THE COMING YEAR PRESENTS BOTH OPPORTUNITIES AS WELL AS CHALLENGES FOR THE BANKING SECTOR

THE RECOVERY & AFTER

 ET SPEAKS TO A FEW BANK CHIEFS TO UNDERSTAND THEIR CONCERNS AND RESOLUTIONS FOR 2010. Inflation, consolidation & credit offtake pose biggest challenges

    FOR Indian bankers, the pain from the global financial crisis — which was unveiled with the collapse of US investment bank Lehman last September — was rather short-lived. And, it was business as usual within months as the Indian economic recovery got underway early this year. With the crisis having given way to opportunity, ET's Sangita Mehta caught up with a cross-section of bankers, economists and analysts to get their take on what could derail this growth momentum. 
While the unanimous feeling points to the economy having put the worst behind it, most bankers view inflation, credit offtake and consolidation in the banking space as the three biggest challenges in the new year. Almost all public sector banks plan to leverage their newly-formed information technology platforms to offer new products and reduce overall cost. Banks are also expected to play an important role in the launch of UID (unique identification number) project. Furthermore, the new year will be one in which mobile banking is set to take off. 
On the subject of inflation, most bankers expect the headline number to rise beyond 6.5% as pegged by RBI for FY10. Rising inflation will see banks raising their deposit rates, which translates into increased cost of funds. Banks are expected to tackle this issue by raising their lending rates. But, this may not actually work out as desired if corporates resort to raising funds from alternative sources such as equity issuances, qualified institutional placements or overseas borrowing. Tapping alternative avenues to meet their fund requirements could put pressure on banks' net interest margins — the difference between interest earned on lending and that paid on deposits — and therefore affect their bottomlines. Rising rates will also hurt banks' treasury income as the price of government bonds, which they hold and trade in, goes down when interest rates rise, leading to trading losses. 
The second challenge will be to ensure credit growth. In the fiscal year-to-date, bank credit has grown just 5.2%, or half the rate of growth witnessed in the year-ago period. Bankers will have to go out of their cubicles to sell loans, if they have to increase business volume. The best possible approach would be to tap the financially excluded (those who do not rely on banks for funding their business), located mostly in rural India, where money lenders charge as much 30-40% interest on loans and borrowers are game for such loans only because they get them when they are needed the most and without the hassles of paperwork. 
The third-biggest worry is that of consolidation. Small-sized PSU bank officials are worried about losing their jobs and identities if their banks get taken over by larger banks. Big banks are worried if they will succeed in persuading not just the smaller banks' managements but other stakeholders such as unions, regulators and political parties for a merger. Private banks are worried about competition from their public sector peers in the light of consolidation.

MV NAIR CMD, UNION BANK OF INDIA & CHAIRMAN OF INDIA BANKS' ASSOCIATION 
CONCERN 

• Ability to get on board all stakeholders — government lo authorities, banks, payment gateway, mobile companie and build infrastructure to facilitate financial inclusion. 

• Ability to get consensus from all the stakeholders for consolidation in banking sector, which will require pursuing all stakeholders. 
RESOLUTION 

• Banks should make financial inclusion the mantra for sustaining equitable growth. It will propel faster growth, which can act as deterrent against social unrest and promote growth at the lowest level. 

• As more and more companies go overseas through M&A or direct investments, it will require huge funding from banking sector. Resolution would be to create 4-5 large-sized banks.

NEERAJ SWAROOP CHIEF EXECUTIVE, SOUTH ASIA REGION, STANDARD CHARTERED 
CONCERN 

• Challenges will be to manage high growth — manage talent and infrastructure support — and ensuring that right controls are in place. 
RESOLUTION 

• One of my key priorities is to deepen Standard Chartered's franchise further by strengthening our client focus across businesses, and enhancing our product capabilities (especially, equity products to be added in 2010). Standard Chartered Plc's proposed listing in India will reinforce our 151 years of presence here. 

• Another priority is our people. Standard Chartered must remain a workplace of choice, welcoming diversity and providing opportunities for growth. Finally, being committed to the community and to financial inclusion have become more urgent, and we will continue with our efforts.

SHIKHA SHARMA MANAGING DIRECTOR, AXIS BANK 
CONCERN 

• Although the global economy may see its ups and downs, India is on a very strong wicket and we should see a growth in the range of 8%. This growth will be over multiple decades. The only concerns are geopolitical risks and environmental disasters, and India is susceptible to both. 
RESOLUTION 

• Given the context of concerns, we want to make a difference by promoting financial inclusion and incentivising greener projects even as we stay focused on profitability.

SA BHAT CMD, INDIAN OVERSEAS BANK 
CONCERN 

• Even as global crisis is behind us, the biggest concern now is how the recovery shapes up. My biggest worry is that it may be a W-shape recovery instead of U or V. And if it is actually W-shape, then it's a nightmare.RESOLUTION 

• There's a need to keep a constant watch on bad loans and stressed assets and ensure that these numbers don't increase. 

• Secondly, the bank will be seeing huge attrition in next two years so we would like to groom the younger generation to take on higher responsibility in order to replace senior management.

TY PRABHU CMD, ORIENTAL BANK OF COMMERCE 
CONCERN 

• Managing asset liability mismatches will be a concern. This is specially so given that there is a huge demand for long-term loans from infrastructure firms while most depositors are parking money for maturity less than three years. 

• Protecting spreads will be another challenge since it is just around 2.2% for us. RESOLUTION 

• Our share of low-cost deposits — what is popularly known as CASA — is only 23% and we have to strive to increase this. 

• We will focus on lending to farmers and small and medium-sized companies.

MD MALLYA CMD, BANK OF BARODA 
CONCERN 

• As of now, there is no real concern since we have smoothly navigated through 2009, despite the global meltdown. And now that we are seeing signs of revival, Year 2010 will only be better than last year. 
RESOLUTION 

• To continue to contribute to the economic growth by ensuring that Bank of Baroda (BoB) is able to provide quality customer service at affordable price. 

• To make BoB an institution that every one would like to be associated with — be it shareholders, customers or employees.

AC MAHAJAN CMD, CANARA BANK. 
CONCERN 

• Delinquencies in small-ticket loan is a concern. The second challenge will be to adhere to the new norm on provision coverage ratio that comes into effect in 2010 — which means that for every Rs 100 loan that goes bad, banks will have to set aside Rs 70. 

• If the momentum for M&A picks up in the banking sector, the challenge would be to help this by not only identifying the right bank, but also by pursuing all stakeholders about the merger. 
RESOLUTION 

• To improve customer service, protect margins and increase fee-based business. Also, the bank would like to extend its reach through financial inclusion.

DL RAWAL CMD, DENA BANK 
CONCERN 

• Rate of interest may harden due to high inflation and drying of liquidity in the system, which in turn may increase our cost of funds. This will put pressure on spreads and asset quality. 

• It may be difficult to arrange long-term resources, which is required to fund infrastructure projects. 

• Attrition may pose a problem to PSU banks, which may make it difficult to hire skilled employees.RESOLUTION 

• To add two million customers, make Dena Bank the most preferred bank, increase visibility, extend reach as part of business development and financial-inclusion drive. Use efficient technology-based delivery channels. 

• Focus on leadership development to face emerging challenges regarding human resource management.