The Biggest challenge facing the sector is the availability of quality assets

The biggest challenge facing the banking sector is the availability of quality assets. The gross non-performing assets (NPAs) of the public sector banks increased to Rs 54,773 crore on March 2001 from Rs 53,033 crore on March 2000, of the private sector banks from Rs 4,761 crore from Rs 6,039 crore and foreign banks from Rs 2,614 crore to Rs 3,071 crore as on March 2001 There are several facets to this. Is the term quality of asset well established within the sector? Is the leadership group in a bank in a position to articulate the quality of assets it plans to procure and manage? Is it a measure driven articulation or qualitative statement? Is that communication understood commonly?

Let us address these under three broad initiatives. The first and foremost is that Indian banking will have to embrace the sophisticated risk management practices. Thereafter, it will have to address the aspect of risk-based pricing and that of capital requirements for banks.

This past June, the bank regulators on the Basel Committee on Banking Supervision postponed the deadline for finalising a new version of the 1988 Capital Accord, to provide the basis of determining capital adequacy. The Committee now plans to issue a new draft in early 2002 and finalise it during that year. The current draft threatens to put an undue capital burden on banks.

This should not discourage Indian banking from embracing more sophisticated credit-risk management practices.

Thanks to the regulators and a docile industry, we have a very rigid approach to reconstruction. There has been a fairly long debate and discussion on asset reconstruction funds or companies, and we continue to be wiser on the subject by the day. There is very little action though.

We need reforms in the sector in the areas of financial instruments essential for reconstruction, as well as the institutions to develop these instruments.

It is generally observed that public sector banking is not very competent to plan and manage revenues. There are several practices that need a close look. We need stable and long-term leadership in these banks to ensure sustained performance. There is also a need for these banks to examine its resource utilisation. These banks possess substantial branch network and manpower. Are these utilised effectively? Why do these banks underutilise technology? Why are they slow to identify opportunities that arise from the substantial resource base? Their fee income, compared to total income, can be improved if they can be efficient in their transaction conduct, and they can cross-sell third party products.

The foreign and new private sector banks are very mindful of the inefficiencies in the public sector banking. They manage their fee-based income far more aggressively. We see them participating in the distribution of insurance and mutual funds products effectively. Some of the progressive players have identified process outsourcing and shared services as a sunrise opportunity.

The banking sector has an uphill task considering the challenges it is facing. The gap between thinking and debating the solutions and the implementation of these is widening. This will erode the viability and the economic value of the business.