A study by FICCI, IBA and BCG highlights that the banking industry is growing in the right direction, but it lags behind global benchmarks in areas like staff deployment and that there is a need for a major overhaul of debt management
Highlights of a banking industry study by FICCI, IBA and BCG
A report on productivity excellence in the banking system says that some banks have alarmingly high levels of non-performing assets (NPA) in safer products like home loans.
The study titled, "Being Five Star in Productivity: Roadmap for Excellence in Indian Banking", is based on an extensive productivity benchmarking exercise conducted across 40 banks. It has been prepared by the industry lobby body, the Federation of Indian Chambers of Commerce and Industry (FICCI), Indian Banks' Association along with consulting firm Boston Consulting Group (BCG).
The report says that the Indian banking industry will be the third largest in the world by 2025, because of the sound performance and growth in the country's gross domestic product.
"We have tried to leverage FICCI's network to ensure that we bring together various stakeholders of the financial ecosystem so the expectations of each of them are considered by the banking industry," MV Nair, chairman of FICCI's Banking Committee and chairman and managing director of Union Bank of India, told a news conference today.
Saurabh Tripathi, partner and director, BCG, explained the findings of the report saying, "There are high NPAs in MSME and agricultural portfolios, but even relatively safer products like home loan has gross NPA varying from 5-0.3%." According to the study "any small bank with small market share has high NPA rate in any product."
The study indicates that while the industry, on an average, has an impressive bad debt performance, the bad debt levels in priority sectors like MSME and agriculture are high and that NPA management processes at banks need a major overhaul.
Explaining the need for public sector banks to invest in developing capabilities of risk management, Mr Tripathi said, "New private sector banks have a 23% share in the home loan industry and they have home loans of around 15% on their books. On an average, they have been successful in bringing down NPAs because they have the benefit of designing a business model which suits this product."
The study has urged the government, specifically, to undertake reforms in the real estate sector. "Sixty-eighty per cent of loans are sanctioned against real estate as collateral. Banks in their personal capability can increase the recovery to a limit. Reforms such as an independent regulatory body, transparency in transactions, and computerisation of titles deeds are required," Mr Tripathi said.
When asked about the concerns over rising NPAs in home loans, MD Mallya, chairman of IBA and chairman and managing director of Bank of Baroda, said, "A lot of understanding is required to recognise the saleability of end projects, considering the overall cost factor and whether it would be able to sell it further at a price which is cost plus. I wouldn't say this is a concern, but a challenge to understand basic viability properly, along with the valuation and saleability of the project."
The report also says that branches can generate higher levels of revenue for banks and Indian banks deploy 62% of staff in customer facing roles as against the global benchmark of 82%, BCG observed.
The report says that the public sector appears to be under-investing in technology, with spending at about 25% of the global benchmark. The average administrative overheads is about 11% of the total staff for Indian banks and across bank categories, and the industry appears to be holding a low headcount in human resources and finance roles. The variable pay at 2% of fixed compensation, is significantly lower than the 12%-15% that is found optimal for incentive compensation.
The study says that growth in usage of new channels, like mobile phones, will account for 20%-30 % of total transactions by 2020. ATMs too have seen just 50% adoption even in the metros so far. It recommends that in order to fully utilise retail banking, banks need to invest in adoption as new channels will enhance productivity and acquire new customers.
According to the report, Indian banks are doing well overall, with the industry cost-income ratio below 50%. Most banks have about 20% of staff deployed in back-office processing (some banks have even 40%) as against a global best of 10% observed by BCG. It says that process re-engineering and operating model changes can help reduce costs, improve services and contain operating risks.
The report stresses that a new paradigm is required for risk management, including a different operating model, technology, experience and expertise retention, and minimum critical size of book.
Nifty may move up to 5,000 if today’s low holds
The domestic market snapped its two-day losing streak to close with modest gains even as some of its Asian counterparts closed lower on concerns over global economic growth. Today, the Nifty made a higher high and a higher low for the first time in many weeks. This could turn out to be the beginning of a small upmove, in case the Nifty is able to sustain above today's high of 4,910 and the low of 4,809 today. The gain may be to the level of 4,950 and thereafter a laboured move to 5,000. In case the Nifty breaks today's low and ends in the negative tomorrow, then we may see a fall up to 4,720.
Weakness in the global markets saw the domestic benchmarks opening mixed this morning. The Nifty opened almost unchanged (down two points) and the Sensex resumed trade at 16,156, up marginally by 14 points. However, the market turned negative within minutes of the opening bell as the absence of positive triggers limited investors' participation. IT, capital goods, metals, banking and auto sectors were under pressure in early trade.
The indices kept fluctuating in and out of the red, amid high volatility. The market fell to its intra-day lows in noon trade. At the lows, the Nifty fell to 4,809 and the Sensex went back to 16,046. However, a recovery in the key European bourses helped push the indices into the green.
The market ventured further northwards, supported by buying in select stocks in the post-noon session. Rising to the day's high, the Nifty touched 4,910 and the Sensex rose to 16,370. Breaking its two-day losing streak, the market closed higher with the Nifty notching gains of 53 points to settle at 4,899 and the Sensex surging 200 points at 16,342.
The advance-decline ratio on the National Stock Exchange (NSE) was a positive 1088:583.
The broader indices had an equal contribution in today's upmove as the BSE Mid-cap index gained 1.25% and the BSE Small-cap index advanced 1.54%.
In the sectoral space 11 of the 13 gauges settled higher. The leaders were BSE Oil & Gas (up 2.47%), BSE Power (up 2.04%), BSE Metal (up 1.91%), BSE Capital Goods and BSE Fast Moving Consumer Goods (up 1.63% each). The laggards were BSE IT (down 0.59%) and BSE Bankex (down 0.14%).
The top Sensex stocks were Jaiprakash Associates (up 5.38%), ONGC (up 3.99%), Wipro (up 3.74%), Tata Power (up 3.60%) and Bajaj Auto (up 3.56%). The main losers were DLF (down 2.25%), HDFC Bank (down 2%), Infosys (down 1.41%), TCS (down 1.24%) and Mahindra & Mahindra (down 0.66%).
The top performers on the Nifty were SAIL (up 7.49%), Reliance Communications (up 6.90%), IDFC (up 6.64%), Reliance Infrastructure (up 6.50%) and JP Associates (up 5.72%). GAIL (down 3.87%), DLF (down 2.09%), HDFC Bank (down 1.81%), Infosys (down 1.69%) and TCS (down 1.34%) ended at the bottom of the index.
Markets in Asia settled lower, as concerns about the economic growth in the US and Europe weighed on sentiments. Banking major Goldman Sachs has cut its US growth forecast for the second half of 2011 to 1%-1.5%, as it sees the economy "losing further momentum".
European Central Bank governing council member Ewald Nowotny was concerned that Eurozone members may not push through parliamentary approval of changes to their EFSF bailout fund as quickly as planned, keeping the region under pressure.
The Shanghai Composite fell by 0.73%, the Jakarta Composite shed 0.08%, the KLSE Composite declined by 0.80%, the Nikkei 225 tanked 1.04%, the Straits Times lost 0.07%, the Seoul Composite tumbled 1.96% and the Taiwan Weighted fell by 0.41%. Bucking the trend, the Hang Seng gained 0.45%.
Back home, on Friday, foreign institutional investors were net sellers of stocks worth Rs902.61 crore. On the other hand, domestic institutional investors were net buyers of equities worth Rs423.25 crore.
Telecom operator Bharti Airtel today said it sees significant potential for an upside in average revenue per user (ARPU), a key metric for telecom carriers, on account of rapid growth in consumption of value-added services (VAS) and the use of mobile internet. For the quarter ended 30 June 2011, monthly ARPU from Bharti's Indian operations fell by 12% to Rs 190 for the quarter. The stock ended 2.68% higher at Rs393.95 on the NSE.
Jindal Steel & Power has raised $475 million through the takeout financing route, to part finance expansion plans overseas. The company has raised the loan at 225 basis points over LIBOR, for a tenure of five years, with 10 banks participating in the transaction. The banks include Standard Chartered, DBS, Citibank, Bank of Tokyo Mitsubishi, Mizuho, Barclays, RBS, ANZ, Credit Agricole and JP Morgan. The stock closed at Rs502.60 on the NSE, up 3.69% over its previous close.
Reliance Industries is likely to close its $7.2 billion deal to sell its stake in 21 oil and gas blocks to UK's BP plc in the next 7-10 days. With the government formally communicating its approval for sale of 30% stake in the 21 blocks, the closing documents are likely to be signed before month-end, sources in the know of the development said. The blue-chip stock gained 3.73% to close at Rs759.85 on the NSE.
Some citizens are disturbed that Team Anna will not listen to other viewpoints on a strong anti-corruption law. There is also concern about who a powerful Lokpal will be accountable to
While Anna Hazare's call for strong ombudsmen against corruption has gone from strength to strength, his ultimatum to the government on tabling his Jan Lokpal Bill by 31st August does not seem to have gone down well with many. At the same time, some citizens think that Anna must also consider suggestions offered by other groups and individuals-like Ms Aruna Roy and her group-instead of being rigid about his draft.
The National Campaign for People's Right to Information (NCPRI) activist Ms Roy recently presented an alternate version of the Lokpal Bill, which is quite different from those proposed by the government or Anna Hazare. However, Team Anna has apparently cold-shouldered the proposal.
Noted RTI activist Bhaskar Prabhu says, "Setting aside the NCPRI'sdraft is something I consider erroneous." He has also expressed scepticism over the shape the movement has taken and he thinks that it should go beyond the popular uproar and manifest itself in concrete forms. The idea that corruption will vanish after the Lokpal is set up is too simplistic.
One of the troubling aspects of Anna's Jan Lokpal Bill is the question of accountability. There is confusion about who this immensely powerful body should be answerable to. The NCPRI version has sought to fill up this lacuna. "The Joint Committee was to hear suggestions from all as to how the prime minister or the judiciary should be brought under the Lokpal. They did not hear the NCPRI and so it is NCPRI's right to suggest their deferred version," Mr Prabhu said.
The NCPRI version suggests that there should be three nodal bodies, instead of one. Also, there are suggestions on strengthening the existing bodies, the Judicial Accountability Bill, and something for the protection of whistleblower.
However, Team Anna has been unwilling to accept any changes to its draft or to discuss its contents.
Ms Roy said, "There have been public meetings, but few consultations on the content of the Act in detail. Every critique was attributed to wrong intent and viewed with suspicion and mistrust by the civil society members of the Joint Committee. A critique of the Bill has evoked sharp reactions, and statements have been made that disagreement with the draft was tantamount to promoting corruption. We were baffled by such statements."
EAS Sarma, former power and finance secretary now turned activist says, "It is not an easy task for any one to come up with a fool-proof behemoth of a system that will eliminate corruption. The strength of civil society lies in its ability to sort out its internal differences and develop a healthy consensus."
Some other citizens, too, have voiced there concerns about the Lokpal as envisioned by Team Anna which appears too powerful. Rajaram Bojji, former managing director of the Konkan Railways, said, "If thousands of inspectors of Lokpal, spread out and start descending on every office, even routine work gets dislocated."
He thinks that in most cases vigilance bodies have victimised more innocent people than culprits. The proposed Lokpal with its vast powers can abuse its authority; considering that its functioning will be the same as others. Moreover, the scope of the Lokpal, as suggested, is too broad. In that case, there will be an overload, and cases/files will soon start to pile up like it has happened with the judiciary.
But Hazare's movement condemns the entire system, which many citizens feel is pushing the envelope too far. "We are one nation and it is unfair to treat the entire group of public servants to be useless and dishonest. That includes the politicians. It does not mean we condemn the entire system. We have done well in spite of some bad guys," says Mr Bojji.