The new normal-different world for banks': BL
BANCON ?2009-10, the annual gathering of bankers and economists, addresses the theme of ?normalcy' ?
that most desirable of attributes ? especially so in the aftermath of a traumatic economic crisis. Most
advanced economies have just escaped a second ?great depression' and suffered just a few months of
recession ? thanks to unprecedented monetary steroids and fiscal stimulus across all top economies.
As these economies struggle towards recovery ? with the prospect of a gradual unwinding of the stimulus,
this is perhaps the right time for bankers and economists to reflect on how Indian banks should handle the
new scenario.
They'll need to debate the argument advanced by Nobel Laureate Paul Krugman that banking should be
made boring ? citing the US experience that when they were tightly regulated, conservative and stripped of
the incentives that encourage dangerous risk taking, it actually proved to be an era of spectacular progress
for the economy as a whole! In contrast, when regulations were lifted, banks expanded credit, debt rose and
eventually the finance industry exploded, he noted. That's something for bankers to ponder.
Reality checks
Although India did not suffer as much as the rest of the world in this crisis, there were some reality checks.
Most notably, the idea that for the foreseeable future, economic growth was one straight, linear and easy
path of continuous 9 per cent plus growth was disturbed.
Another idea that got a jolt was the so-called ?de-coupled Indian economy' because of its innate strengths
and large domestic market.
This was expected to insulate us from any shocks world-wide. Reality proved a bit different as various
sectors from software to textiles were affected by the ripples from abroad. For an increasingly integrating
economy, the slowdown in GDP growth was perhaps an eye-opener.
The last time this conference was held two years ago, the mood was different. Every one was gung-ho
about 9 per cent GDP growth and India's status as the second fastest growing economy and a new
emerging economic super power.
Although software companies put India on the world map, manufacturing sector was also catching up. Many
Indian companies ventured outside to other shores, making high profile acquisitions, with bankers in tow.
Bank loan growth didn't seem like coming down below 30 per cent. In the post-2009 scenario, that
exuberance has been replaced by a lot more caution. That doesn't however mean that we get back to the
complacent 3.5 per cent Hindu rate of growth.
In fact, after earlier fears that GDP growth may fall to 5.5 per cent, most experts think growth will return to 8
per cent by the end of this fiscal. With some planning and help from normal monsoons, a revival in other
economies (that are export destinations) and good luck, it is possible to target double-digit GDP growth in
the immediate future.
Looking back at the crisis, one can't but help get the feeling that its timing was perhaps a blessing in
disguise for the sector.
For, April 2009 was the time that was fixed about four years ago to open up the Indian banking sector to
foreign competition. In the interim, domestic banks were expected to strengthen themselves, improve their
capital base, consolidate wherever possible on the lines of the roadmap laid down by reputed committees
(Narsimham Committees I & II) and prepare to share turf with foreign banks.
If the crisis had not set in during the second half of 2008, it is possible that the gates may have been opened
a bit, notwithstanding the resolute reluctance of the regulatory authorities to such moves. Foreign banks that
eyed the potential of the Indian market and often lectured on the moral hazards of bailing out public sector
banks in India, themselves had to face the ignominy of being bailed out by their respective governments.
When their market capitalisation dropped precipitously, there were jokes floating around about how Indian
banks could even consider taking over some of these foreign banks ? provided there was really something
left in the books.
The wheel had turned a full circle.
In the event, we got a reprieve. But, to use Churchill's memorable phrase after the miraculous evacuation of
British troops stranded on the beaches of Dunkirk, ?We must be very careful not to assign to this deliverance
the attributes of a victory.?
That's sound advice for Indian banks too. It will probably take at least another two years for foreign banks to
recover their strength (paying off their dues to local governments) before they think of venturing out again.
That's providential time ? for the sector to pull up its socks and prepare for the next round of invasion.
Although Indian banks have weathered the crisis fairly well so far, and flaunt strong capital adequacy ratios
and low NPA numbers (even if one makes allowance for the restructuring of assets), there are still a lot of
milestones to cross and benchmarks to reach. Consolidation in public sector banks still remains a distant
goal, notwithstanding some encouraging sound bytes once every few months from the Finance Ministry and
a couple of bank chairmen. High governance standards and autonomy still lie in the realm of text books.
Customer service has improved when compared to a decade ago ? but there's still a long way to go.
Financial inclusion is still a distant mirage, notwithstanding impressive achievement of ?targets'. Speedy
recovery of delinquent loans, despite the presence of numerous legal remedies, remains unfulfilled.
Use of new risk management tools has increased, although that's not necessarily proved foolproof.
Transaction costs still remain high in segments of the banking industry. HR practices need improvement.
Banks need to address all these and more - apart from tackling macro challenges such as interest rate
volatility, high government borrowing, high inflation etc.
Even as economies limp back to normalcy, bankers and regulators need to remember that it was easy
liquidity and low interest rates that fuelled the sub-prime crisis that finally brought down so many reputations
and institutions. Those conditions are still there.