May you live in interesting times,” says a Chinese proverb – seemingly both a curse and a blessing. It aptly describes the state of affairs in the banking space. Over the past decade, the sector has weathered several storms: economic downturn, corporate deleveraging, non-performing assets (NPA), digital disruption and the Covid-19 pandemic.
In times like these, lenders who were able to use every adversity to their advantage came out on top, as the 26th edition of the BT-KPMG Best Banks 2020-21 survey reveals. ICICI Bank, the country’s second-largest private bank by market capitalization, is the Bank of the Year for the second consecutive year. (See sidebar Roll of Honor.)
The banking sector as a whole had a better year. It posted a net profit of Rs 1.21 lakh crore during FY21 against Rs 10,999 crore during FY20. Return on assets (ROA) and return on equity (ROE), two key profitability metrics, also came out of the red over a three-year period. Among other metrics, the capital adequacy ratio – a measure of a bank’s lending capacity – improved from 15.3% to 16.3%, while gross NPAs fell by 9, 1% in FY19 to 7.3% in FY21. “The improved metrics partly reflect the regulatory relief given to banks during Covid-19 as well as fiscal safeguards and financial support provided by the government,” the Governor of the Reserve Bank of India (RBI) said recently. , Shaktikanta Das. But, as Das was quick to point out, there are risks and challenges ahead that require serious introspection and action by the banking system.
In recent years, banks have made conscious efforts to build a well-balanced loan portfolio, with an inclination towards retail banking. “The change in the advances mix is also driven by macroeconomic conditions as demand for corporate credit has been quite weak while retail advances have grown in double digits over the past few years,” says Jaideep Arora, CEO of Sharekhan of BNP Paribas. Bankers also turned cautious after a few debacles. The focus is on a secure retail portfolio and top-notch corporate clients. The current low interest rate regime also has its challenges. “Now you need to offer retail customers a range of choices that will allow them to beat inflation and save something for the future,” says Madhav Kalyan, CEO of JPMorgan Chase Bank India. Banks have also realized that they need to connect with customers both digitally and through physical branches. “If you look at the numbers, the credit drawdown has been in retail and not so much in business credit,” Kalyan says.
“As competition and caution increase, banks may see some erosion of their net interest margins relative to historical trends. However, we believe the pressure would be more evident for larger banks. medium or smaller, while large banks would retain their margins due to their strong liability deductible,” says Arora.In retail, banks are facing disruption from fintech players, who are innovating in payments and lending Today, several banks have partnered with fintechs to serve customers and attract new ones.
The pandemic has accelerated digital adoption and led to gains for banks. For example, supply chains are being digitized, which offers huge potential for banking services across the network. Another gain was employees working from remote locations with higher productivity and efficiency. Adoption of digital payments is also much higher. “The distinction between banks is no longer which has the best digital skills, but how they personalize banking services for an individual customer,” says Shyam Srinivasan, MD & CEO, The Federal Bank. But with digitization comes the danger of cyber fraud. A Deloitte India study listed large-scale remote working patterns, increasing number of customers using non-branch banking channels and limited use of forensic analysis tools to identify signals potential alarms as reasons for the increase in fraud incidents over the next two years.
The RBI regulator has also been at the heart of things. Her ban on new digital offerings from HDFC Bank was a clear message that she will not tolerate technical issues affecting customers. Additionally, the RBI is going after banks heavily for any compliance failures. “After the YES Bank debacle, the regulator is embarking on business model changes wherever it is not comfortable protecting the interests of depositors,” sources say. The view of the RBI is that banks are different from other entities because the objective of maximizing shareholder return comes at the expense of small public depositors. “As custodians of public resources, banks need to design appropriate governance standards and implement internal controls to be worthy of public trust,” RBI Deputy Governor MK Jain said recently.
The regulator has also become stricter in extending CEO terms. Last April, it capped the tenure of CEOs and CEOs of private banks at 15 years. “With such a long mandate, linking continuity and extension to performance is a good and rational idea. Additionally, most banks are publicly traded, so it makes sense that market factors and dynamics influence the tenure of CEOs,” says Tarun Bhatia, MD and Head of South Asia in the Forensic practice. Investigations and Intelligence from the consulting firm Kroll. Indeed, the extension of the CEO every three years will now have to be accompanied by a solid financial performance without surprise on the quality of the assets. The RBI has also introduced rules that require banks to rotate auditors every three years with a cooling off period of six years.
While the last decade has been difficult, there are some green shoots. Now there is a Bad Bank framework to deal with NPAs. The government has also set up NaBFID, headed by veteran banker KV Kamath, to finance infrastructure projects, which should reduce the burden on banks. Banks can focus on retail banking as the digitalization and formalization of the economy brings underbanked and underserved customers into the banking network. “At the current juncture, the Indian economy appears to be poised for another multi-year bull economic cycle and banks are well positioned to support the same through a marked improvement in asset quality and balance sheet capitalization,” says Arora of Sharekhan by BNP Paribas, while Kalyan of JPMorgan believes that “capital efficiency has now entered the banking system”. Experts suggest that the distinguishing factor over the past decade has been asset quality. “Some banks have moved significantly away from the asset side and as a result have benefited disproportionately from it over the past decade,” says Srinivasan of the Federal Bank.
Clearly, banks that are able to issue good quality loans and redefine their business models to suit the operating environment will survive and thrive despite the difficulties.