EMERGING TRENDS IN BANKING

A PRESENTATION BY: JAGDISH BUDHIRAJA

CHANGES IN BANKING LANDSCAPE

ADVANCED BANKING SYSTEM IS THE HARBINGER FOR ECONOMIC DEVELOPMENT FROM SPECIALISED INSTITUTIONS TO UNIVERSAL BANKING RISE OF SERVICES SECTOR AND CONSUMERISM, INTEGRATION OF WORLD FINANCIAL MARKETS: LIBERALISATION/ DEREGULATION OF BANKING SECTOR IMPORTANCE OF PRUDENTIAL NORMS & RISK MANAGEMENT FOR STABILITY OF BANKING INSTITUTIONS CONSOLIDATION OF INDIAN BANKS: MERGERS & ACQUISITIONS
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IMPORTANT EMERGING TRENDS

REDESIGNING PRODUCTS TO SUIT THE CHANGING ENVIRONMENT/ CUSTOMER NEEDS SPURT IN OFF BALANCE SHEET EXPOSURES, DERIVATIVES, PLASTIC MONEY PRODUCTS TECHNOLOGY ADVANCEMENT/ INNOVATION & TECHNOLOGY BASED PRODUCTS (ATMs, PLASTIC CARDS, TELEPHONE BANKING, MOBILE BANKING, E-BILL/ TAX PAYMENT, E-FUND TRANSFERS, RTGS/ NEFT, INTERCITY CLEARING, CHEQUE TRUNCATION IMPORTANCE OF MICRO FINANCE: SPREAD OF BANKING UNIVERSE IMPROVEMENT IN DEVELOPMENT FINANCE, IMPROVING ASSET-GDP (31.4% IN 1980 TO 93.3% IN 2008-09 THOUGH STILL LOWER THAN EMERGING ECONOMIES) CREDIT-GDP (19.3% 52.2%), DEPOSIT-GDP (29.8% TO 72%), RATIOS, HIGHER GROWTH OF BANKS/ INSURANCE VIS--VIS GDP (10.6%/ 5.6% IN 1980 TO 15.4%/ 9% IN 2008-09) . KNOWLEDGE MANAGEMENT & BUSINESS PROCESS REENGINEERING BUSINESS CORRESPONDENTS/ FACILITATORS
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FINANCIAL SECTOR REFORMS

PHASE OF RAPID EXPANSION: 70s & 80s, BANK NATIONALISATION PHASE OF DEREGULATION: 90s: NARASIMHAM COMMITTEE RECOMMENDATIONS PHASE OF TECHNOLOGY: 2000 NEW PRUDENTIAL NORMS: MTM, CAPITAL ADEQUACY, PRIVATISATION, LOOSENING GOVT. CONTROL BANKING IN 2010: INTERNATIONAL BENCH MARKING: BASEL ACCORD
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TRENDS IN KEY HEALTH INDICATORS

CAPITALIZATION THROUGH PRIMARY MARKET FROM PUBLIC. CAPITAL ADEQUACY UP TO OVER 15% AS ON 2007-08. NPAs DECLINED FROM 15.7% IN 1997 TO 2.3% IN 2007-08. IMPROVED PROFITABILITY: ROA OF BANKS INCREASED FROM 0.4% IN 1991-92 TO 0.99% IN 2007-08. IMPROVED STAFF PRODUCTIVITY. COMPLIANCE OF KYC/ ANTI MONEY LAUNDERING GUIDELINES FAIR BANKING PRACTICES.E OF DEREGULATION: 90s: NARASIMHAM COMMITTEE RECOMMENDATIONS PHASE OF TECHNOLOGY: 2000 NEW PRUDENTIAL NORMS: MTM, CAPITAL ADEQUACY, PRIVATISATION, LOOSENING GOVT. CONTROL BANKING IN 2010: INTERNATIONAL BENCH MARKING: BASEL ACCORD
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UNIVERSAL BANKING
RECOMMENDED BY NARASIMHAM & KHAN COMMITTEES UNIVERSAL BANKING REFERS TO PROVISION OF ALL FINANCIAL SERVICES UNDER ONE UMBRELLA FINANCIAL SERVICES INCLUDE: MUTUAL FUNDS, BANCASSURANCE, UNDERWRITING, BROKERAGE, LONG TERM INDUSTRIAL LOANS, ADVISORY SERVICES. MODELS ADOPTED: HOLDING COMPANY, SUBSIDIARY COMPANY, JOINT VENTURE BENEFITS: IMPROVEMENT IN PRODUCTIVITY & PROFITABILITY
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MICRO FINANCING
MICRO FINANCE IS A SET OF SERVICES COMPRISING THE FOLLOWING ACTIVITIES; MICRO CREDIT: SMALL LOANS INCLUDING LOANS FOR CONSUMPTION NEEDS MICRO SAVINGS: THRIFT & SMALL SAVINGS FROM BORROWERS OWN RESOURCES ADVANTAGES OF MICRO FINANCE: EMPOWERMENT OF THE POOREST PROMOTING SELF EMPLOYMENT A TOOL FOR SOCIAL CHANGE INVOLVEMENT OF NGOs AT GRASSROOTS
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1. 2. 3. 4.

CONSOLIDATION OF INDIAN BANKS

IMPORTANCE OF MERGERS/ ACQUISITIONS: ECONOMIES OF SCALE RISK DIVERSIFICATION STRENGTH OF SIZE FINANCIAL STABILITY DIFFICULTIES IN M & A: NO UNIFORMITY ON TECHNOLOGY FRONT PROBLEMS IN HRD MATTERS; LABOUR UNIONS SKILL DEVELOPMENT: TRAINING OF STAFF LEGAL HASSLES
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BANCASSURANCE IN INDIA
BANCASSURANCE IS THE CONCEPT OF DISTRIBUTION OF INSURANCE PRODUCTS THROUGH BANK BRANCHES. BANKS HAVE OVER 65000 BRANCHES IN UNDIA AND 65% OF HOUSEHOLD SAVINGS ARE ROUTED THROUGH BANKING CHANNELS. THERE IS A VAST UNTAPPED MARKET FOR INSURANCE PRODUCTS HUGE POOL OF SKILLED PROFESSIONALS CREDIBILITY OF BANK AS SERVICE PROVIDER COMLIMENTARY TO BANKS CORE BUSINESS; IMPROVING PROFITABILITY
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BASEL II
HISTORICAL PERSPECTIVE:

BANK FOR INTERNATIONAL SETTLEMENTS (BIS) ESTD. IN 1930, IN BASEL, SWITZERLAND IS THE WORLDS OLDEST INTERNATIONAL FINANCIAL INSTITUTION BASEL COMMITTEE ON BANKING SUPERVISION (BASEL ACCORD I 1998), BROUGHT OUT GUIDELINES ON CAPITAL CHARGE ON LOANS & ADVANCES BASED ON RISK WEIGHTS. BCBS IS THE THINK TANK FOR BANKING REGULATORS. RBI IS ONE OF THE CORE 16 COUNTRIES THAT WERE CONSULTED FOR DRAFTING CORE PRINCIPALS
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NEED FOR BASEL II NORMS

BASEL II IS THE RECOMMENDATORY FRAMEWORK FOR BANKING SUPERVISION ISSUED IN JUNE 2004. ACCELERATED DEREGULATION OF THE BANKING SECTOR. INCREASED RELIANCE ON TECHNOLOGY/ AUTOMATION CONSOLIDATION IN THE BANKING SECTOR , COMPLEX ORGANIZATION STRUCTURES, FREQUENT REVAMPING OUTSOURCING OF KEY ACTIVITIES BY BANKS. INTRODUCTION OF COMPLEX FINANCIAL PRODUCTS. GLOBALIZATION OF THE BANKING, ACTIVE ACROSS NATIONAL BOUNDARIES.

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BASEL II
BASEL II GOVERNS THE CAPITAL ADEQUACY OF BANKS ACROSS THE GLOBE. THE THREE PILLARS OF BASEL II FRAMEWORK ARE: MINIMUM CAPITAL REQUIREMENTS, BASED ON 3 COMPONENTS OF RISK: CREDIT, OPERATIONAL, AND MARKET RISK. SUPERVISORY REVIEW PROCESS THROUGH INTERNAL CAPITAL ASSESSMENT PROCESS (ICAAP) MARKET DISCIPLINE REQUIREMENTS: DISCLOSURE NORMS
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Capital requirement under Basel 2

Pillar 1 requirements
Credit Risk (SA; FIRB; AIRB) Market Risk
(SMA; SDA; IMA)

Operational Risk (BIA; TSA; AMA)

Pillar 2 requirements
Concentration risk Residual risk IRRBB Liquidity risk Operational risk Reputation risk Strategic risk

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BASEL II
BASEL II FRAMEWORK FOR BANKING SUPERVISION PILLAR 1: CAPITAL REQUIREMENT OF A BANK IN RELATION TO CREDIT RISK UNLIKE BASEL 1 ONE SIZE FITS ALL. STANDARDIZED APPROACH INTRNAL RATINGS BASED APPROACH, SECURITIZATION FRAMEWORK METHODS. IT SETS OUT CAPITAL REQUIREMENT FOR OPERATIONAL RISK AND MARKET RISK ALSO. PILLAR 2 : ADEQUACY OF CAPITALIZATION LEVELS ON THE BASIS OF THE BANKS OWN RISK MGT SYSTEMS AND PROFILE OF CAPITAL. PILLAR 3 : FRAMEWORK FOR IMPROVEMENT OF DISCLOSURE STANDARDS FOR FINANCIAL REPORTING, RISK MANAGEMENT ASSET QUALITY, REGULATORY SANCTIONS THAT THE SUPERVISORS CAN TAKE.
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UPDATES TO BASEL II
REVISED FRAMEWORK UPDATED IN NOVEMBER 2005 TO INCLUDE TRADING ACTIVITIES AND TREATMENT OF DOUBLE DEFAULT EFFECTS COMPREHENSIVE REVISED FRAMEWORK IN JUNE 2006 TO INCORPORATE CONSTITUENTS OF CAPITAL AND 1996 AMENDMENT REGARDING MARKET RISK

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THANK YOU
A PRESENTATION BY: JAGDISH BUDHIRAJA

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