Whither India\\\'s banking sector?

To realistically face Basel III, or global prudential banking norms, all banks have been planning to shore up their Tier 1 capital. According to the Reserve Bank, Indian lenders will require additional capital of Rs 5,000 billion to meet the new global banking norms, Basel III.
How long will infusion of capital go on? The government infused Rs 140 billion in public sector banks during the financial year ending March 31, 2014. Of this, the State Bank of India  got Rs 20 billion, while the Indian Overseas Bank  received Rs 12 billion. As per latest goings, the government is likely to infuse additional capital of up to Rs 80 billion in public sector banks in the current fiscal to expand their capital base. Incidentally, it may be mentioned here that Rs 112 billion is the provision made (in interim budget), although there was higher requirement and the balance which can be Rs 60 billion-Rs 80 billion.
Banks' assets quality has been terrible - bad loans or NPAs in the public sector banks are a cause for concern for all stakeholders. As of now, banks have to provide a huge amount in terms of provisioning, about Rs 900 billion going into provisioning. Though bad loans or non-performing assets situation of state-owned banks improved to 4.44 per cent for the three-month period ending March 2014 as against 5.07 per cent at the end of December 2013, yet the sector has to travel miles before a satisfactory level is reached. This was mainly due to vigorous recovery efforts of the banks' NPA that the situation had improved in the final quarter of the last fiscal, compared to the October-December period of 2013-2014.
But the overall picture remains far from being satisfactory. The asset quality of banks has deteriorated at a 'frightening pace' during 2013-14 fiscal with public sector banks bearing the maximum brunt of bad loans, a Reserve Bank of India panel report recently opined. At the end of December 2013 quarter, banks collectively held loan provisions of Rs 985.93 billion, an increase of 13 per cent over the provisions held a year earlier.
Of this amount, Rs 322.95 million of provisions were held by the SBI group and Rs 453.57 billion were held by other public sector banks.  Thus, 79 per cent of total bank provisions were held by public sector banks, demonstrating the high level of stress visible in these banks. This has taken its toll on quarterly profitability for public sector banks. The profitability of SBI Group alone has fallen 30 per cent over a period of one year, while for other PSU banks it has declined 39 per cent.
For these bank segments provisioning is nevertheless inadequate, as net NPAs as a proportion of net advances have risen 50 per cent in a year for the SBI group and 41 per cent for other public sector banks, the Reserve Bank report found.
Very rightly issuing stern warning wilful defaulters, Financial Services Secretary G S Sandhu hinted that banks might go in for a change in management of the defaulting party if it fails to clear dues. "There will be tough action against wilful defaulters, which can include even the change of management because so much money is stuck. So we want to recover that. If the original borrower does not come up with some option of repayment, then we will call some other person if he is able to provide that assets could be handed over to the other person."
Then what's about raising of capital? Public sector banks have to explore the possibility of setting up holding company and Special Purpose Vehicle (SPV) to raise funds for expansion as the government may not be able to provide more than Rs 80 billion additional capital support. Various options like ESOPs, SPV model and holding company model may be tested on this score by which banks could raise funds from the market to meet their capital requirement. It is important to note on this score that the State Bank of India just announced plans to set up a holding company. Setting up of a holding company is one of the possibilities (for raising capital) for exploring options for raising funds.
A number of good steps taken by the RBI in the recent past deserve special appreciation. Easing norms for functioning of overseas branches of Indian banks, the Reserve Bank has permitted them to offer structured financial and derivative products, a move that would help in improving their income. However, these products like Exchange Traded Funds and bond derivatives are not permitted in the domestic market. Previously, as per earlier rules, banks were not permitted to offer structured financial products through their branches or subsidiaries outside India that are not specifically permitted in the domestic market.
The RBI also decided that if foreign branches/subsidiaries of Indian banks propose to offer structured financial and derivative products that are not specifically permitted by the RBI in the domestic market, they may do so only at the established financial centres outside India. The established foreign branches or subsidiaries could be in New York, Singapore, Hong Kong, Frankfurt, Dubai etc. Accordingly, the foreign branches or subsidiaries of any such bank should ensure that their entities dealing with such products should have adequate knowledge, understanding and risk management capability for handling such products. However, for other centres, banks may offer only those products that are specifically permitted in India. The central bank has also directed banks to offer such products in foreign branches in compliance with the host country regulations. Yes, banks should continue to adhere to more stringent among the regulations in respect of these products and should ensure that the suitability and appropriateness policy is strictly adhered to.
It has also been a fact that currently a number of banks have shown a pick-up in sales to asset reconstruction companies (ARCs) in their reported earnings. This is not only because of the fact that the NPAs increased substantially, but also because the RBI advised that ARCs should be used not just for passing over assets but as end solution for NPAs. This type of sharp focus by the RBI generated a lot of interest in banks for selling assets to ARCs. The total amount of assets acquired by ARCs is more than Rs 200 billion and ARCIL has acquired Rs 44 billion of that.
It should not be forgotten that at the time when sub-prime crisis was blowing all over as well as the incidence of Dubai World was alive, the RBI was active in extending necessary safeguards to the Indian banks.
Needless to say that the only certainty about the future is that it will be uncertain and change will occur at an increasing rate. It will also be more complex. So, banks have to develop a strategy before developing a Web presence as well as to develop a strategy by focusing on technology, branding, marketing, and service.
Rajan Kohli, head of the banking and financial services business at Wipro Technologies and Mauro Guillen, Wharton professor of international management, critically observes: "Banks across the world are facing multiple pressures on their profitability with tighter regulatory requirements, changing customer preferences and increased competition." However, technology can help them overcome those pressures.
Digital tools allow banks to offer new services, grow in underserved markets, achieve omni-channel presence, automate processes to lower costs, be more transparent to customers and regulators, lower risk and combat fraud.
Finally, how long to neglect HRM? Neglect HRM and lose the game. It is better to remember that it is worker and worker alone that add to real values, not capital or machines! Banking businesses need to harness the talent of all to succeed. How do we address the leaky pipeline of talented employees leaving before they can reach the top? How do we change the governance and leadership of banking business so as to unleash the power of diversity?
Dr. B K Mukhopadhyay, a
management economist, is attached to West Bengal
State University, India.
 m.bibhas@gmail.com