Morphing Banks into
Financial Services Conglomerates:
New Opportunities in
The Emerging Global Scenario.
A diversified asset
portfolio; a large liability book; an extensive network
of branches. These are no longer the prerequisites for a
good profitable bank. Indeed, with the emerging
structure of the new economy, increasingly sophisticated
financial markets, and cutting edge technology, not only
the look and feel of banks or their size and structure
but also their soul and substance is changing. There are
banks that hardly have a brick and mortar presence.
Their asset build up is minimalist. And even less so,
liabilities. Non-interest income contributes more to
total income than interest income. What then is the new
DNA of a bank? And how will it affect the financing
needs of the economy? In the new economy, finance is a
commodity and banking is a service. The commodification
of finance and its productisation is turning banks into
financial service providers. This transformation goes
beyond the blurring of distinction between commercial
banking and investment banking consequent upon
liberalization and deregulation of financial sector.
This transformation has to be seen in a global context,
which is making it imperative for Indian banks to think
in terms of size and structure. The financial sector
would be open to international competition once the tone
for the rules of the game gets operationalised under the
WTO. Banks will have to gear up to meet stringent
prudential capital adequacy norms under Basel-II as they
compete with banks with greater financial strength.
The pressure of impending competition from foreign banks
is mounting. Long terms strategies need to be in place
now. Mergers and acquisitions – be they planned, or
market driven; friendly or hostile – are bound to happen
and bring in its wake a serious consolidation in the
banking space over the next few years. Looking outwards,
can the KPO trend provide an opportunity for Indian
banks to get a toehold in the global markets? Given the
strengths of Indian banks and banking sector, the
regulatory framework, prudential norms, and
technological sophistication; this is a window of
opportunity in the emerging global scenario. Can Indian
banks morph into financial services firms and replicate
the success and spread of information technology? If so,
how and how soon?
There are macro-economic needs and implications of all
these changes. Some are sector specific, some will be
policy oriented, and some others will be regulatory
oriented. From a policy perspective, how can this
transition, if at all desirable, be facilitated? Does it
have to be done on a case to case basis or can there be
generic guidelines and benchmarks? Can there be a road
map for the transition path and strategy for smooth
conversion into a financial services provider. Do the
prudential norms have to undergo a change along with
this transition? From an operations point of view, will
this mean a complete overhaul in the mind set of the
bankers, their work process and their core competencies?
Is there need for a business process reengineering?
These are some of the issues that need serious and
focused attention. In this backdrop, BANCON 2008
provides an ideal forum, bringing together as it does
the bankers, policy makers, analysts and academicians.
Sub Themes
of Bancon 2008
Banking-The New Financial Services Model:
Globalization coupled with technological
development has shrunk the boundaries by
which financial services and products are
being provided to the customers residing at
any part of the globe. Further, due to
innovations and improvements in service
delivery channels, the trend of global
banking has now been marked by twin
phenomena of convergence and consolidation.
The trend towards convergence is driven
across the industry to provide most of the
financial services such as banking,
insurance, investment, cash management, to
the customers under one roof.
How does one juxtapose this new model
where non-interest incomes outweigh the
interest incomes of banks with the needs of
a not so well developed economy? Will this
have an impact on the lending behavior of
banks and will it impair the debt financing
of projects and corporate? Is there anyway
in which one can minimize the adverse impact
of Indian banks moving from a completely
regulated sellers market to a totally
deregulated customer’s model?
Competing with Financial Service Companies:
In a highly fragmented financial market,
Indian banks are not only competing within
themselves or with their global counterparts
but with all financial sector participants.
Be it on the assets or the liabilities side,
banks compete with entities that straddle
different businesses and function under
different regulators. Also, public policies
related to taxation, prudential norms or
regulatory requirements are making it
difficult for banks to compete.
Be it Mutual Funds, NBFCs, Post offices,
correspondents or insurance companies, all
in their own way are eating into the
business of banks particularly into their
liabilities side. Even on the asset side, no
matter what the individual bank’s lending
rates are, 40 per cent is pre-empted through
priority sector lending; add to that the
export credit, sponsored schemes and staff
loans, the market rate applies on less than
half of the portfolio.
Is there need for a level playing field?
If so, who will provide that? The Reserve
Bank of India alone can’t do it. It will
need a broad based public policy reform.
What should be the contours of this reform?
M&A-Towards a
Creative Solution:
Indian Inc has gone global in the
manufacturing and service sectors. The top 10
acquisitions made by Indian corporates in the
recent past, is almost three times the amount
involved in US companies’ acquisitions of Indian
firms.
Along with convergence, will consolidation
also become a trend in the coming years? Come
2009, Indian financial sector landscape is
expected to witness spree of M&A’s for
compliance with minimum net worth or norms on
diversified ownership or simply to gain size to
ward off or absorb intensified competition or
improve scale economies.
The system needs to be prepared for such a
scenario and in this context there is a need to
revisit the regulatory, legal, accounting and HR
related issues, which may arise in the process
of consolidation.
Can this consolidation be designed in a
manner in which it can provide a creative
solution to the issues confronting Indian banks?
Is it possible to look at the emergence of a
bi-polar structure of Indian banking of large
national banks and small regional banks?
Regional
Commercial Banks v/s The National Monoliths-Who
is suited better to perform in the new diverse
economy:
Will the domain knowledge, emotional
brand equity, dominant market share in
specific geographies and huge infrastructure
build up of regional banks prevent them from
being taken over or acquired?
As such, if post consolidation, a sort
of a bi-polar structure – large national
banks and small region-specific banks --
does emerge, will it be relevant for the
Indian economy? Looking beyond balance
sheets of banks and seeing them in the
context of the needs and requirements of the
various constituents of the economy, it has
to be understood how the regional banks have
performed and how they can adapt to the new
situation.
Will they be enclaves of protected banks
amidst a sea of global banks? What will be
the impact of this on customers and customer
service? Can they match the product pricing?
Will they do a far better job of financial
inclusion? How will these banks reposition
themselves to deliver bottom line results?
Valuation of Banks- An Analysts’ Perspective:
The coexistence of banks, with similar
ownership, conducting business in the same
sector, and in more or less the same
macro-economic environment, trading at
multiples of 16 and those trading at less
than book value, needs some explanations.
The idea is not to see how analysts really
assess banks, as it is to understand the
principles of value creation in banking and
asset management.
Can the use of different valuation
methods to value a financial institution
vary so widely across firms or analysts? If
so, are there tangible reasons that stand to
reason in cross sectional and time series
data?
How does management read the
disjunctures between enterprise valuations
with equity valuation? In view of banks
operating in a more or less homogenous
environment, what role do qualitative
factors play in affecting the value of
banks? Is it the intuitive feel of an
analyst or is it the overpowering sell side
research that has the final say?
Financing Service Economy– Banking in the ICE
Age
On the one hand, it is argued that the
future lies in the Knowledge Economy or the
ICE age. On the other there has been little
focus on how banks, which are a part of the
growing knowledge economy, need to change in
order to catalyse growth in, and benefit
from this growing sector. Most banks are
still devoting themselves to various aspects
of traditional firm financing. It is still
an asset based, turnover oriented,
collateral driven lending model that
dominates the lending landscape. There is
little idea or innovation on how the new
knowledge-based firms are to be financed.
Banks need to put in place institutional
strategies, structures and risk assessment
practices to lend to the new economy. It
needs to be understood to what extent banks
have to modify traditional lending
approaches and practices to meet the needs
of knowledge-based firms.
A look at the lending of all banks will
reveal that specialized strategies,
structures and processes for lending to KF
have not been developed adequately in the
banking sectors. Do we need to have
knowledge-based lending specialists? Do
banks have to now start valuing intangibles?
If so, how? How does one fund embodied
knowledge? Can a brand be a security? Going
ahead, these questions must be debated in
order to develop new business opportunities
for banks as well as for overall economic
development.
J&K-
Towards a New Sub-National Financial
Architecture :
Policy makers have been totally
preoccupied with national level economic
management. Be it fiscal, monetary or
financial policy, it all operates at the
national level. Surely, there can be no two
ways about monetary management. It has to be
done at that level. But there can be greater
flexibility in fiscal and financial matters.
While it is true that there is some freedom
in fiscal policy, given the fiscal-federal
structure of the country, no thought has
been given to how to create decentralized
financial systems within the country. This
issue needs to be taken up in view of the
fact that the old regime of controls and
planning for a unified regionally balanced
economy is now not the center of our
policy-making.
Indian economy is today more like a
conglomeration of 28 state economies that
one large economy. These state economies are
not only structurally different from each
other but they are at different levels of
economic development and financial
intermediation. Instead of trying to fit
them into one model of financial
development, it might be worthwhile to
explore different models and build
institutions around those models that are
economy specific, or region specific or
culture specific. The diversity of Indian
economy must be reflected in its
institutions of financial development.
J&K is one of the most distinctive
economies in India. Not only is it a special
category state, it is unique in many other
ways. For instance, it is the only state in
India, where the state government owns a
bank, the J&K Bank. Can this uniqueness be
leveraged to create a new financial
architecture for sub-national economies?
What are the options? Does bank lending in a
closed economy like J&K have a different
developmental impact? Can a bank act as a
developmental agent in a defined
geographical area, which furthers its
commercial goals? These are some of issues
that are worth exploring.
