SPEECHES(87kb)

Date:Feb06,2015ANewBankingLandscapeforNewIndia

(KeynoteaddressbyShriS.S.Mundra,DeputyGovernor,ReserveBankofIndiaattheMintsAnnualBankingConclave,2015onANewBankingLandscapeforNewIndiaonJanuary29,2015)

Smt.ArundhatiBhattacharya,Chairman,StateBankofIndiaSmt.ChandaKochhar,MDandCEO,ICICIBankLimitedSmt.ShikhaSharma,MD&CEO,AxisBankLimitedShriAdityaPuri,MD,HDFCBankLimitedShriSunilKaushal,RegionalChiefExecutive,India&SouthAsia,StandardCharteredBankasalsootherseniormembersofthebankingandfinancialsectormembersoftheprintandelectronicmedialadiesandgentlemen!

2.Attheoutset,letmethankTamalandtheMintManagementforinvitingmetodeliverthekeynoteaddressattheMintAnnualBankingConclave.Thiseventhasbecomeoneofthemostawaitedeventsonthecalendarofbankers.IlastattendedthiseventasapanelistinJanuary2014whenthetopicforpaneldiscussionwasIndianBanking:ANewBankingLandscapeandthistimeitisenlargedtoANewBankingLandscapeforNewIndia.

3.WhenIsatdowntothinkaboutthethemeoftheConclave,IwonderedwhatisnewaboutIndia.Isitthenewpoliticalregimeandconsequentialpolicychanges?Isitthetagofbeingthenewgrowthleaderintheworldeconomy?IsitamorefinanciallyincludedIndiathatisbeingthoughtaboutorisitadigitalorconnectedIndiathatisnew.Ithinkitisabitofallandbeyond.Weallknowthatpoliticalstabilityisanecessaryprecursortoasustainedeconomicdevelopmentanywhereintheworldandademocraticallyelectedgovernmentwithdecisivemandateiscapableoflaunchingsignificantprogrowthreforms.

DefiningContoursofNewIndia

4.Whatare thedefiningcontoursof thenewIndia?Whatare the themes thatwouldplayoutover thenextdecadeor two?Tomymind, therearesevenkeythemeswhichwoulddefinetheIndianeconomyandIndianbankingsectorinthedaystocome.Theseare:

demography

urbanization

digitization

industrialization

education

inclusionand

globalintegration

Letmeelaborateonafewoftheseingreaterdetailanddelveupontheimpacttheycouldhaveonthebankingsystemgoingforward.

a)Demography

5.MuchhasbeentalkedaboutthedemographicdividendthatIndiapossesses.Atitscurrentpaceofgrowth,theIndianpopulationispredictedtoexceedChinaby2025.Further,whileChinasworkingagepopulationmaypeakaround2015andshrinkforadecadeandahalfthereafter,68%ofIndiapopulationwouldbewithintheworkingagerange(1564)until2030.LifeexpectancyoftheIndianpopulationisalsoslatedtoincreasetoabout70yearsby2030.Whileontheonehandthenumberspresentsustainedopportunityforthebanksintermsofnewstreamofcustomers,italsopresentschallenges.Thesechallengesareintheformofdiversebehavior patterns that customers in different age groups display. The banks would need to continuously foretell the customers preferences and focus theirstrategiesonmeetingthemproactively.

b)Urbanisation

6. India isalsowitnessingagrowing trendofurbanisation.By2030,urbanpopulation isestimated to rise to631mn recordinganannual increaseof2.6%asagainstanannualriseof1.1%intheoverallpopulation.Thiswouldmeanthat41.8%ofthepopulationwouldbelivinginurbanagglomerationsasagainst31%today.While even at that percentage, the urban populationwould be far lower than the global average at 50%presently thiswould open up huge businessopportunitiesforthebanksforcreationofpublicinfrastructure,housing,consumption,educationneedsofcustomersandsoon.

c)Digitization

7.DigitisationisanotherareawhichisbeingpursuedrelentlesslybythenewGovernment.Thereismassivefocusonenhancinginternetpenetrationinthecountrythroughacceleratedbroadbandconnectivity.Theinternetpenetrationhasseenasharpgrowthoverthelastyear,however,theextentof internetpenetrationat20%palesincomparisontootherdevelopingcountrieslikeChina(46%),Brazil(53%)andRussia(59%)letalonethedevelopednationslikeUS,UKandJapanwherethenumberisinexcessof85%.Intheselownumberslietheinherentopportunitiesforthebankingsector.Asthenumberofinternetusersinthecountrygrows,thebankswouldbeabletobetterutilizethismediumasadeliverychannel.Ontheotherhand,themobilepenetrationinthecountryissignificantlyhighataround930.20mnandbeckonsasanopportunitytobetapped.

d)Industrialization

8.ThenewGovernmentsMakeinIndiapitchalsotouchestherightcordsandeffortsareafoottoincreasethepresentlystagnantshareofmanufacturinginGDPtoaround2530%by2025from15%atpresent.Ifthatmaterializes,itwouldmeanadditionof90milliondomesticjobsandattendantcorporateandretailbusinessopportunities.

e)Education

9.Likewise,thereistremendousscopeofimprovingthelevelofeducationinthecountrybystrategicfocusonthefourEsi.e.Expansion,EquityandInclusion,Excellence&Employability.Itwouldentailsignificantchangesinconsumerawareness,needs,demandsandexpectations.

f)FinancialInclusion

10.ThelaunchofthePMJDYschemewithafocusonlinkingeachhouseholdwithabankaccounthasreceivedextremelypositiveresponse.At lastcount,thenumberofaccountsopenedundertheschemehadreached12.14crore.Idontneedtoemphasizetheavenuesthatthisschemehasopenedforthebankers.Moreover,itisjustasteppingstone.Majorpartoftheworkhastocommencenow.

g)GlobalIntegration

11.Thatbringsme to the last themeofgrowingglobal integration,which Ibelieve isalreadyhavingsignificant repercussionson the financialsector.Be it thequantitative easing by the advanced economies and the subsequent withdrawal of it, convertibility of currency, making or breaking of regional alliance ofeconomiesandcurrenciesetc.Therecouldbeotherhithertounforeseendevelopmentstooaffectingtheglobalstructureof finance.LetmehighlighttworecentheadlinesreportedinFinancialTimes:One,thepotentialexclusionofRussiafromtheSWIFTpaymentsystemandtheotheraboutwithdrawalfromcorrespondentbankingrelationships in30 jurisdictionsby threeof theworldsbiggestbanks.Ostensibly, themotivation for thesebanks tosever their tieswith the lenders indevelopingnationshasbeentolimittheriskofbeinghitbyregulatorysanctionsonaccountofbreaches,moneylaunderingandterroristfinance.Eventssuchasthese,thoughhavingtheirorigininspecificjurisdictions,havethepotentialtosignificantlyimpactthebusinessandfinanceelsewhereintheglobe.

12.Underthecircumstances, itwouldbeimportantforthebankstokeeptrackofemergingtrendsandbepreparednotonlytonegotiatethroughtheimminentchallenges,butsimultaneouslybereadytolatchontotheopportunitiesthatpresentthemselves.

Home AboutUs Notifications PressReleases Speeches Publications Statistics

Keyactors/actsintheNewBankingLandscape

13.Letusseewhatwouldbetheimpactofthesethemes/developmentsonthekeyactors/actsinthenewbankinglandscape.

14.Customers,employees,ownersandregulatorscomprisethekeystakeholdersinthebankingsystem.Intheemerginglandscape,thebankswouldhavetocontendwithasetofcustomerswhoaremoreeducated,betterinformedandwellnetworked.Thebanksmayprobablybeforcedtohardselltheirproductsandservicesusingavarietyofmediaacrossthephysicalandthevirtualworld.Asthecomplexityoftheproducts/servicesdemandedbythecustomersincreases,thebankswouldhavetonotonlyfocusonupgradationofskillsetsoftheiremployeesbutalsoontheirretention.AlsothenewcompetitionwouldpotentiallypulldowntheROEsthattheownerscurrentlyenjoyrenderingitdifficulttopersuadefutureinvestorstoputinmorecapitalinthebanks.Incaseofpublicsectorbanks,theownershipstructureitselfmaychangewithGovernmentbringingdownitsstakeinthesebanks.Theywould,thus,alsojointheracetoseekprivatecapital.

15.Aswehavewitnessed, theregulatorsacross theglobehavebeenparticularlyverysevereon failingsof theregulatedentitieson theconsumerprotection,moneylaunderingandfairmarketconductfront.Thisregulatoryactivismisevident inthefrequencyandquantumofpenaltiesleviedonbanksworldwide.Postcrisis,thebanksinUSandEuropealonehavebeenforcedtocoughupapproximately$230bninpenaltiesandlegalcostsofar .Nexttwoyearsarelikelytoseeanother $70 bn being forked out by the banks for the same reasons. These are staggering numbers.We have also seen some enforcement actions in ourjurisdictionbuttheseareprettybenignincomparison.BelievemeIndianregulatorshavebeenrelativelymoretolerantthusfar.Someofyouwhohaveoverseasoperationsarewellawareofthetoughstancethatthehostregulatorsadopt.Bankswouldneedtogearuptofacestricterregulatoryregime.

16.Thenewbankinglandscapewouldimpacttheprocessescurrentlyinvogueinthesector.Letmehighlightsomeoftheseingreaterdetail.

CompetitionandConsolidation

17.Competitionandconsolidationinthesectorisanimpendingdevelopmentthatthebankswouldhavetocontendwithsoonerratherthanlater.Twonewprivatesectorbanksshouldstartoperatingwithinthiscalendaryear.Further,thesmallfinancebanksandpaymentsbanksmightmarktheirpresence,maybe,laterintheyear or by early next year and so. There could be consolidation and mergers between the existing market players. No doubt, the pie is big enough toaccommodate new players and there is plenty of opportunity for the wellorganised and mainstream regulated players to wean away the customers fromunregulatedshadowbankingentities.But,theexistingplayerscanaffordtostayindenialattheirownperil.Wehaveseencompetitiongivingatoughruntothemonopolyplayers.Ithashappenedintheaviationsector,thetelecomsectorandthereisnoreasonwhyitwouldnothappeninthebankingsector.Andbelieveme,thisisnottheendofnewcompetitionforyou.RBIhasbeenindicatingaboutthepossibilitiesofthebanklicensingprocessbeingputontapor introducingmorevarietiesofdifferentiatedbanks.Also,thereisahealthyappetitefromtheforeignbankstoenterthiscountry.

18.Theentryofnewcompetitorsalonewouldnotmeandramaticchangessoon.Bankingisabusinessofscalewhichthenewplayerscannotbuildovernight.Newbankswouldstartsmallandscaleupoveraperiodoftime.Notonlywouldtherebeacompetitionforbusinessbutalsofortalent.Theprocesseswouldbeforcedtobemoreefficient.

Technology

19.Ihavealreadytalkedaboutaparadigmshiftbeingbroughtaboutbytechnologyinthewaythesocialinteractionsaretakingplace.Growingmobileandinternetpenetrationhasopenednewavenuesfortheentrepreneurs.Thisisreflectedinthewaythenewagecustomertransactsherbusiness.Ifalltraditionalbusinesseshavebeen impactedby technology, banking couldnot have remainedunaffected.Asa flipside to itswelldocumented advantages in terms of efficiency andeffectivenessofservicedelivery,technologyhasalsofasttrackedtheprocessofcustomeralienationfirstintheformofATMsandthenintheformofinternetandmobilebanking.Inthissense,bankshavebecomefacelessentities.Thistransitioncallsforachangeinthewaythebanksinteractwithandretaintheircustomers.Iwillshortlyreturntotheexpectationsbuiltaroundtheintegrationoftechnologyinthebankingservicesanditsimpactonthebanks.

RiskManagement

20.RiskManagementinbanksisofthesamevintageasthebanksthemselves.Thebanksareinthebusinessoftakingrisksandhencetheyneedtohaveariskmanagementframeworkinplace.ItsbeenmorethanadecadeandahalfsinceRBIfirstreleasedtheriskmanagementguidelinesforbanksinIndia.But,myownsense is that risk management has been pursued in our banking system more under compliance compulsions and has not been dovetailed in the banksbusinessesprocessesasmuchastheyoughttohavebeen.Asthecomplexityinthefinancialworldgrows,thebankswouldneedtocarefullyconsiderandsettheirriskappetiteafterdulyevaluatingtheircapitallevelasalsotheskillsetsoftheofficialsentrustedwiththemanagementofrisks.

21.AsIsaidbefore, thedefiningelementsof thenewIndiawouldhavefarreaching impactoneachof theactorsandtheacts in thenewbanking landscape.Theseelementswouldinterplayandprovideshapetothenewbankingorder.Itwouldbeinterestingforyoutopickupthese7contours,4actorsand3actsandinterplaythemtobuildprobablebusinessscenarios.Youmaybeamazedtoseetherangeofpossibilitiesandchallenges.Letmenowreturn to thesubjectoftechnology,whichiswidelyperceivedasthebeallandendallofthenewinbanking.

TechnologyAGreatEnabler

22.IwouldbeginbyquotingBrettKing,theauthoroffamousbookBank3.0.

Customersdontusechannelorproducts in isolationofoneanother.Everydaycustomerswould interactwithbanks invariousways.Theymightwiremoneytoathirdparty,visitATMtowithdrawcash,goonlinetochecksalarycredit,payanutilitybill,usetheircreditcardtopurchasesomegoodsfromaretailer,filloutapersonalloanapplicationonline,ringupthecallcentertoseewhattheircreditcardbalanceisorreportalostcard.Moresophisticatedtheyare,theymayalsotradesomestocks,transfersomecashfromtheirEuroA/ctoUSDa/cputupalumpsuminaMutualFundorsignupahomeinsurancepolicyonline.

23.TheabovestatementdenotesthediversesetofbankingapplicationswhichtechnologycansupportInfact,thereisaneedofasinglechannelsolutiontomultipleproductofferings.Itmust,however,berememberedthattechnologyisjustanenablerandnotapanaceaforallills.Most,ifnotall,Indianbankshaveinvested heavily in webbased andmobilebased delivery solutions. Each of these channels is supported by a different vendor and each one uses differenttechnologywhichincreasescomplexityandinvolvescost.Further,technologyiseverevolvingandadoptionofnewtechnologyforstayingcontemporaneousisacostly proposition. Hence, unless we are able to optimally exploit all the capabilities of the technology enabled delivery solutions, we could be looking atunproductiveinvestments.

24.While there isa lotofeuphoriaaround theadoptionofmobilebankingandmobilepayments, themodelhasbeen relatively lesssuccessfulbarringa fewcountrieswheretherightenvironmentalfactorsexisted.Iamtalkinghereaboutthedeliveryoffinancialandpaymentservicesbyusingthemobiledeviceratherthanitsuseasanaccesschannelforinternetbankingetc.IntheIndiancontext,anobjectiveanalysiswouldrevealvariousreasonsforslowadoption.Ontheotherhand,therearetechnicalissuesliketypeofhandsets,varietyofoperatingsystems,encryptionrequirements,interoperableplatformsorthelackofit,absenceofstandardisedcommunicationstructures,difficultyindownloadingapplication,timelaginactivationetc.Thesegetaccentuatedbytheoperationaldifficultiesinonboardingmerchantsandcustomersandcustomerownershipissues.Theinterplayofthesefactorshasstymiedthedeploymentandadoptionofmobilebankingasaneffectiveandwidelyaccepteddeliverychannel. Issuesofcoordinationandcooperationbetweenbanksand telcos, isanotheraspectwhichactsaseitheradriverorabarrier to theadoptionofmobilebanking.These issuesneed tobequickly resolved if themobilehas toserveasan influentialdeliverychannel fordistributingbankingproductsandservicesinIndia.

25.Letmealsohighlightsomeopportunitiesthattechnologythrowsup.TakeforexampletheresultsdisplayedontheGooglesearchpagewhichispersonalized.EachtimeanindividualrunsasearchatGoogle,thewebsitecollatesdetailsofthesitesvisited/linksclickedbythatindividualandloadsmoreofthosewebsiteshis/herfuturesearches.TherearemoreATMtransactionsthansearchesontheGooglewebpageatpresent.However, thekindofpersonalisationGooglehasachievedinitssearcheshasnotbeenattemptedintheareaofadvertisementonATMs..Thiscouldbeanareaforthebanksandtheirsoftwarevendorstoworkoninfuturesoastogeneratefurthersalesleads.

FewQsseekingAs

26.Letme leaveyouwithsomequestions that thebankingprofessionand thebankerswouldneed to findanswers toensure their relevance in theemerginglandscape.

(i)Can there be a possibility ofaccount number portability on similar lines asmobile number portability?So, if an individual is not happywith the servicereceivedatonebank,hecanpossiblyoptforshiftinghisbankingrelationship,lock,stockandbarreltoanotherbank.Ofcourse,therecouldbeissuesaroundloancontractsetc.but there isno reason tobelieve that suchchallengescannotbesurmountedandpave theway for amassivedisruption in thewaybanking isconductedtoday.

2

(ii)Howlongcanthebankscontinueincreasingtheirretailloanportfolio?Unlesssomemeanstopoolanddistributetheseloanstootherinvestorsinthemarketiscreated,theretaillendingpipelinecangetchockedquitequickly.

(iii) How iscrowd funding going to impact lending business of the banks in future? The amount of funds raised by crowd funding platformsworldwide hasincreasedprogressivelyfrom$1.5bnin2011to$2.7Bnin2012andfurtherto$5.1bnin2013.Ihearsomeofyousayitisnegligibleinvolume.Thepaceofgrowthhowever,isquitefastandcombinedwiththepeertopeerlendingbusinessthiscouldcreatedisruptions,atleastforsomeoftheplayerswhooperateinthesamesegment.

(iv)IfMobileBankingweretosucceed,wouldplasticmoneystillbeneeded?Basicallytherearetwoquestionsrolledinone.First,whethermobilebankingcansucceedandifthatisthecasewhatimplicationswouldithaveforthefutureofATMsandthedebitcardsthathavebeenissuedbybanks.Thereisjustifiablyagrowingneedforreducingtherelianceplacedoncashbythesystemandhence,ifmoreandmorepeoplemovedtomobile/internetbasedpayments,theplasticcardsandtheinvestmentsmadethusfar,wouldberendereduselessunlessputtomoreimaginativeuses.

(v)WhatIFRSimplementationwouldmeanforthebankingsystem?IFRSaccountingcouldpotentiallyoverstateassetsoroverstatecapitalposition.ThequestionishowprudentialregulationwouldexistalongsideIFRS?ProposedimpairmentcalculationsunderIFRS,accountingforinterestincomeonEffectiveInterestRatebasisandpresenceofmultiplesystemsforoperationsandaccountingofdifferentportfolioswouldmeanthatITsystemswouldhavetobeupgraded/realignedforIFRSmigration.Bankswouldalsoneedtoovercomechallengesaroundconvergingpoliciesforfinancialaccountingandtaxaccountingforpreparationoffinancialstatements.Thebankswouldneedtotraintheirstaffinvariousdepartmentslikecredit,andtreasury,etc.foracquiringproficiencyinIFRSaccounting.

(vi)Wouldthelargecorporatescontinuetoborrowfromthebanks?Oflate,theglobalmarkets,particularlytheemergingmarketeconomies,havebeenflushwithfundsflowinginonaccountofvariantsofQEslaunchedbytheCentralBanksintheAdvancedEconomies.Manylargecorporatehouseshavebeenabletoaccessfundsatverycheaprateswithoutneedingtoreachouttobanks.ThesustaineddeflationarytrendsintheEuroAreaandJapanportendfurtherboutsofQEswhichcanadversely impact the lendingbusinessofbanks in theemergingmarkets.Further, the largecorporates indevelopedcountriesnormallyaccessfinancialmarketsdirectly for their funding requirements rather thancommercialbanks.Hence,evenwhile this timespecificeventofQEsmight fadeaway, asIndianeconomyandthefinancialmarketsmature,moreandmorelargecorporatescouldstartbypassingbanksfortheirfundingrequirements.

(vii)Wouldthepainfromtheloansrestructuredearlierreturntohauntthebanks?Myunderstandingisthattheprolongedglobaleconomicslowdownmighthavethrownoff theprojectionsmadeearlierat thetimeofrestructuringtheadvances inthe immediateaftermathof thecrisis.As themoratoriumperiodcomestoaclose,thebankswouldneedtotakeahardlookatthetechnocommercialviabilityoftheseprojectsandtakethelosseswherevertheviabilityseemsinjeopardy.Timelydecisions,includingforrecall/recoveryoftheloan,whereverthefinancialprospectsareunviable,wouldbecritical.

Conclusion

27.Before I conclude, letmealso give a perspective on the global regulatory reformsandhow itmight impact the Indian banks. Basel III norms have beenannouncedandsettobeimplementedaspertheindicatedtimeline,withtheliquidityregimealreadykickinginfromJanuary1,2015.Soyouarewellversedwiththenewregulatoryphrasesleverage,capitalconservationbuffers,countercyclicalcapitalbuffersetc.TheDSIBsguidelineshavealsobeenannouncedandthelistofbanksconsideredsystemicallyimportantinthedomesticcontextwouldbeunveiledinAugust2015.Besides,beingsubjectedtostrictercapitalandliquiditybuffers,thesebanksmayalsobenudgedtopreparedetailedrecoveryandresolutionplans.NegotiationsarealsoonattheFinancialStabilityBoardlevelforimplementationofaTLAC(TotalLossAbsorbencyCapital)frameworkforthebanksidentifiedasGSIBs.Theessenceofalltheabovediscussionisthatthebankswouldneedtosubstantiallyaugmenttheircapitalbasestostayinthebusiness.Thequestioniswheredoyoufindsuchcapital?

28.IhavecoveredmuchbroaderlandscapethanIhadoriginallyintendedto.Ibelievetheelitepanelgatheredheretodaywoulddeliberateontheissuesraisedandalsoreflectonthemlater.IonceagainthankMintforinvitingmeandwishyouallafruitfuldeliberation.

Thankyou!

KeynoteaddressbyShri.S.S.Mundra,DeputyGovernor,ReserveBankofIndiaattheMintsAnnualBankingConclave,2015onANewBankingLandscapeforNewIndiaonJanuary29,2015.

http://www.irishtimes.com/business/financialservices/useuropeanbankshavepaid230bninlegalcostssince20091.2064163

1

2