Sustainability of Indian Banking

Riyaz Ahmed Bhat
After surfacing of certain scams in recent times the public perception, with regard to sustainability of Indian banking system has come to focus of public discussion. This has resulted in debating on non issues, of present happenings, by non concerned or non professionals causing misconceptions in the minds of the general population with regard to sustainability of Indian banking against the shocks caused by frauds or scams. Furthermore, the recent introduction of financial Disputes Resolution of Insurance and Banking (FDRIB) bill in the parliament has raised certain concerns in the minds of population regarding security of their deposits with the banks. This is quite natural because Indian Banking Industry has witnessed the failure of a large number of private sector commercial banks in past seven decades. Also the failure in numerous cooperative banking institutions has been a worrying factor for population of lower strata as these banks cater to this major segment of population of country. Hence the passage of FDRIB bill in parliament and its referral to select committee is being closely watched by Indian public as they fear that after failure of any bank they will be bound to lose their money which actually is not the case.  This public perception is posing a serious challenge to the industry and to counter the narrative of public discussion the bank staff along with managements of the Banks has to come forward explaining the things to their clientele and make the things understandable for them. These things include explaining of existing risk management system put in place by the Indian Banks to absorb the shocks caused by market happenings, operational failures or financial calamities on economy and their brunt faced by these banks.
The risk Management system is broadly formulated by the banks, as per their individual needs, on the instructions of the regulator, Reserve Bank of India (RBI), to absorb the losses which may occur occasionally due to the said untoward developments.  As far as the formulations of guidelines by RBI are concerned it was in 1997 that first broad parameters were issued by it for individual banks however the well defined mechanism envisaged by The RBI came into existence in 2007 following then a newly formulated concept of risk mitigation, to counter the precipitation of losses due to untoward happenings, was conceived and made public. In this mechanism the definition of Risk and various contours of its precipitation were elaborated and all types of these risks were addressed by encouraging the individual banks to put in place a framework which now is referred to as risk Management system framework. Understanding this framework we note that every bank is expected to have a well defined division to look after the devolution of future risks and steps to be initiated after precipitation of these risks. Simultaneously the RBI has been upgrading or revising these set of guidelines from time to time in order to have a robust mechanism which should enable the individual banks and banking industry to withstand the shocks provided by sudden booking of losses due to various operational failures or changing market conditions. As per present status of guidelines we can understand this framework by having a compartmentalized approach. First would be understanding the definition of a risk in terms of banking which states that any undesirable occurrence which is quantifiable hence insurable. In banking business the crux of business module lies in borrowing and lending of money hence any undesirable occurrence will result in loss of that money which is always quantified. If the loss is quantified then it can be insured within the bank or with outside player. The present model applicable in Indian banks has visualized the forms of Risk under various categories which include Regulatory risk, Market Risk, Interest rate Risk, credit risk and operational risk. In terms of this mechanism The RBI has devised a set of rules to ask the banks to provide the surplus capital in mitigating these risks as per their requirement. This requirement may be uniform for all the banks in case of some segments like regulatory, Market, Interest and credits risk which involves the risk of change in regulations, market conditions, interest rates and default in loans granted. But regulations for other segments of operational risk are different which deal with surfacing of frauds or losses on account of operational failures like damage to bank property due to fire and rioting, flood or quake or other work hazards, wherein past record of an individual bank dictates the quantum of capital to be kept aside.  Application of these set of regulations have already generated a need of capital infusion in Indian banks which is likely to increase after the revised set of guidelines which will come into force in April 2019 keeping in view international commitments.
The risk management system is an ongoing initiative of RBI to address the problems of Indian Banking system to assure the population which has to completely rely on this industry for their day to day needs like parking, movement or availment of funds for start or expand an economic activity.
The problems of the banks presently include the shaken confidence of its clientele generated after rumor mongering of some so called non concerned drawing room debaters and it is a fact that the population of the country wants the banks, as custodian of their wealth kept with these institutions, to be strong enough so that no loss can endanger their deposits with them. To address this concern it is necessary to clarify that the initiatives of strengthening of banks have come across the globe and various regulators across countries having put their heads together to address the problems. The regulators in USA and other European countries, have been formulating and upgrading set of guidelines with regular intervals. The Indian regulator, RBI, followed its international peers in 2002 on first place and afterwards same was upgraded in 2012. Another upgraded framework is expected to come into force in April 2019. These frameworks are usually referred to as BASEL I, BASEL II and BASEL III Norms.  The main aim of these guidelines and frame work, world over, is to strengthen the banking systems in individual countries and thus making the system of these countries including India compatible to international banking standards. As per their view the enforcing of such regulatory mechanism is going to enhance the reputation of these banking systems making them hard to fail in their operations. In today’s environment such an approach has been deemed necessary to facilitate international trade between the countries besides plugging the gaps ending menace of banking channels being used for unlawful activities of money laundering by fugitives of law.
In light of these observations the view of some commentators that the Indian banking system being fragile, poorly monitored, endangering the wealth of its depositors and weak to withstand the shocks of uneven economic developments is over exaggerated. It is agreeable that there may be some lacunas in the system but the system has its own capacity to overcome these weaknesses and continue its march on path of resurrection and progress.
(The author is Secretary General               Jammu and Kashmir Bank Officers Forum)
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