[sbinews] Banking Industry Vision report 2010: Echoing the cost-control wisdom (Businessline)

  • From: "Rajendra S. Pai" <rajendra.pai@xxxxxxxxx>
  • To: <sbinews@xxxxxxxxxxxxx>
  • Date: Fri, 23 Jan 2004 08:53:39 +0530

Banking Industry Vision report 2010: Echoing the cost-control wisdom
Dharmalingam Venugopal

As domestic and international competition hots up, banks may have to shift
their focus to `cost', which will be determined by revenue minus profit.
Cost-control in tandem with efficient use of resources and increase in
productivity will determine the winners and laggards.
YEARS ago when Mr T. A. Pai was asked for an explanation for the fast growth
of banking in south Canara, he put it simply: In conventional economics,
income minus expenditure is savings; in south Canara, income minus savings
is expenditure. Echoing a similar wisdom, the Banking Industry Vision report
2010, released recently, urges banks to focus on cost-saving to survive in

The report has been prepared for the Indian Banks' Association by a
committee of experts headed by Mr S. C. Gupta, Chairman and Managing
Director, Indian Overseas Bank.

In the sheltered days of banking, when customers could be freely charged,
banks concerned themselves with only `revenue' which was equal to cost plus
profit. Post-reforms, when the cost of services became nearly equal across
banks and cost-control was key to higher profits, the focus of banks shifted
to `profit', which was equal to revenue minus cost.

In the future, as domestic and international competition hots up, banks may
have to shift their focus to `cost' which will be determined by revenue
minus profit.

In other words, cost-control in tandem with efficient use of resources and
increase in productivity will determine the winners and laggards in the
future, says the report.

Qualitative growth

The growth of banking in the coming years is likely to be more qualitative
than quantitative, according to the report. Based on the projections made in
the "India Vision 2020" prepared by the Planning Commission and the Draft
10th Plan, the report forecasts that the pace of expansion in the
balance-sheets of banks is likely to decelerate.

The total assets of all scheduled commercial banks by end-March 2010 is
estimated at Rs 40,90,000 crore. That will form about 65 per cent of GDP at
current market prices as compared to 67 per cent in 2002-03.

Banks assets are expected to grow at an annual composite rate of growth of
13.4 per cent during the rest of the decade against 16.7 per cent between
1994-95 and 2002-03.

On the liability side, there is likely to be large additions to capital base
and reserves. As the reliance on borrowed funds increases, the pace of
deposit growth may slow down.

On the asset side, the pace of growth in both advances and investments is
forecast to weaken.


On the growing influence of globalisation on the Indian banking industry,
the report is of the opinion that the financial sector would be opened up
for greater international competition under WTO. Opening up of the financial
sector from 2005, under WTO, would see a number of global banks taking large
stakes and control over banking entities in the country.

They are expected to bring with them capital, technology, and management
skills which would increase the competitive spirit in the system leading to
greater efficiency. Government policy to allow greater FDI in banking and
the move to amend Banking regulations Act to remove the existing 10 per cent
cap on voting rights of shareholders are pointer to these developments, says
the report.

The pressure on banks to gear up to meet stringent prudential capital
adequacy norms under Basel II and the various Free Trade Agreements that
India is entering into with other countries, such as Singapore, will also
impact on globalisation of Indian banking.

However, according to the report, the flow need not be one way. Some of the
Indian banks may also emerge global players. As globalisation opens up
opportunities for Indian corporate entities to expand their business
overseas, banks in India wanting to increase their international presence
could naturally be expected to follow these corporate entities and other
trade flows out of India.

Alongside, the growing pressure on capital structure of banks is expected to
trigger a phase of consolidation in the banking industry. In the past
mergers were initiated by regulators to protect the interest of depositors
of weak banks. In recent years, there have been a number of market-led
mergers between private banks.

This process is expected to gain momentum in the coming years, says the
report. Mergers between public sector banks or public sector banks and
private banks could be the next logical development, the report adds.
Consolidation could also take place through strategic alliances or
partnerships covering specific areas of business such as credit cards,
insurance etc.

Risk and reward

The ability to gauge the risks and take appropriate position will be the key
to successful banking in the emerging scenario. Risk-takers will survive,
effective risk mangers will prosper and risk-averse are likely to perish,
the report asserts.

In this context, the report makes a very pertinent recommendation that risk
management has to trickle down from the corporate office to branches.

As audit and supervision shifts to a risk-based approach rather than
transaction oriented, the risk awareness levels of line functionaries also
will have to increase.

The report also talks of the need for banks to deal with issues relating to
`reputational risk' to maintain a high degree of public confidence for
raising capital and other resources.


Technological developments would render flow of information and data faster
leading to faster appraisal and decision-making. This would enable banks to
make credit management more effective, besides leading to an appreciable
reduction in transaction cost.

To reduce investment costs in technology, banks are likely to resort more
and more to sharing facilities such as ATM networks, the report says. Banks
and financial institutions will join together to share facilities in the
areas of payment and settlement, back-office processing, date warehousing,
and so on.

The advent of new technologies could see the emergence of new players doing
financial intermediation. For example, according to the report, we could see
utility service providers offering, say, bill payment services or
supermarkets or retailers doing basic lending operations. The conventional
definition of banking might undergo changes.

Social banking

All these developments need not mean banks will give the go-by to social
banking. Rather than being seen as directed lending such lending would be
business driven, the report predicts. Rural market comprises 74 per cent of
the population, 41 per cent of the middle-class, and 58 per cent of
disposable income.

Consumer growth is taking place at a fast pace in 17,000-odd villages with a
population of more than 5,000. Of these, more than 50 per cent are
concentrated in just seven states. Small-scale industries would remain
important for banks.

However, instead of the narrow definition of SSI based on the investment in
fixed assets, the focus may shift to small and medium enterprises (SMEs) as
a group. Changes could be expected in the delivery channel for small
borrowers, agriculturists and unorganised sectors also.


The expected integration of various intermediaries in the financial system
would require a strong regulatory framework, the report states. It would
also require a number of legislative changes to enable the banking system to
remain contemporary and competitive. Underscoring that there would be an
increased need for self-regulation, the report states that development of
best practices could evolve better through self-regulation rather than based
on regulatory prescriptions.

For instance, to enlist the confidence of the global investors and
international market players, the banks will have to adopt the best global
practices of financial accounting and reporting. It is expected that banks
would migrate to global accounting standards smoothly, although it would
mean greater disclosure and tighter norms, the report adds.

Notwithstanding the limited time ahead, the expectations, suggestions and
recommendations of the Banking Industry Vision report are well within the
realm of realisation in part or whole. The first phase of banking reforms
was born out of panic. The second phase can be implemented from a position
of strength and confidence in a compressed time-frame.

(The author is an economist with Indian Overseas Bank and can be contacted
at dvenu@xxxxxxxx)

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