, Gold Linked Account, Gold Pension Plan, ETFs could work in this scenario.

The audience radiated inner peace with the smile guru Shri Sri Sri Ravi Shankar’s tips on how to build an inhibition-free intellect and violence-free society. Stay in the present, just like a child, he advised and strongly made a case against Indian society giving business a bad name. Meditation helped the sleep-deprived, stressed bankers prep up for the marathon round of sessions in the afternoon. 

 

 
Mr H R Khan, DG, RBI stated 40% in India have a bank account; 13% have credit cards and 2% have debit cards and elaborated on GIRO system, BBAN and E-BAAT. Shri Naro Narain Meena, Hon’ble Union Minister, State for Finance explicitly mentioned how entrepreneurs could use a good blend of innovations and technology.

The rural-urban banking divide in India

Many Hindi movies zoom in on an impressive shot of money-capital, Mumbai’s landmark railway station, (recently christened as CST) to showcase the wronged-hero’s migration from an oppressive village to the city of dreams, to make it big. Banks too have played a significant role in propelling population influx to urban centres by focusing on growth solely in cities. Only 32,500 villages out of 600,000 have banking facilities. Why are economies of scale so difficult to achieve in rural India, typically characterized by the post office as its most vital banking intermediary?

Take another instance: 600 mobile users in India waiting to be tapped. Supposing average revenue per user, is Rs 120, services will be charged at a premium for the telecom companies to recover their investments. Result? Elite users only. Will this change with RBI mandating that banks open 25% or their new branches in unbanked rural areas and offer priority sector lending? The dynamics of an urban model with its high staff cost will not work among people who believe their money will be safer with a moneylender. Instead of the brick-and-mortar branch, banks can hire local people to establish a comfort level or use business correspondents and mobile vans. SBI has tied up with Bharti Airtel and ICICI with Vodafone to provide mobile banking. While at the other end of the spectrum, convenience is defined by a citizen in the capital walking into a Standard Chartered or Citibank branch as late as 9pm and availing of facilities. While private players have pioneered internet banking they cannot match the PSU’s in terms of reach and access to low cost deposits. Mergers then seem to be the answer; like HDFC with Times Bank, Anagram Finance with Bank of Madura.

But how will banks tackle another kind of mindbloc, like the one widely prevalent in Tier II cities, where even  an educated populace will not opt for online shopping; and similarly would prefer traditional modes of banking too. Despite this, SBI, one of the few banking giants, is aggressively expanding its ATM presence in non-metros, according to an ASSOCHAM study. Even in rural areas, banks do not give step-motherly treatment, as is commonly believed. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.

What steps have your bank taken to bridge the urban-rural divide? Share with us.

Risk analysis, why its a requirement for every bank

Financial stability and consumer protection, two phrases that are music to an average Indian who entrusts his life’s savings to a bank, to secure his future and fund for his dreams whether it is a child’s education or his own dream home. And why not? If you were to buy a bike or a car, would you not inspect it and insist on a test ride? Similarly, when a bank conducts a risk-weighted average to analyse a corporate’s worth, it has to adhere to a checklist to ensure the organisation’s capability to pay back; its assets and the collateral it offers as security. One such stipulation is the RBI-adopted CAMELS framework which stands for Capital adequacy, Asset quality, Management, Earnings, Liquidity, Systems and controls.

Foreign banks operating in India are also rated on the same parameters through the CALCS model:  Capital adequacy, Asset quality, Liquidity, Compliance and Systems & Controls. In fact, risk-based supervision was formally launched in 2003 on a pilot project basis. Onsite supervision is conducted based on the last audited balance sheet; while offsite refers to macro-level indicators. A Risk Profile Template (RPT) also assists banks to cover five chief business risks: Credit, Market, Liquidity, Operational and Group. To add teeth, Prompt Corrective Action (PCA) links regulatory action to quantitative measures of performance after identifying triggers like steep decline in Net NPA and RoA.

 

 But one of the shortcomings is the uniform, one-size-fits-all approach regardless of the bank’s risk profile. Another drawback is that supervision lacks a risk focus, a skewed allocation of supervisory resources, is the result. Worse, selection of branches for inspection is done on an ad hoc basis instead of risk assessment findings or audit results. The risk assessment process need urgent changes, primarily updating bank related information collected from various sources and indepth analysis of each concern arising from the bank’s operations. The process should adeptly identify bank activities that may create potential hazards and their impact. A Supervisory Relationship Manager (SRM) could be appointed to undertake an extensive and holistic assessment of various material risks that a bank faces and to ensure that risk management has been properly done.


What steps does your bank take while conducting a RWA? Feel free to share with us.