No credit crisis brewing in the Indian banking system5 min read . Updated: 09 Oct 2008, 12:19 AM IST
No credit crisis brewing in the Indian banking system
No credit crisis brewing in the Indian banking system
Mumbai: The global financial crisis is changing the banking landscape. As bankers and regulators struggle with the crisis, Noel Gordon, managing director, global banking industry of consulting firm Accenture Ltd spoke about his assessment of what lies ahead for banks. He says global banks will get bigger because of the crisis and that these banks will look at emerging economies for new opportunities. Edited excerpts:
If you were given the mandate to come up with a solution to the banking crisis, what would it be?
In a way the solution lies in two domains, one is solution by regulators and second by banks themselves. Banks themselves have to cut cost, thats going to be critical if markets have stopped grow, keep the confidence of retail customers, stay close to the customer, be very good at managing the customers experience and relook at their risk management practises.
Learn some lessons from whats happened over the last year.
What regulators would have to do is to take more and more steps to build customers confidence by easing interest rate, providing liquidity as when the markets needs. Intervene and stop banks from failing. The critical thing for us is speed. Banks would need to adjust quickly to this new landscape including the recessionary environment and regulators to act with speed to build retail investor confidence.
Didn’t risk managers see this crisis coming?
The regulators set the standard capital ratios through Basel II and it has been proven that banks need to hold more capital than what the regulators thought. Challenge is in deciding what the new prudential capital standard should be for the next three years. A lot of banks knew what risk they were taking but the probablity of such extreme events happening was something they did not expect. Their so-called stress testing systems didn’t really put enough emphasis on exterme events as they dont happen every often.
The second challenge is for banks to look carefully at what types of risk they are prepared to take on their books. The challenge was that there was so much product innovation in structured products. The speed at which these products were innovated banks and insurance companies invested in them without knowing the risk associated with them. They would now have to reinvent their business model as those (structured product) markets are really gone away and therefore they have to look at new profitable segments, which today lies in traditional banking.
Failure of risk management is a story of the failure of the industry. The industry as a whole was not really prepared for such an extreme catastrophic event.
What will the bank managements have to do to rectify the errors?
The most important management action over the next 12 months I think boils down to the capacity of an institution to reinvent itself in a number of different areas like risk management, cost management, finding new profitable sources when most of the capital market sectors have shut down. In our opinion the banks that will be winners is the one where the management team has the capacity to reinvent and assimilate new acquisitions.
Its never been more imp and a better time to cut down structural cost and they could do it by outsoucing, cutting complexity in back office and streamlining processess in front office.
Do you see the credit crisis affecting other credit products?
It is certainly possible that the contagion would happen however, that depends heavily on how big the economic recession will be. The most important economic condition for debt default is unemployment. If unemployment rises deterioration in other credit assets like car loans, credit cards and personal loans. However, the only good news is that the banks were very skillful in selling credit insurance with these protects so as there were a huge source of fee income. So lets hope they use this cover when they need it.
Traditional way of running business is right?
Banking is fundamentally a service industry, second piece is time based transformation of assets what is right for a high performance banks over the next two years going back to rediscosver the basics like customer service, keeping trust on the deposit side, the second half of the formulae is staying relevant reinventing yourself. We have 10 years of easy money we are now looking at two to three years of hard money and dfifficult profitability so you cant just say go back to basic.the other half of the fomrmue of reinveting business.
What are the lessons Indian banks need to learn from the crisis?
Globalization creates the need for speedy responses. It has told you that financial crisis can spread overnight. Financial crisis can have an immediate impact on real economy, it can be much faster than anybody can think off. Even if India has a projected growth rate of 6-7%, most economies are expected to be affected by the global slowdown.
Indian banks are part of the world economy and they are waking up to the fact that global events can affect them. Coordination among central banks has become absolutely critical but it is difficult to do.
Has the conservative approach of banking benefited Indian banks?
Conservative approach in this crisis has proven to be the best thing you could have done as a bank.
Do you see a credit crisis brewing in the Indian banking system?
No. Comparing the Indian banks with those of other countries, there are some check lists that if we go through say that Indian banks are strong like their peers in Canada, Australia and China. If I were to ask, do Indian banks have big exposure, have they made imprudent balance sheet decision, are the retail customers losing confidence in banks, the answer would be “no". However, if I were to ask this question in about five other countries, the answers would be “yes".
Most importantly, there is no property bubble in the country.
How will the global banking landscape emerge after this crisis?
In a perverse way in the next 18 months some of the global banks will become more global....
There are three or four markets such as Canada, Australia, India, China where domestic banks are very strong and remain unaffected. This will be one part of the landscape.
The second piece of the landscape is that the best global banks will get bigger. Those are banks such as Standard Chartered Bank, Hongkong and Shanghai Banking Corp. Ltd (HSBC), Bank of America, JP Morgan Chase and Co., DBS Bank Ltd. The third piece will be where in some great names in banking would have disappeared. In the fourth piece, we would see mid-sized banks in the Western economies consolidate. We will see it happening in the US and Spain. Its already happened in the UK.
Where did the global banks fail?
In summary, there is a loss of confidence in two dimensions, between banks and between retail customers and banks... Our view is that what the regulators are doing is that they are not trying to find a silver bullet but are taking a series of confidence building measures to put some floor under the markets and the retail investors.