Current challenges in the Indian economy, and the banking sector in particular, are a good time for banks to introspect, redraw strategies and focus on the critical issue of financial inclusion. This was the overwhelming consensus among major bankers, policymakers and market players at the FE Roundtable Conference on ?Banking: The New Reality?, in Mumbai on Wednesday.
Turmoil in financial markets overseas and the problem of high inflation and interest rates actually present an opportunity for banks to strengthen their basic framework and focus on critical issues like cost cutting, risk management and take a close look at their lending practices, particularly retail lending, bankers said.
Setting the tone for an engaging debate, Pawan Kumar Bansal, minister of state for finance said though there is pressure on banks due to rising interest rates, the sector has been the major driving force for the country?s growth over the past four to five years. ?When the world is grappling with the possibility of recession, Indian banks have fared well. Hundred per cent financial inclusion seems to be a possibility now as the bankers? committees of various states have already given figures of the areas covered under financial inclusion,? said Bansal.
The minister said low-cost current account-savings account funds could prove advantageous for banks while serving the objective of financial inclusion. Traditional banks should get ready to face competition. ?Competition has helped Indian banks in a big way. I still think that a change in the mindset is the need of the hour,? Bansal said.
Among other vital issues for public sector banks, Bansal said retention of staff has become a big issue.
Pointing to the mad rush for retail lending, the minister said creditworthiness of the customer has become important in the present context.
MV Nair, CMD, Union Bank of India, said: ?This is the time banks need to tighten their belts as regulatory requirement would lead banks to bring down credit to curb inflation. There are challenges before public sector banks,? he said. According to him, the moot question is, why state-owned banks lost 10% of marketshare to foreign and new generation private sector banks.
?Still, there are some good things with us. Our net NPA has come down to 1% and our return on assets has improved to 0.9% from 0.4%. Introduction of the biometric card is another good innovation by us. Technology has brought down cost, but at the same time, it has given a number of advantages too,?? he said.
Naina Lal Kidwai, group general manager & country head, India, HSBC India, said: ?While in the short term the sentiment looks very cautious, good projects will happen. In 2009-10, foreign banks will come into India and make the scenario very competitive.?
At the outset, the banking sector is all set for a rollercoaster ride. High inflation and interest rates are putting pressure on the overall banking system. The consumer portfolio looks much stressed today. The slowdown in the sector is not positive news for the industry, Kidwai added. ?In the near term, we are seeing that credit into some sectors is slowing in a big way. We might even see an industrial slowdown,? she said.
Speaking at the discussion, ABN Amro Bank country executive for India Meera Sanyal said: ?Today, the biggest challenge and constraint for us is rural delivery.? Talking about the huge corporate investments in the pipeline and the need for resources, Sanyal said, ?Where are the long-term sources of funding? There is an asset-liability mismatch. We need wider reforms to allow more players to deepen the market.?
Rana Kapoor, founder & CEO of Yes Bank, said banks have strategies for three scenarios: short-term, medium-term and long-term. ?Though the short-term strategy has to manage the tougher issues, in the longer term, the India growth story remains very attractive.?
Rashesh Shah, chairman, Edelweiss Group, said the market had some areas of concern for banks, which included the ability to raise capital and higher inflation. However, there were opportunities as well, going forward, in the medium-to-long term, which would be viewed carefully by investors. The fiscal deficit was another challenge, he said.
Describing the scenario for banks as ?challenging? in the present environment, Viren H Mehta, partner, financial services, Ernst & Young said focus on risk management and cost cutting were vital. On financial inclusion, he said: ?Banking correspondents can prove to be fruitful only when certain restrictions are removed from the model. Foreign banks willing to adopt the model find it difficult as the norm says you must have your physical presence within a radius of 15 km from the area where you want to implement it, which is not possible for them.?