Indian pvt banks are well placed as theyre not reliant on wholesale funding

Written by Saikat Neogi | Updated: Aug 21 2012, 06:39am hrs
Moorad Choudhury, treasurer of the corporate banking division at The Royal Bank of Scotland, says that the balance sheet of Indian private sector banks, with respect to asset quality, is in good shape and they are not reliant on wholesale funding. In an interview to Saikat Neogi, he says it will take 3-5 years for banks to establish credibility globally and what is more important is that both customers and shareholders alike regain a healthy confidence in the sector.

Do you think that banks will increasingly focus on core competence and sectors to reduce risk

I would have answered yes to this question at any time in the business cycle; at least, thats what all businesses, whether banks or any industrial entity, should look to do at any time. Its a core part of efficient and effective risk management. Of course, post-crash, there would appear to be more emphasis on this approach, which is a good thing. It always makes sense to follow this approach, as its inherent to the core principle of know your risk.

Is the emphasis of banks globally shifting back to basics, with an emphasis on loan origination standards

No one would say no to this question, and the emphasis from regulators in every jurisdiction is certainly along the lines of prudence and good governance, which would encompass maintenance of loan origination standards through the business cycle. To be frank, that should be the guiding mantra of all bankers, irrespective of the regulatory environment. Back to basics is a harder question to answer. Many aspects of finance are complex, reflecting the investment and risk hedging requirements of bank clients. If by back to basics, one means a refocusing in terms of customer service, then certainly again the answer is yes. But if one means basic as opposed to complex banks, that is too simplistic a distillation of the issues.

Do you think innovation in banks will now increasingly focus on better ways to capture and present management information, and be more transparent on credit risk and growth risk

Innovation is a worthy objective in any industry or field of human endeavour. Not all innovation leads to an increase in human well-being, but one cant cherry pick which bits of innovation one allows or encourages; the worthwhile ones will simply be recognised and developed. That is the beauty of the free-market economic system. Certainly, there is always a need for more accuracy and transparency with respect to management information, so that both management and shareholders have the best possible awareness of credit risk and overall balance sheet and ALM risk, and one would expect new developments and improvements in this field.

But much of banking and finance is a commoditised market; one would also expect continuing innovation in all aspects of finance, just as one would in all industries, and market participants seem to develop a competitive edge.

How well prepared are Indian banks to tackle the various risks and which are the ones that should be addressed urgently

I cant comment on the state-owned sector, because Im not familiar enough with it, but from my understanding of Indian private sector banks, I would say fairly well prepared. Their balance sheets with respect to asset quality look to be in very good shape and they are not reliant on wholesale funding; so, on the whole, they are a model for other country banks. Also, I know from personal experience, having delivered a course there last year, that the central bank is well up to speed on all the issues and what the requirements of its regulated entities are. The most urgent issues are the same as those facing banks elsewhere meeting the enhanced capital and liquidity needs of Basel III, and also addressing the new MI challenges presented by things like the liquidity coverage ratio and intra-day liquidity risk management.

Overall, do you think it will take a long time for banks globally to re-establish their credibility

I am an optimist by nature and time is relative, of course; if it takes, say, 3-5 years to establish credibility globally, I would not say that is a long time. What is important is that both customers and shareholders alike regain a healthy confidence in the sector, and while I am sure that will indeed happen, it may take longer in some jurisdictions than in others.

If one is looking at banking stocks, what are the key factors investors should look at

Im not an equity analyst, and have no experience of equity markets, so Im not really the person to ask this question of. Also, my own savings are all invested in UK gilts! However, if I was an equity person, I imagine I would follow Warren Buffetts maxim, which appears to be one of picking companies with long-term potential and sticking with those companies over the long term. I hope I havent done Mr Buffett an injustice with that succinct distillation of his investment philosophy.