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Remains Healthy and Resilient
Interview with Asit Pal, Executive Director, Corporation Bank

What is your assessment of the current situation in the banking industry in India?
The banking sector in India remains healthy and resilient   and has performed well during 2008-09, so far. Deposit mobilization by banks remains robust. The growth of non-food credit also remained fairly high. SCBs aggregate deposits as at December 2008, recorded a y-o-y growth of 20.8% while bank credit recorded a y-o-y growth of 23.1%.
However, in the current banking scenario, with heightened uncertainty surrounding global financial markets, moderation in GDP and industrial growth - slow growth in corporate earnings and concerns pertaining to asset quality - may put pressure on the banking industry in India. The government and the RBI have announced a series of measures to infuse liquidity in the system, which have considerably alleviated the pressures on the domestic financial markets.

How do you view Indian banking sector’s significant progress since nationalization?
Indian banks have come a long way since the nationalization of banks in 1969. The network of branches/offices of Scheduled Commercial Banks (SCBs) in India have increased manifold from 8262 offices in 1969 to 77,773 offices as at the end of March 2008. Aggregate deposits of SCBs improved from Rs 4,646 crore to Rs 31,96,940 crore  as at March 2008. SCBs advances increased from Rs 3,599 crore to Rs. 23,619,13 crore during the same period. With the post reform phase of progressive deregulation, enhanced competition, entry of private and foreign players, increased autonomy, and technological upgradation, Indian banks today hold up a comparative mirror against their global counterparts. Yet challenges remain. The emerging environment highlights the challenges of meeting higher customer expectations, improving productivity and profitability, seeking ways & means of boosting thinning margins and meeting the legitimate credit demands of the growing economy.

Where does the Indian banking sector stand compared to international banking sector?  
Having largely catered to a domestic economy (or to the domestic diaspora, even with foreign branches) Indian banks have lagged behind international banks in terms of size and worldwide reach. However, they compare favorably with their global peers in several commonly accepted international measures, such as, growth, asset quality, return on assets, capital to risk weighted assets ratio (CRAR) and several other efficiency and profitability parameters. More so, our financial sector in general, and banking sector in particular, has been largely insulated from the recent financial crisis. This clearly shows the soundness of our banking & regulatory system, as well as its ability to withstand shocks, which are inevitable with rising global integration.

However, the structural transformation of the Indian economy, with the increased global integration and intense competition, challenges Indian banks to expand, if they have to match up to the best in the world. Their network has not only to expand domestically for the purpose of greater financial inclusion; they also have to branch out abroad along with adequate infrastructure, qualified personnel, and cutting edge technology. 
What are the key issues facing the banking sector today?
While India’s banking system has been largely decoupled from the current global financial crisis, it continues to be plagued by a number of current issues, such as, economic downturn, slowing industrial production, slow growth in corporate earnings, effectively implementing the Basel II framework and maintenance of asset quality.

With the deceleration in the corporate sector and the possibility of rising slippages, banks have to adopt a more prudent approach in lending. This requires an accent on improving asset quality, sound risk management systems and reduction in intermediation costs.

Which are the thrust areas for banking sector in India?
In these difficult times, there is an immediate need for the banking sector to maintain steady growth - both in business and profits, keeping NPAs in check and improving credit quality, improving margins and earning higher fee income, upgrading skills of staff, leveraging technology for greater productivity & efficiency, and measures to improve the flow of credit to productive sectors of the economy.
How do you look at the future of Indian banking sector?
Though the global recession is quite deep and likely to stay on for some more time, the outlook for Indian banking system is quite good. It is expected to grow at a faster clip in the future. Improvement in the banks’ overall financial strength, particularly strong deposit and credit growth, adequate liquidity on the back of stringent prudential norms and adequate capital to meet the emerging needs will ensure a buoyant banking sector. However, in today’s competitive environment, attracting and retaining customers, introducing innovative products, and marketing these products through diverse channels, will prove to be the greatest challenge. Banks will have to be more efficient and competitive in managing their funds as well as meeting the demands of their customers. Further, compliance with international standards/codes and implementation of stringent capital adequacy norms are necessary for strengthening the domestic financial architecture.

What will be the future strategy of Corporation bank?
Corporation Bank, today, functions as a premier financial services provider with a history of over 100 years. Our future strategy is to emerge as the most preferred bank with global best standards in financials, efficiency, technology, products and services.

What would you advise your customer to be the best way to manage the money?
I would advise them to diversify their investments keeping in view their varying needs at different time periods. At the absolute minimum, they should have a savings account, preferably with a public sector bank. Moving on to acquiring some fixed deposits (they are most liquid and loans can also be taken against their security, if required); for tax savings purposes they could open a PPF account, or buy some tax-saver bonds. An ancillary target would be to get some amount of risk cover for self and family. Medclaim and other such health covers are an absolute must in today’s fast paced life – a single hospitalization can send accumulated savings into a tailspin! The mantra would be to buy adequate insurance and to start at the earliest age possible (when they are healthiest and policies are cheapest). As a rule, the cheapest policies are pure term policies; though they provide no return, they can serve to provide the largest insurance cover (in lakhs) with limited means. We have to assess that, if we are no more, how much sum should be there, say as a bank FD, on whose interest our family can spend the rest of their life – this should form the core term insurance. Insurance companies generally do not provide the best returns on other policies; for better returns, we need look at mutual funds. Choose from top performing, well managed fund houses with a good reputation. Allocate money into balanced funds/equity funds, based on your risk appetite – equity being the riskier (but providing higher returns over longer periods).  Build a portfolio of mutual funds, either by allocating lump sum or better still, through monthly investments in Systematic Investment Plans (SIP), whereby we average out stock market fluctuations. Over time, we should have a portfolio that is balanced between liquid bank funds, insurance (health, term and others), and the stock market (preferably through mutual funds).

What are you doing about the improvement of the services of Corporation Bank?
Corporation Bank is established as a highly customer responsive Bank, taking conscious initiatives and showing proactive response to changing customer expectations and market realities. It is already a well accepted brand catering to the needs of diverse segments. The bank has been endeavouring to provide upgraded services and a basket of products based on latest technologies, such as remittance using NEFT through ATM, mobile banking, internet banking, payment of government taxes using various e-payment options, etc. A number of tie-ups have also been activated to provide services such as bancassurance, mutual fund investments, depository services, internet trading, among others. The Bank will continue to expand its products/services on an ongoing basis to meet the surging customer expectations and changing market realities.
How do you see the banking industry in the year 2020?
Indian Financial System has witnessed a rapid and radical transformation in recent years with new technologies, systems, products and services. Now economy has become global; the Indian banking system is facing severe competition, both from within and outside the country. In the next 10-12 years, there will be huge surge in the working population as well as urban areas. The options for differentiated customer service will be huge. We need to focus on our core strength on what our customer wants and do it as cost effectively as possible. Technology will continue to drive the processes and will play an integral part in all aspects of banking by 2020.

The situation however is quite dynamic and there would be changes, which we are unable to anticipate now. It is clear, however, that the banking industry will have to emerge larger in size, technologically better equipped and stronger in capital base. The regulatory as well as the self regulatory mechanisms will have to match the best in the world to ensure that the health of the Indian financial system is preserved and remains strong.

Priority sector credit targets have not been met in many cases…what is the reason behind it?
Under the government policy all domestic banks (including private sector banks) and foreign banks are required to provide 40% and 32% of their Adjusted Net Bank Credit (ANBC), respectively, to priority sector. By and large, banks in India have been able to meet their overall priority sector lending targets. However, it is under direct agriculture lending that PSBs and private sector banks have fallen short of meeting their mandated target of 18%.

Looking back, we find that since 1995, there has been a substantial improvement in the ratio of priority sector advances to net bank credit across the banking sector, which reached a peak during 2001. Thereafter, there was some decline but even then the ratio reached 39.7% (March 2007). This was only marginally lower than the mandated target of 40%.

One possible reason for some of the decline could be the changing priorities of present day banking. Banks have been called upon to finance an economy which has been growing at a rate of over 8.6% per annum since the past five years SCBs credit growth has been more than 30% since March 2005, dropping to 25% only in March 2008. Most of this expansion has been concentrated in the metropolitan and urban centers as the demand for credit has come mainly from industry, retail, housing, realty, hospitality and infrastructure sectors. On the other hand, the overall credit growth in rural areas came down from 28.1% in March 2005 to 18.3% in March 2008.

Another trend witnessed since 2001 is that, (to meet growing demands) banks are opening more and more offices in semi-urban, urban and metropolitan centers. While the total number of offices of SCBs increased from 65,919 in March 2001 to 77,069 in September 2008, rural offices actually went down from 32,562 to 31,117 during the same period.

In spite of the above, performance of banks under priority sector lending has improved substantially in 2007-08. Priority sector advances as a percentage of ANBC, as at March 2008, constituted 44.6% for PSBs and 47.5% for private sector banks as against the mandated target of 40%. For foreign banks the same constituted 39.5% against the stipulated target of 32%. The changeover to previous year end’s credit figure since April 2007 has also helped banks in planning better for credit growth in the priority sector.

What about recent activities of Corporation bank?  
After completing a century long journey, Corporation Bank has today emerged as a one-stop-financial-shop offering quality services to meet the varied needs of its customers. With advanced use of technology, Corporation bank has witnessed unprecedented changes, all of which have resulted in customer convenience. The bank has recently surpassed various milestones by crossing Rs.1,00,000 crore in business, 1000  branches and 1000 ATMs As part of our global expansion plan we have recently opened overseas Representative offices at Dubai and Hong Kong. Befitting the occasion, the bank won the prestigious Gold Trophy of “Scope Meritorious Award” for Best Managed Bank instituted by SCOPE for government owned enterprises. 
Any comments on government policy?
The government of India has taken several steps with a view to enhancing public confidence in the financial institution and to deal with the effect of present financial crisis on the Indian economy. The first priority was to re-assure the stability of the financial system in general and of the safety of banking sector in particular. To this end, steps were taken to infuse liquidity into the banking system and also to address problems being faced by various non-bank financing companies. The stimulus package announced by the Government, aimed at boosting the growth of the economy by cutting taxes, increasing public expenditure and ensuring flow of credit to infrastructure, construction, housing and export sectors. Besides in the Interim Budget for 2009-10, the government has given adequate thrust for social and infrastructure sectors, extended the interest subvention for the exporters and also decided to recapitalize 15 PSBs over the next two years.    

The whole package will minimize the impact of weak global economy on the Indian economy and we are hoping that the government will continue its focus on necessary areas and come out with more steps if necessary.

Any other points?
Banks have to do much more to adapt traditional risk management systems to the needs of today and bring them in line with Basle committee and our own central bank’s recommendations. The various crises which have taken place in the developed economies (E.g. Sub-prime crisis) and our very own Satyam and the Maytases underscore the need to have forward looking risk management systems, not as a mere formality or compliance issue, but in true letter and spirit. Only then would it be possible to keep our banks safe in increasingly volatile environments.

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   RNI No. WBENG/2008/27737
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