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Balancing Risks And Returns

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It has been a good year for banking in India, especially when seen against the backdrop of the global financial crisis that has afflicted several of the biggest banking names. But assuming that there has been no impact at all would be wrong.

For one thing, India's banking sector has been relatively insulated by regulators from the radioactive fallout of the crisis. While there have been a few notable exceptions (read ICICI Bank), few banks have developed an overseas business model that can compete with foreign banks on their home ground. Which, in hindsight, may have been a good thing.

But in a globalising economy, an overseas footprint will soon become essential. As Indian companies start making overseas acquisitions, the opportunity costs of not being able to give their clients access to overseas credit markets could cost banks dearly. But before that, banks need to have in-house capabilities to manage large transactions across markets and structure balance sheets that can absorb the risks. In a column (see ‘Overseas Opportunities' on page 84), global consulting firm PricewaterhouseCoopers (PwC) experts lay out the challenges for Indian banks in this regard.

"Conserve capital, consolidate credit portfolios, contain costs and plan for the economic upturn. That would sum up the response of Indian banks to the global financial crisis and recessionary pressures in the economy," says Jairaj Purandare, markets and industries leader and head, financial services at PwC India. "From where they are today, many of them can take courage to look beyond local shores and set sights on global expansion."

India's Best Banks 2009So how ready are Indian banks to do so? The attempt at this year's survey of the country's best banks is an assessment of Indian banks' strengths and vulnerabilities. We have used balance sheet data for a three-year period from 2006-07 to 2008-09 as a starting point, then brought together a jury of experts including ex-bankers, for qualitative aspects: management, reputational risk and business sustainability.

The purpose of the survey is only partly intended as a look at the best in class. A long-term objective — one that will be developed in the evolution of our methodology and working in association with our knowledge partners — is to identify broad trends in risk-management capability, business process re-engineering and the response from real customers. Over time this survey will become a diagnosis of the structure of scientific evolution in banking, to paraphrase the elegant title of historian Thomas Kuhn's seminal history of science.

To some degree, the banking sector in India has already learnt to deal with the global capital flow — their inrush as well as rapid withdrawal. Sure, mistakes have been made, but both regulators and financial market participants have adapted quickly and rather well. The fundamentally robust foundations of balance sheets have ameliorated the associated risks.

"Unlike 2008, there was excess liquidity in the system in 2009, since the regulators proactively created a conducive environment for credit," points out Jayesh Mehta, country treasurer at Bank of America in Mumbai. "There were not enough credit takers as corporates put expansion plans on hold. Companies have chosen to raise capital via equity, but the liquidity situation is changing." Companies are revisiting expansion plans and are clearly set to roll out plans in 2010, he says. But the impact from the crisis is far from over. If anything, the seeds of a second possible crisis could be germinating. Economies in Greece and Spain, to name two, are beginning to show signs of fresh tremors. Volatility in a number of currency markets has still not been dampened satisfactorily.

These shifts pose challenges for banks as they try to balance funding growth with risk-management models. There is not yet an Indian bank that is globally competitive across the spectrum of services. This year's best large bank, State Bank of India, moved to No. 380 in the rankings of the Fortune 500 list of global companies, and is the only Indian bank on that list.

Duking It Out With The Best
Size is a distinctive feature of the winners on this year's best bank awards. The best in class is also the largest in class. But that does not say anything about organisational capability. On a long and tricky road of growth and global presence, Indian banks have miles to go before they can consider themselves as having arrived.

Click here to view enlarged imageEven the ones with a global footprint service their domestic clients' aspirations on the global stage, rather than provide services to companies or individuals in countries where they have presence. True, many of them — particularly the large private ones — compare themselves to their rivals on the processes and business models they have. Some have acquired smaller banks in other countries — ICICI Bank, for example, acquired a Russian bank that may have given them more headaches than advantages. But these rankings allow them to at least know how they stack up against the challenges of becoming global banks.

Today two major challenges loom in domestic markets. One, the adoption of technology that helps them service their clientele better, and two, bringing access to financial services to the poor populations. For the latter, they need to go beyond the basic no-frills accounts and similar products to making finance a cornerstone of building better lives, and most important, making it a bankable proposition. In our coming surveys of financial inclusion, we will be more granular and qualitative in our assessments.

On the former, much can be done to harness the technological virtuosity that allowed India to become a leading player in software development and services, going beyond labour arbitrage to build business models, products and services that take banking services to the far- flung corners of the nation. To that end, each year the survey will strive to bring you the levels of excellence that banking institutions and the people who work there try to achieve.


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