For banks is it better to be boring?

Thu, 30 Aug Pre-Open

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Banking has soiled its reputation over the past few years. Banks have been involved in one crisis or scandal after another. The subprime-crisis, LIBOR scandal, Euro crisis, money laundering are all recent examples of the banking sector's avarice. What is worse is that most big bankers walked away with massive bonuses while the shareholders were left with nothing. The situation has reached such levels that a new term has been coined - 'bankster' - a mash-up of the words banker and gangster.

So while things are still messy globally, how are our Indian banks faring? According to HDFC chairman Deepak Parekh, the stability of financial system in India still remains relatively intact despite its boring tag. The 'Basic Banking Model' also referred to as boring banking is the winning strategy for banks in the country. There is enough potential on the retail front for all existing banks as well as new banks as and when fresh licenses are doled out. There is enough business for non-banking financial companies (NBFCs), microfinance companies and other players as well within the system. This is because consumer credit penetration in India is extremely low compared to countries like China, Japan, Singapore and Malaysia.

Indian lenders never had to resort to complex financial engineering or complicated operations unlike their counterparts in the western world. Plus, according to Mr. Parekh, leadership plays an important role in shaping the culture of a bank. But now banks have grown so large that it is tough for CEOs to keep track of what their employees or traders are up to. He probably had the Swiss banking giant, UBS' US$ 2.3 bn trading loss due to unauthorized trades on his mind, when he made this statement. The recommendation of ring-fencing safe retail banking from riskier investment banking is becoming more compelling now at least amongst global regulators.

Thanks to the Reserve Bank of India (RBI), the regulations of the Indian banking system are on firm grounds. Even most restructured loans are not actually stressed because of poor credit quality, but rather due to the current policy uncertainty. The current slump in the investment cycle has taken a toll on the banking sector in the country. However, India's key fundamentals continue to remain robust due to its demographics, job opportunities, rising disposable incomes and high household savings rate. Thus exponential growth is expected till the end of this decade. And banks will reap the benefits of funding this growth by increasing their reach, balance sheet size and services.