'Banks will have to be careful about operational risks'

BEYOND BASEL I NORMS

The banking sector, in the last decade, has undergone dramatic transformation both in scope and content. The pace of reforms in the banking sector has not been witnessed in any other sector in the country.

The sector has come a long way from being a sleepy business to a highly proactive and dynamic entity. New distribution channels like ATMs, internet banking, and mobile banking are not only helping banks in acquiring new customers but have reduced their operating expenses significantly.

The deregulation of interest rates, grant of functional autonomy to banks in the area of credit, emergence of new private banks and entry of foreign banks has made the banking environment more competitive.

In an interview with Business Standard, professor T S Rama Krishna Rao of the Institute of Chartered Financial Analysts of India (ICFAI) University, talks about the current scenario in the industry. Excerpts.

What do you think of the present scenario in the country's banking sector?

The banking industry over the last decade has seen a lot of change in every department be it in the asset management, the recovery of non-performing assets or other departments. But then banks have to be cautious about the new Basel II norms, which would be implemented by the end of 2006.

How do you see Basel II norms affecting the working of the sector?

Once Basel II replaces the existing Basel I, the requirements of capital and risks will increase.

For example, banks till now were concentrating on credit and market risks but once Basel II is implemented, banks will have to be careful about operational risks "� a factor which the banking industry has not yet understood. Apart from the above, the industry would also face challenges from the regulator and the customers.

Apart from these, what are the other challenges that beckon the industry?

Banks would also have to cope with the challenges regarding infrastructure. It would also be interesting to see how banks would finance the requirements of services sector.

For example, the tourism sector requires financing to the tune of Rs 3 lakh crore, which has to be raised through financial institutions and by other means. This would be a great opportunity for the banks to improve on their asset growth.

How do you see the new norms that are being implemented affecting the sector?

The banking industry is flush with funds. A big amount lot of funds are invested in government securities would be diverted towards the cash reserve ratio (CRR) requirements. So it would not affect the banks in a big way.

The present government has a mandate to see that the sector expands. Over a period of time, maybe by around 2010, the government would like to have only a 33 per cent stake in banks. And over the next five years, one would see a lot of mergers and acquisitions.

Weak banks will not be able to survive once the new norms come into existence and the only alternative they would have is to merge themselves with stronger banks.

Over a period of time, what the Narshimhan Committee II recommended that ideally only three or four national banks should have a global presence, will become a reality.

Would banks go in for more professional recruitment rather than following the conventional way?

One step towards this is that the Banking Service Recruitment Boards (BSRB) have been dismantled and henceforth all the recruitments would be done through banks and not through a central agency.

And once Basel II is implemented banks will need people with experience in areas like treasury management, export-import management, investment banking, wealth management and other specialties. Reorganisation of manpower in banks would also lead to new opportunities being created.

What is the shortfall in manpower that the industry is currently facing?

As of now, looking at the pace at which the retail banking is growing, the job requirements would be around 30,000 to 40,000 across the industry this year, and a big chunk of it, may be around 10,000 jobs, would be created in the five new private sector banks.

Colleges offering various courses in related fields would also have electives to deal with banking-related aspects to cater to the changing trends.

Banks are cutting down on the strength and going for more computerisation. So how do you think there would be new employment opportunities created in this sector?

First, the reorganisation of manpower will create new opportunities and second, expansion that is happening across the sectors will create new opportunities.

Certain areas require a lot of manpower. For example retail banking would require a lot of marketing people, servicing personnel and people to look after the recovery. So there will be employment opportunities.

How would the co-operative banks fair, once the new norms are in place?

The biggest problem that the co-operative banks face today is of double regulation. Both the Reserve Bank of India and the state government regulate them. And being a close industry with exposures being limited to few baskets, the biggest challenge that they face today is regarding sourcing of funds.

However, with declining interest rates their economics do not work out. Finally, like the other banks, only those, which are well-placed, will survive.