News: Indian bank alliances, a positive development

(BL 30/09/2006) Chennai - Be it M&A (merger and acquisition) or `alliance', Basel or technology, many things have been happening in Indian banking these days. Business Line caught up with Sanjay Aggarwal, Head Financial Services, KPMG, for his views on the issues that concern banking now.

A fellow member of the Institute of Chartered Accountants of India, Aggarwal has been involved in the audit of banks such as ANZ, Citibank, Emirates Bank, Habib Bank and BCCI Bank during the period 1987-2001. Here is his take on a few questions:

What do you think of the alliances that banks are striking these days?

Very positive development. When capital and other resources are scarce, successful business strategies will definitely comprise alliance and collaboration strategies.

How would you describe the post-UWB-IDBI scenario? What has changed in the banking arena?

The immediate impact of the merger announcement is the increased awareness of the need for a framework for early identification and resolution of banks facing potential sickness. A proper framework will improve timely restructuring and action.

How long do you expect the current consolidation phase to last?

This is expected to be a regular feature. The environment is very competitive and business strategies could go wrong. Non-performers will, therefore, have to seek M&A to resolve crisis situations.

What are the key parameters that will force a bank to the M&A fold?

Most probable candidates will be the ones with low growth rates and low profitability. Being dependent on fewer customer segments is also a negative.

Assuming that banks merging have their own CBS (core banking solution), what happens after the deal? Will there be only one CBS after merger?

This would depend on the situation. All possibilities of synergies will have to be explored. For, there have to be good reasons to operate separately.

What according to you are the top three areas that Indian banks have to focus to increase their revenues?

Banks will need to continually be aware of customer needs and requirements and develop solutions. Banks will have to be clear on product profitability and distribution channels to be cost effective.

What does Basel mean for the customer?

Great opportunity to enhance risk management systems and operating effectiveness to create sustainable competitive advantage. Banks should look at this opportunity not as mere compliance but to develop and implement in substance better risk management systems in an integrated manner to achieve competitive advantage and improved profitability.

Where do Indian banks stand in terms of readiness for the next big thing in Basel?

We have just completed a survey of banks on this subject and the report is to be released shortly. The survey was aimed at assessing the level of preparedness of banks in meeting the requirements of the Basel-II Capital Accord. While the 1988 Capital Accord addressed market and credit risks, Basel-II has substantially changed the treatment of credit risk. It requires banks to have substantial capital to cover operational risks.

We find that there are a number of challenges around approach to Basel, understanding of Basel, and top management philosophy towards implementation.

Is Indian banking industry attracting the best talent these days?

It continues to attract the best talent. But retention is becoming a significant issue.