BANKS: CHALLENGES AND OPPORTUNITIES

Banks at present are under tremendous stress because of ever-rising nonperforming assets (NPAs) and huge frauds which have taken a big toll on their profits, thus resulting into deterioration in their balance sheets as well as the brand image in the eyes of the public. Under these testing times, Banks are facing huge challenges which need to be faced with courage, maturity, dedication, hard work and tact. The challenges at present are enumerated as under:-

  1. The health of the Banks:-  The mounting NPAs, losses due to big frauds and continuous increase in operating expenses due to periodic increase in various types of variable costs such as salary, fuel, rent, and boarding lodging expenses are a big challenge for the banks to meet. These are a serious threat to the overall health of the banks. Concerned with this trend The Indian Banks Association (IBA) has offered a shockingly meager increase of only 2% to the bankers during the negotiations for the revision of their salary. This may be a cruel joke with the bankers but it speaks volumes about the health of the banks.
  2. Keeping the flock together:- Under the stress on resources, the workers get demoralized and start losing interest in the institution. Some may try to change job or search for the greener pastures. Only a team with high moral and a deep sense of belonging (A SENSE OF BELONGING)can keep the institution strong. This challenge needs a good and inspiring leadership at the top who could keep the flock together by providing guidance, hope, and good future to the stakeholders.
  3. Maintaining a sustainable growth:- With the graphs showing downwards trends, it is becoming difficult to manage growth in face of the tough national and international competition. All high-value proposals of multinational companies are taken by foreign banks who provide them credit at very cheaper rates because their cost of funds is very low. They can afford to give loans at thinner spreads and still make handsome profits because of high volumes and low cost of transactions. Because of reduced interests on deposits, the depositors are not attracted towards banks as in some cases, the net interest income after payment of income tax doesn’t cover the cost of inflation. Added to this is the fear in minds of the depositors about the introduction of a new law about bail-in in the banking sector, which though has been put on the back burners but people still have a fear in mind that the ghost may reappear at any time. They ponzy schemes and the crypto currencies like the Bitcoins have taken a big toll on the deposits of the banks. In view of stress on resources,  the banks are unable to fund large proposals.
  4. In-cumbersome procedures:-The age-old procedures of processing proposals with a lot of paperwork especially for the small traders and businesses and other small loans, discourage the perspective loanees from coming forward. Although some progress has been made in simplifying the procedure yet a lot needs to be done in order to attract customers.
  5. Comparatively Smaller unit size and strength of Banks:- Barring very few banks like State bank of India, the size, strength, capital base, and technological exposure of our banks is no match with the foreign banks. With the globalization and the world becoming a global village, our banks have to compete with the foreign banks. This is not possible unless we match their strength as well as the cost of operations.
  6. Diminishing of the physical interface:- With the introduction of technology in the banks, there is less interface with the customers as most of the transactions are done through the internet, mobile, or online banking, as is done in the foreign countries. Our culture, traditions, and behavior are different from theirs. Face to face interaction has an element of emotion to which we are used to, and the absence of which creates dryness in the relationship. With the increased size of business as well as the number of customers, it may be difficult to keep interface contact with them.
  7. Replacing the outdated technological infrastructure:- In order to match the competitors, the technological infrastructure needs to be updated or replaced with the more sophisticated and efficient one. This may not be economically feasible for the weak banks but in the face of competition and to ensure sustainable growth it becomes imperative to go for it. To stay in the market, an appreciable increase in the volume of business can only take care of the cost factor involved in the upgrading of electronic infrastructure. Only big volumes can reduce the cost of the transaction. The recent case of heavy costs incurred by banks while replacing the currency note holding trays of lakhs of ATMs, when the Govt. introduced new currency notes in place of old notes of different denominations is a live example of updating technology under compulsion in order to stay active in the market.
  8. Strengthening of internal controls:- In view of the rising NPAs and incidences of frauds, the strengthening of internal controls (DEFECTS IN BANK AUDITS AND INSPECTIONS) at any cost has become very urgent. The recovery of NPAs and strengthening of internal controls, management audit, effective inspections and audits of all operational activities, and forensic audits may add costs to the already burdened banks but there is no escape and must be activated in a mission mode in order to regain the public confidence.
  9. Skill building and succession planning:- Advance training in specialized fields and skill upgrading of staff is need of the hour. Gone are the days when banking was every body’s job and bankers used to be a jack of all trades but masters of none. Now with a lot of advancement in the banking field, new innovative ideas are the order of the day in order to beat the competition and the challenges. Value addition to banking products with fine packing and branding which may suit the tastes, requirements, and choices of the customers have to be tailored in order to stay ahead in the competitive atmosphere. A robust and sustainable succession planning must be done at least for the next two decades and which may be reviewed and upgraded periodically.
  10. Setting up an advisory for the clients and brand building:- The Brand building is a long and continuous process. Successful leaders have built successful Brands which have resulted in heavy returns for their businesses. A product can be easily copied by anyone but a brand can’t be copied. Banks need to attract more clients by providing them with the products suitable to their requirements and choice. The markets and businesses now are not protected against competition from across the international borders especially after the signing of the world trade agreement. Now only the strongest,  the fittest, and those who can afford to adopt a change can survive; others are bound to vanish from the scene. Under such circumstances, banks are bound to suffer losses as their products are exposed to greater risks. This is one of the reasons for a spurt in the level of NPAs of banks in the last few years.                                                                                                                                           THIS IS A BIG CHALLENGE FOR THE BANKS AND FOR MEETING THE SAME BANKS NEED TO PROVIDE EXPERT ADVICE TO THEIR CLIENTS AND FIND SOLUTIONS FOR THEIR SURVIVAL. BANKS NEED TO ESTABLISH ADVISORY WITH EXPERTS WHO COULD PROVIDE SOLUTIONS TO THEIR CLIENTS FOR SURVIVAL. The upcoming of big Malls, online shopping through big international giants like AMAZON, ALIBABA, FLIPKART, SNAPDEAL etc have adversely affected the retail market in the country. In order to compete with these big sharks, the retailers have to come up with a matching model of business in the market. Banks have to come up with new innovative models for their clients in their own interests.
  11. Retaining the existing clients:- In view of the tough competition in the sector, banks have a big challenge ahead in retaining the existing clients not speak of adding more to their kitty. The clients have various options and opportunities available to them, so the banks need to ensure that none of the good clients slips out of their grip. Gone are the days when there used to be a customer loyalty and attachment with their banks. Now the customers change banks more often than their vehicles. A regular contact with the customer/ holding customer meets by higher executives whose words and decisions matter need to be organized in order to create more confidence and bonding with the customers. Good leaders are good listeners and people love to be listened to. Promoting and advertising of banks products is very necessary. One of the cheapest ways to promote and advertise banks products is to feed their salient features as caller tunes into thousands of the mobile phones of staff members. In addition to products, the caller tune can be made to contain a mission or a brand promoting song. 

Good leaders have the tact and the wisdom to convert their weaknesses into their strengths and challenges into opportunities. All that is required is a strong will, dedication, a deep sense of belonging to the institution, and a good team of dedicated staff.

OPPORTUNITIES:- While there are big challenges, there exist equal opportunities also. Some of the opportunities available to banks are…..

  1. Big market and big population:- The size of the market is fast increasing and in order to meet the requirements of the second largest population of the world, which is increasing by 20 million souls every year, ample opportunities are becoming available  to the banks to finance in all sectors, may it be agriculture, horticulture and allied, industry and manufacturing, trade and services, infrastructure, mining, shipping, transport, power, tourism and so on. In addition to this, banks have the opportunities to go for business beyond the international boundaries as the entire world is open to them for doing business. All that is required is strength and will.
  2.  The country still not fully developed:- The country is still not fully developed and there is a lot of scope for investment in almost all sectors of the economy. Still, we are calling for FDI in various fields for economic development. Banks need to enlarge their capital and size to substitute the FDI. There is no dearth of opportunities, banks need to redraw their working models suiting the economic activity and matching the foreign banks.
  3.  Advisory services:- With the advent of an open economy, there is a need to change business models in almost all sectors. Banks can provide services for providing training to clients in order to take up new business models and earn some fees and attract customers. This is already being done on a small scale by banks and govt. like some awareness programs for artisans, farmers, and agriculturists etc. EDP(entrepreneurship development programs) are conducted by EDI in the country where banks can participate and attract young budding entrepreneurs.

Money blocked in NPAs and loss assets:- There is a lot of money blocked in NPAs and loss assets on account of money lost in frauds and for which banks have already made provisions out of their incomes. These block of funds are in a way HARD AND A LITTLE TOUGH MINES of reserves for the banks. Any recovery from these heads adds to the income and overall health of the banks. These reserves must be tapped by effective recovery techniques (Management of NPAs -Some recovery techniques.) and maximum effort needs to be made to address further slippage to this category. (Bank’s NPAs. Causes and Remedies.)

Rod and reward:- Banks must not spare the rod wherever required and should not become a miser while promoting the talent and rewarding the performers.

Challenges make one more strong. Challenges provide an opportunity to face hard situations and increase one’s self-confidence. They provide an opportunity to prove your will and strength. A nation becomes strong only when it faces challenges and so are the banks. Banks have to take these challenges in the right perspective which ultimately will change their fate.

DEFECTS IN BANK AUDITS AND INSPECTIONS

These days most of the Banks are suffering from the problems of Bad Loan around the world especially the Asian countries. As a result of globalization, any failure in banking systems in any part of the globe affects the banks in other countries too. The subprime lending in American banks had its effects in the banking sectors across the globe.

The recent trend of increasing NPAs and frauds happening in the banking sector is a serious matter which has shaken the confidence of not only of the depositors and other stakeholders but also that of the general public, in the banking institutions.

This trend needs to be curbed in order to reverse the shaking of confidence of the public in the banking systems. The reasons for loans becoming NPA is already discussed in the blog published on 16th December 2017. The reasons for frauds may be:-

  • Due to staff negligence/Connivance.
  • Lack of proper supervision and controls.
  • Lack of experience, knowledge and adequate training of the staff.
  • The absence of corporate governance from the banking systems.

Most of the frauds have happened due to the staff connivance and it appears as if these were like a consensual rape. Unless there are strict deterrents in place, the frauds will continue to happen. Any laxity in taking strict actions against the delinquent staff of all cadres overtly or covertly involved in the fraud will continue encouraging them to commit more frauds. Many big and small frauds have happened in the past, but hardly there is any action against the perpetrators, more so, in the higher cadres. Only a few small fish is caught in the net and the big ones are allowed to escape. All those who are involved in the crime need to be named, shamed and severally punished. There should be no place for the dishonest people in the financial sector as they not only spoil the sacred institutions by themselves but also induce others to follow the dirty trend.

However merely Staff is not responsible for all the deceit in the system, there are many problems with the audits and inspections in the banking system too. The staff hardly gets time to attend or go through all the voluminous audit and inspection reports and thus they are hardly of any use. Many inspections are just repetition of each other and need to be done away with. Nothing can be achieved by repeating the inspections and only effective inspections and audits should be carried out. At present, the banks go through:

  • Internal inspections mostly conducted by the bank staff only.
  • The concurrent audit carried out daily, snap inspections by all senior executives every month.
  • Credit audit and stock audits.
  • Central bank’s audit and statutory audit of select branches in every quarter.
  • An audit by the teams from Auditors from Auditor General’s office.
  • The yearly statutory audit by the chartered accountants deputed by the comptroller and auditor general’s office.

In spite of all these audits, financial frauds are still happening. ‘Too much of everything is bad’ is an old adage which is truer in respect of the audits of banks. Banking system can adopt following measures to make audits simple and more effective:-

(A). The concurrent audit on real-time bases should be made more effective by allotting the job to professionals and they be made accountable for any lapse that may remain in the day to day transactions. The concurrent audit is the most suitable solution because when a lapse happens and if not detected immediately may prove to be fatal afterward. Lapses such as ‘release of the loan without execution of documents’ can only be rectified on or before the date of release of the loan and not afterward.

(B). Statutory audit is the domain of comptroller and auditor general whose auditors are masters in their field and have a reputation. Unfortunately, this important task is outsourced by the CAG to the Chartered Accountants against a fee to be paid by the banks directly to the Chartered Accountants. Anybody is bound to be loyal to his paymaster and to none else. Banks can get their balance sheets structured by putting pressure on these CAs. In case if the CAG does not have enough staff to take the load of these statutory audits of banks, then at least they can pay the fee of the CAs through their office after successful completion of the audit after recovering the same from the concerned banks. CAs would then not oblige the banks, instead, they will remain true to the audit and the CAG.

(C). Recently the World Bank has advised Indian Government to give more teeth to the Reserve Bank. RBI auditors too are very professional but the audits are not properly followed and strict actions are not taken. RBI should make the Boards and the top bosses in the banks accountable for any laxity in the corporate governance of the respective banks.

(D). Too many audits and inspections consume the too much working time of the branch staff and they get fed up by repeated audits and tend to ignore the same. Some of the useless inspections may, therefore, need to be done away with.

(E). Banks are doing everything except banking. They should not enter into the domains not meant for them. They are made to go for pennies and lose pounds. Banking is the backbone of country’s economy so they must be allowed to focus only on their field of activity.

(F).Well trained, efficient and experienced staff should be posted in the audit and inspection units of the banks. Generally, those who fit nowhere in the system or don’t compromise with their bosses are posted in the inspections department. This vital organ of banking has been ignored but it needs to be strengthened. As a matter of policy, it should be made mandatory for every upcoming officer to undergo a Compliance training or certification by the bank and must be made to give at least one tenor in this department for promotion to a higher grade because one learns a lot in this department.

Banks, therefore need to lay more stress on corporate governance, make inspection wings more active, vibrant and efficient. ‘When the old cock crows the young one learns’, the senior functionaries should therefore create a self-example of honesty, dedication, and sense of belonging to the institution. Unless some harsh measures are not taken to restore public confidence, it is feared that the future of banks may remain uncertain. The Central Government, Central Bank, and Comptroller & Auditor General need to make changes in the policies for the banks for bringing transparency in their functioning.