Banking sector: Learning from the recent recessionary experience

A high official of the Indian central bank, Reserve Bank of India, very rightly opined that "most business activities and operations are driven by considerations of returns or profitability. However, the search for returns exposes the businesses to risks. Banks are no different; only the element of risk in the banks' business and operations is higher as they not only carry out their operations with borrowed money and with high leverage, but also attempt to provide a vast range of financial services". Risk management has to ensure that the bank holds adequate capital and reserves to make sure that its solvency and stability are not threatened.
Here comes Basel III - the global regulatory standard on bank capital adequacy, stress testing and market liquidity risk.   
Basel III measures aim to improve the banking sector's ability to absorb shocks arising from financial and economic stress, improve risk management and governance while at the same time targets to strengthen banks' transparency and disclosures. Basel III is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. According to Basel Committee on Banking Supervision, "Basel III is a comprehensive set of reform measures to strengthen the regulation, supervision and risk management of the banking sector".
The banks have learnt a good lesson from the recent recessionary experience. As the incidence leaned heavily on failure of the internal risk management system, the banks have become much more cautious compared to previous days. The risk management practices had been there in the past, but as of now they look more seriously before the leap. Current trends are also reflecting departure from traditional practices in a number of ways; such as, auditing is attached more importance, compliance is taken seriously than before, switching over to the base rate regime, interest rates  being revised more frequently, and risk management practices being widely understood.  The banks are more cautious about customer dealings. Though as a whole the trends are encouraging, yet regarding management of assets and liabilities a lot of things are to be done. The assessments are to be made more specific especially keeping in view the newer risk factors.
In fact, recent evidences suggest that finance is not only pro-growth, but also pro-poor and economies with better developed financial systems experienced faster reductions in income inequality and poverty. For ensuring fast and consistent economic and social development a well functioning financial system is an essential pre-requisite and so also the depth, capability and efficiency of the financial system.  
Crisis period has taught the lesson of careful assessment of the causes, effects as well as the future plans, and as such any sort of complacency is out of question. What is more important under the ongoing scenario, specially keeping in view the fast changing banking scenario where a particular technology is being replaced rapidly by another technology, it is better to take for granted that in the near future there would be intense competition. Such competitions would take place not only at the macro level, but at the very micro level also. Competitions would also stretch to both intra and inter levels where the players would be government owned banks, old private sector banks, new private sector banks and foreign banks.
Appropriate financial sector policies calls for encouraging competition and providing the right incentives to the individuals on one hand; and extending necessary support to foster growth, poverty reduction and better distributive justice making full use of the capacities on the other. Improving financial access in a way that most benefit the poor calls for adoption of appropriate strategy and as such it is vital to broaden the focus of attention to improving access for all who remain excluded.
Naturally, fixation of strategies, continuous upgradation of skill and making best use of talent backed by effective planning techniques pose the biggest challenge. Thus the future is for them who emerge to be top risk managers through optimal utilisation of all of the resources - physical, financial, technological and the most important one, the human resources.  
In this age of innovention - innovation plus invention - the buzzword is 'strengthen the marketing team' who will innovate the required strategies that are customer- centric and at the same time risk-centric in approach. To achieve the same continuously changing business environment is required to be given appropriate weightage. At the same time retaining the customers emerges to be the biggest challenge all over the banking world now.
The need is very much there to follow a defensive marketing strategy as well so that the ageing building does not suffer from unnoticed pilferage. Business boosting does not have any short cut formula. Reality is something where one has to keep pace with the changing needs and thus correcting the strategies to be followed. What is more, one particular strategy is not going to necessarily give lasting success.
Well-managed, aggressive branches are sure to attract an increasing proportion of the banking business in a particular region while at the same time boosting efforts towards retaining the existing customers should be beefed up. It is crucial to provide bank customers with a pleasant environment and naturally the look must be for improving ways related to the service quality. It is extending such personal attention that the customers would not typically get from the larger competitors.
In fact, stability and resilience during financial turbulence is to be rigidly watched and practised. Dr Rangarajan, former Governor of Reserve Bank of India, was very correct in saying that with judicious action plan India could weather the storm earlier than others. The Committee on Financial Sector Assessment clearly stated that the banking system had not exhibited any significant vulnerability and cautioned against any sort of complacency. Bankruptcy proceedings need to be reformed for effective enforcement of creditor rights and for enhancing creditor's confidence level in the matter of contract enforcement.
What will happen tomorrow cannot simply be said as it is nothing but mystery. Yesterday is history - why not to learn from it? Simply following the others' path may lead to putting one's leg into a bottomless pit.
Dr B K Mukhopadhyay, a management economist, is attached to the West Bengal State University.
m.bibhas@gmail.com