Results of a survey of top banks by CARE Ratings
The main challenges faced by banks encompass both the prevailing economic and business environment as well as evolving developments of this industry. This is according to a survey of banks taken up by CARE Ratings. The survey results have been summarised below:
(a) Deceleration in economic growth impacting banking sector growth. Quite clearly this is one factor which affects the growth and prospects of this sector. The fact that the Indian economy has slowed down in the last three years is significant here.
(b) Maintaining asset quality in the face of growing NPAs and restructuring of advances. There is a clear link with the overall state of the economy.
(c) Augmenting capital and maintaining prudential capital adequacy in view of the implementation of Basel III.
(d) Preserve and augment profitability of banks in a stressed environment. Banks are witnessing pressure on margins on account of capital requirement, provisioning, regulation, liquidity, volatile interest rates etc.
(e) Achieving desired credit growth in a weak economy.
(f) Implementation of Financial Inclusion & DBT (Direct Benefit Transfer). As the RBI has been reiterating the need for focusing on financial inclusion this factor has become a challenge as it has to be addressed while keeping an eye on capital, quality of assets and profitability.
(g) Increased competition from both within the banking sector with various banks becoming aggressive in the existing space as well as potential competition from new entrants.
(h) Adopting and adapting to technological changes/ innovation to meet regulatory requirements as well as to tap alternative channels in banking
(i) Dealing with technology related frauds and improving risk management systems of banks
(j) Improving quality of human resources for efficient working of banks in view of the latest technological developments.
Banks do expect to see a series of reforms and measures to be implemented by the RBI in the next one year encompassing regulation, financial inclusion, technological focus etc. These have been elaborated upon below:
(a) Stringent norms pertaining to NPAs and restructured assets. The level of NPAs has gone up sharply this year which becomes more worrisome when the restructured assets are also factored in.
(b) Target Consolidation/mergers and entry of new players. This would involve:
- Continuous bank licensing (as has already been voiced by the RBI),
- Conversion of some urban co-operative banks into full-fledged commercial banks,
- Separate licenses for niche/specific banking operations/functions such as wealth management, investment banking, wholesale banking or retail banking. This has been spoken about in some detail by a special Committee set up by RBI on financial inclusion.
(c) Reforms in Corporate debt market, Government Debt Market & Money Market.
(d) Focus on asset – liability management for banks.
(e) Increased Usage of Technology in Banking. Leveraging of technical developments on various banking activities
(f) Focus on Financial Inclusion/Deepening
(g) Introduce measures for the removal of structural bottlenecks on credit delivery and free pricing of financial assets
(h) Bring about transparency and improvement in clearing and settlement practices
(i) Reforms aimed at creating liquidity and depth for efficient price discovery of all banking products
If these expected reforms come into being, bankers expect them to have wide ranging impact. Some of the expected results are:
(a) Norms on NPAs would improve quality of assets & recovery, liquidity and the overall balance sheets of banks.
(b) Consolidation of banks and new players would result in competition and consequently in innovation and efficiency/productivity of banks. It would also bring about economies of scale and economics of scope for banks.
(c) Conversion of some urban cooperative banks into full-fledged commercial banks will help Banks to participate in main stream line of business on lower risk.
(d) Increased usage of technology could lead to technological upgradation and more e-products would be designed. Technology will help sustain and scale business.
(e) Financial deepening would make banking more inclusive, improve geographical coverage, reduce regional imbalances and credit to the unorganized sector would see an increase.
The underlying WPI inflation trend is around 5.5%, with a mix of factors creating volatility around this trend
WPI (wholesale price index) inflation moderated to 4.7% year-on-year in February 2014 from 5.0% in January 2014. The moderation was due to lower input cost (primary + fuel) inflation, while output price inflation (core) rose slightly. On a seasonally adjusted basis, Nomura estimates that WPI inflation rose 0.3% month-on-month in February 2014, which is lower than the six-month average of 0.4%.
Both food and fuel price inflation moderated in February 2014, lowering cost pressures (Figure 1). Food price inflation (primary + manufactured) eased to 5.6% year-on-year from 6.2%, due to lower vegetables, protein-rich food (chicken, egg), tea, edible oil and sugar prices, while a decline in coking coal, electricity (agriculture), turbine fuel and LPG (liquified petroleum gas) prices moderated fuel price inflation. However, output price inflation – as measured by core WPI (manufactured ex-food) – rose marginally to 3.1% from 3%, partly on base effects and higher wood, paper and leather product prices.
Nomura expects both headline and core WPI inflation to accelerate over the next six months – headline WPI inflation above 6% and core WPI around 4%. First, base effects are adverse (Figure 3). Second, Nomura sees risks of higher momentum in food inflation from the unseasonable winter rains, hailstorms across the country and higher probability of El Nino (associated with lower rains) in 2014. Additionally, the rise in soft commodity prices globally over the last two months (led by coffee, sugar, corn) will likely increase input cost pressures in coming months.
In Nomura’s view, the underlying WPI inflation trend is around 5.5%, with a mix of factors (supply shocks, base effects, commodity price changes) creating volatility around this trend.
Following a preliminary enquiry by CBI, four public interest directors of MCX-SX, including Pillai, had expressed their desire to quit the Board
Following the resignation of GK Pillai, MCX Stock Exchange (MCX-SX) on Friday elected Thomas Mathew T as its new chairman and Dr Ashima Goyal as its vice -chairman. In a release, MCX-SX also dismissed reports claiming that several of its board members are likely to put in their resignations.
Earlier in the day, Pillai, the former home secretary, resigned as chairman of MCX-SX, even as the union government and market regulator Securities and Exchange Board of India (SEBI) tried to assuage concerns arising out of the bourse coming under the scanner of Central Bureau of Investigation (CBI).
The resignation came hours ahead of a scheduled board meeting of MCX-SX, where Mathew, the former chairman of Life Insurance Corp of India (LIC), was elected as new chairman and Dr Goyal, professor at the Indira Gandhi Institute of Development Research (IGIDR) as vice chairperson of the Exchange.
SEBI is looking at ways to assuage the concerns of investors, trading members and other stakeholders in MCX-SX, according to senior officials.
Meanwhile, Finance Minister P Chidambaram said he hopes that directors of MCX-SX would act in public interest and that there was an orderly resolution of the crisis.
Soon after a preliminary enquiry (PE) registered by CBI on Thursday into the grant of licence to the exchange way back in 2008 and the subsequent renewals, Pillai and some other ‘public interest directors’ of MCX-SX had expressed their desire to quit.
Surprisingly, the PE has also been registered against SEBI’s former chairman CB Bhave and ex-member KM Abraham, besides MCX-SX promoters Financial Technologies India Ltd (FTIL), and Multi-Commodity Exchange (MCX).
In a release, Saurabh Sarkar, managing director and chief executive of MCX-SX said, "The board meeting was as per the schedule and planned one month in advance. Mr GK Pillai, the outgoing chairman, has played a key role in ring-fencing the exchange at a critical juncture and helped bring stability to the exchange. All other directors continue to be on the board."
The Exchange also announced that FTIL and MCX have been re-classified from the category of "promoter shareholder" to "public shareholder".
MCX-SX management also announced that the ongoing rights issue (in the ratio of 2:1) has received good response and it has received expression of interest from new investors.
MCX-SX has come out with a rights issue to reduce its related companies’ stakes. Financial Technologies and MCX hold 5% each in the Exchange while their total stake has to be brought down to 5% in all, according to SEBI guidelines.
There are apprehensions that the licence of the Exchange, which is already battling low business volumes due to problems at National Spot Exchange Ltd (NSEL), can be cancelled if CBI probe finds something detrimental.
The original promoters of MCX-SX have been issued show-cause notices by regulator SEBI after Commodity markets regulator Forward Markets Commission (FMC) ruled they were not “fit and proper” to run any exchange in the wake of the NSEL fallout.
The exchange was initially granted permission for only a limited segment of currency derivatives in 2008, on the condition its licence would require approval every year.
The PE was registered into the MCX-SX licence matter on a day when CBI carried out raids at various premises of NSEL.