Are Indian lenders ready for global banking?  

September 7, 2010

India is one of the unacknowledged drivers of global recovery. There has been an impressive improvement in the quality and quantum of financial intermediation. However, the question is whether this phenomenon will help Indian banks to become global players

Are Indian lenders ready for global banking? This was the question asked by participants in the banking conference organised by the Indian Banks' Association and the Federation of Indian Chambers of Commerce and Industry (FICCI) in Mumbai.

The answer to this question is 'yes' and 'no'. Yes, because, despite making inroads into all parts of the country, there still is an opportunity to tap the unbanked segment and bring a huge number of people into the banking system. No, because, there is a dearth of skilled workforce and capital in the industry, said participants.

Speaking about the shortage of skilled manpower in banking, OP Bhatt, chairman, State Bank of India (SBI) said, "We do not have skilled manpower in the country and it is a challenge to build a pool of well-trained employees, which is a challenge for the Indian banking system. In addition, we also lack such institutions which can teach the necessary skills to students."

Last year, SBI, the country's largest lender, recruited a number of people. However, Mr Bhatt said that is not enough and the bank needs to recruit "thousands" of people. "We need to recruit more manpower, in large numbers, train them. We also need to build a leadership pipeline so that all employees are in sync with the management and vice versa," the SBI chairman said.

Retaining talent may be a challenge for public sector banks (PSBs), where the salary structure and other perquisites are very low compared with private banks. Warning that PSBs may lose employees to private sector lenders, the Reserve Bank of India (RBI) governor Dr D Subbarao said there is a need to revisit the compensation structure in PSBs.

He said, "The executive compensation in the public sector, as is well known, is lower than that in the private sector. Notwithstanding the historical reasons for this, there is perhaps a good reason to revisit this. If public sector banks are required to compete with private banks on a level playing field, there is a good case for compensating them too on a competitive basis. There is also the risk that if public sector bank compensation is not improved, the public sector may lose talent to the private sector."

The RBI governor said that a "flawed incentive framework" underlying the compensation structures in advanced country banking sectors fuelled the economic crisis. "With the benefit of hindsight, the compensation framework overlooked the perverse incentives it would engender. Bank executives focused too much on short-term profits and compromised long-term interests with disastrous consequences," he added.

Following the crisis, the Financial Stability Board (FSB) has evolved a set of principles to govern compensation practices and the Basel Committee has developed a methodology for assessing compliance with these principles. The proposed framework involves increasing the proportion of variable pay, aligning it with long-term value creation and instituting deferral and claw-back clauses to offset future losses caused by executives, Dr Subbarao said.  

Earlier, speaking about the challenges faced by Indian banks, Dr Amit Mitra, secretary general, FICCI, said that the country needs to improve the savings ratio, develop bond markets and move banking towards 'mass banking' rather that 'class banking'. Over the coming decade, said Dr Mitra, we need to encourage micro, small and medium enterprises (MSMEs) and be ready to handle large infrastructure projects, which require long-term financing. But the question is whether Indian banks are ready for this change.  

The RBI governor also spoke about the proposed Basel-III norms. He said, "Basel III reflects the lessons of the crisis, and I believe it is going to be quite game-changing. However, as I indicated, not all the reform measures are going to be binding constraints for us."

According to the Basel Committee on Banking Supervision (BCBS) proposal, under Basel III, banks are required to hold more and better quality capital and to carry more liquid assets. It will also limit their (banks') advantage and mandate them to build up capital buffers in good times that can be drawn down in periods of stress.

"The buffers built into the reform package are expected to provide automatic stabilisers obviating the need for external support during a downturn. Also, as the buffers will be built up over time and during the upturn of the business cycle, the system should not be unduly stretched," Dr Subbarao said.

Speaking about the scope for Indian banks over the next decade, Mr Bhatt said that young people would drive economic growth. Over the next decade, home loans could top volumes of
$1 trillion in India, he said.

Banks are supporting infrastructure-related activities in the country and the sector will need finances worth over $1 trillion in the next five years, especially in urban areas, Mr Bhatt said. As more and more people are shifting to urban areas from rural areas, there is a need to develop basic infrastructure like roads, sanitation and drinking water, he added.

Terming technology as the "backbone of the banking industry", the SBI chairman said the banking system cannot survive without the help of technology and there is a need for better and cost-effective technology.
— Yogesh Sapkale