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Ernakulam excels... Big bank merger, bigger expectations One down in private sector All that glitters is not gold... Hesitancy in announcing year-end results How okay are new banks? Small is ‘more’ beautiful Drop in SLR- sparing lendable resources Good, bad and ugly Needed a Banking Atlas Thirty more cities seek to become SMART Financial inclusion vs unclaimed deposits Anytime banking to anywhere banking Monetary policy continues to adopt dis-inflationary path Cautious and considerate Ferrying digital banking to Lakshadweep Another route for achieving financial inclusion Smart banking in smart cities Capital base of regional rural banks raised It’s a war on black money, support it. From lazy banking to easy banking Reaching out: is it slowing down? Well-lived... A bank for women, by women New capitals of Migrant banks Mega merger is on Two banks: their jubilees and performances Insatiable appetite for credit Banking overhauling or reorganisation? Perhaps small is more beautiful than big! Bank deposits account for 46.3 per cent of household savings Reaching the Unreached… Nothing much can happen…. Greet Lakshmi the banking robot Managing NPAs... What is the priority – mergers or NPA reduction? Banking on Risk United India Insurance - Rs 110 crore losses have been claimed till now due to floods in Tamil Nadu Holy or unholy? Lacklustre credit expansion LVB- A supermarket of financial services Why priority status? Small finance banks offer high interest rates Growing gainfully Banking in Telangana Rationalised Stage set for Indian ‘avatar’ of foreign banks Cut in repo rate – lower than expected The collaboration suite of cyber criminals Emerging crisis Payment banks have arrived Why any time money? Targets continue to be ad hoc New bank licences, at last... Cradle of banks to a smart city... Just 660 days! Target over-ambitious... Bottomlines shrink, bad loans rise... Indian customers are tech savvy Growing volume of stressed assets… Merger mania haunts banks A new development bank rising in the east… Governance in Reverse Gear? Too big to fail and too small to sail Who is the real beneficiary? Small finance payment banks... Fund healthcare clinics in villages... A development bank for BRICS Aadhaar, niraadhaar and banking Grows Bigger Drastic decline in asset quality The paradox: clamour for the Goliath and David How ‘secure’ are the secured loans?
 
Banking on Risk
Banking is all about risk as the world learnt to its cost in 2008 when the shenanigans of a few big banks brought entire economies to their knees.

India escaped a meltdown, widely credited to the ‘safe’ banking practised by its banks, but the question remains as to how banks have actually fared in risk management and what the future holds.

The basic features of the sector, namely the dominance of government, owned banks (PSBs), continued reliance on the narrow banking model and the overarching role as the prime supporter of the government’s borrowing programme. All three are inter-related and have a deep bearing on their performance as well as in understanding risk management.

First, PSB dominance (over 75 per cent of total assets, deposits and advances) has meant a massive branch banking structure and a high-volume, low-value business model. Over 83 per cent of total borrowing accounts are small (under Rs 0.02 mn) and constitute about 10 per cent of total credit outstanding, with deposits and advances constituting about 75 per cent of the balance sheet, the cost of doing business is high, though it has led to the widespread reach of banking.

Secondly, a ‘narrow’ banking business model has led to a large reliance on interest spreads for profitability: about 88 per cent of income is from interest; foreign banks and private banks score over the PSBs in this regard- they have larger proportions of fee-based income that not only insulates them somewhat from credit risks but gives them better market valuations; the narrow banking model clearly limits profitability, since it is an accepted fact that banking is a low value-added activity commanding. This is amply borne out by the slim RoAs recorded by the sector (0.81 in 2013 and 1.04 in 2013), caused largely by PSBs ( RoA of 0.5 in 2014, down from 0.88 in 2013).

Unduly risk averse?

This brings us to the question of whether the narrow banking model has served us well or whether Indian banks have been unduly risk averse and forgone higher returns in the quest for safety. We can look at a few ratios to gauge the risk appetite of the sector.

The table represents averages over the past 5 years (2010-14). Overall Investment Deposit Ratio at about 35 is significant, considering the much lower statutory requirement (25 per cent), (over 75 per cent of investments are in government and approved securities). Non-approved securities were quite low for PSBs, while foreign and private banks had much higher shares. Consequently the CD ratio has remained around 77 (again, largely due to PSBs, while other banks had higher CD ratios).


Preference for safety…

There are several reasons for this apparent risk aversion. Historically, banks have been financing the bulk of the government’s market borrowing programme, which is why SLR ratios were as high as 35-40 per cent in the past. As if to offset this, these investments were allowed zero risk weights, which helped boost the CRAR, without actually raising additional capital. Further, there were restrictions on exposure to risky products (equity, derivatives and OTC products). Finally, with government as the owner of the major part of the system, there was no real shareholder pressure to improve returns on equity; nor was there a ‘culture’ of risk-taking, so to speak. The need to support government borrowing and other mandated forms of lending (priority sector), pre-empted resources for other avenues. This has become so operationally embedded that even with continuous lowering of SLR, investment ratios are well in excess, indicating preference for safety.

The subdued demand for bank credit and the mounting levels of NPAs also have much to do with the cautious approach to lending; but the fact remains that decades of narrow banking have dented innovation and risk taking. An important reason has been the need to shore up CRR for Basel 3 compliance, without raising massive amounts of capital, for which cutting down risk weighted assets was a softer-option.

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