News: Three distinct trends on Indian banking horizon

(BL 04/01/2007) Chennai - While talking to Business Line about banking in retrospect, Robin Roy remembers `Blue Ocean Strategy', from Harvard Business School Press. Any business can adopt a non-combative approach and yet succeed, he says, citing the international bestseller by W. Chan Kim and Renée Mauborgne.

"From, strategic alliances among large sized banks (Bank of Baroda, Oriental Bank of Commerce, Union Bank of India) to leverage on customer bases, to quicksilver takeover attempts (ICICI/United Western Bank) to exchange traded gold bonds, to CDOs (collateralised debt obligations), the banking sector saw it all in 2006," notes Roy, Principal Consultant, Banking & Financial Services, PricewaterhouseCoopers (P) Ltd. To him, we posed only two questions...

What were the most eventful happenings in the year just gone by, in no particular order?

1. While the banking regulator walked the tight rope between moving towards total Capital Account Convertibility and opening up the banking sector, it also introduced perpetual debt instruments, to help banks augment their capital base, already hamstrung with ownership issues.

2. The window of regulatory arbitrage available through NBFCs (non-banking financial companies) was further narrowed and the move was towards activity-based supervision, from entity-based supervision. 3. With the pace of credit growth not relenting and with interest rates hardening over the year, banks had to face both supply and demand pressures. ALM (asset liability management) was becoming a major challenge.

4. After a hue and cry from all quarters on unsolicited marketing calls for all products, ranging from credit cards, home loans to personal loans, a "no call registry" was introduced by many banks and you could actually take steps to put a stop to such calls. 5. Statistics seem to indicate that the number of official billionaires (in $ terms) in India has crossed to well over 100 providing indications of a surge in demand of private banking and wealth management services. 6. Cleaning up of the balance sheet without the crutches of DICGC (Deposit Insurance and Credit Guarantee Corporation) and loan write-offs was possible through `loan actions' where distressed assets were actually purchased through tenders. The days of `vulture funds' seem to be coming with many a distressed asset fund, waiting on the wings.

So, what would 2007 bring in its wake?

Under the shadow of Basel II, Clause 49, and breaking down of conventional business models, banks may turn the value chain upside down, to join hands with retail stores, postal services and telecos to come closer to the customer.

We have seen this happen in Japan, in Germany and Singapore. Three distinct trends are visible on the horizon: One, banks will move towards customer acquisitions more innovatively; two, banks will have to be more transparent with products, services, prices; and three, banks will have to continuously explore ways to augment capital and more importantly, preserve it.

7. Loan factories are the new assembly blocks churning out loan assets with `guaranteed' turnaround times. The retail mantra continued to hold sway with the risk appetite being whetted all the time. To enable `sub-prime' borrowers to avail loans, credit insurance is becoming increasingly important. Word has it that applications have been made to the regulator to introduce mortgage guarantee products.

8. Innovative alliances are being explored. Like telecos partnering for insurance, banks are trying to forge alliances in areas that they understand better: infrastructure financing, project financing and financial product distribution.

9. M&As (mergers and acquisitions) in a sector where PEs (price-earnings) are low and banks are open to inorganic growth, are beginning to look up. Between the Scylla of regulations and Charybdis of a `strategic fit', banks continue to look for the right opportunity.

10. `Financial inclusion' and `micro finance' became an organic part of a banker's lexicon. We could add `financial literacy' to this. How good would it be to have `informed' customers who understand the nuances of financing and appreciate the risks of the market? Credit ratings and gradings would become that much more acceptable.

So, what would 2007 bring in its wake?

Under the shadow of Basel II, Clause 49, and breaking down of conventional business models, banks may turn the value chain upside down, to join hands with retail stores, postal services and telecos to come closer to the customer.

We have seen this happen in Japan, in Germany and Singapore. Three distinct trends are visible on the horizon: One, banks will move towards customer acquisitions more innovatively; two, banks will have to be more transparent with products, services, prices; and three, banks will have to continuously explore ways to augment capital and more importantly, preserve it.