Predicting future is a difficult task in these turbulent times but intelligence is not in prediction, it lies in the preparation so that when the future arrives we stay ready and hungry to pounce on it. SCMHRD, with its Banking Conclave 2007 brought together the industry Bigwigs imparting views, opinions and criticism on the burning topics of New Age Banking - Microfinance and Basel-II norms.Banking Conclave Started in 2005 as a platform to discuss the reforms and policies affecting the future of banking, in its second version at the Ballroom of Intercontinental The Grand, Mumbai presented amongst the august forum the repercussions in terms of operational and credit risk due to Basel norms implementation and Micro Financing as the latest buzz word. It was an enlightening flow of ideas and experience on the topics of immediate future importance.
The day started with a welcome address by Prof. K. S. Subramanian, Director of SCMHRD who set the ball rolling by particularly emphasizing on the time of this event, which coincides with the MNC Banks growing bigger, Standard & Poor upgrading India's ratings and corporate India doing well. Hence, Banking is the pillar that would support the growth. Microfinance, on the other hand should change the face of developing nations, as it leads to inclusive growth.
Chief Guest Mr. Pawan Bansal, Minister of State, Finance further emphasized the importance of banking to sustain not just industry but the economy as a whole. Mr. Bansal was particularly happy and encouraged management students to take such initiatives more often. Mr. Bansal also talked about the Self Help Groups (SHGs) and the fact that financial expansion shall lead to social expansion. 42% of population still does not have access to institutional credit. A financial exclusion leads to social exclusion. To sustain microfinance, the cost of capital has to be low. SHGs can not be left in the hands of NGOs alone. Basel – II norms affects the operating risk management and the focus area of the bank shifts with change in socio - economic responsibility.
This was followed by a panel discussion on Micro Finance. The key note speaker for this event was B. D. Narang, Director, NABARD and Ex – Chairman, Oriental Bank of Commerce. He identified that India has the largest pool of manpower which can be turned into entrepreneurs, this condition is further facilitated by high rate of growth of economy. He emphasized the need to look towards the poor as a customer instead of a beneficiary. The effective cost of transaction routed via MFI is still very high.
Ms. Sharma, Head of Microfinance & Sustainable Development (SD) Division of ABN AMRO said that to make the model sustainable we need to reduce the cost by using effective technology. Another point put up in the discussion: Even though Micro Financing may have been successful, it has failed on the principle of universality as the success achieved by Micro Financing Initiatives has invariably been individually driven and the replication of the model at other places has been a failure. So the panel agreed upon developing a robust model which can be replicated. Micro finance is also a dire need of the hour because it can provide a paradigm shift to the socio – economic structure of the society as it hands the economic parity to women in society, which is apart from the vertical divide between the haves and the have-nots.
The discussion on Basel ll was started by Krishnakumar Variar, Director- Risk Solutions & Consulting, CRISIL, who opened the discussion by questioning the need and significance of regulatory compulsions of Basel II norms. It was found that whether banks would have implemented risk systems, may be not, but at whether they should have as a part of best practices definitely, yes.
Basel ll reforms help in implementing a system to reduce operational risks and manage credit risk volatility. Basel ll is a policy which may not directly impact the economy but it is for the survival of the banks in its own. In simple terms, Basel ll proposes that capital needs to be sensitive to risk, hence risk has to be quantified.
The accord directly refers to the need for reduction of operational risks and facilitates the same with standard procedures. Raising the capital adequacy ratio to 12% from 9% increases the safety net towards credit exposure.
The panel reached at the consensus that for a successful implementation we need to build skills for risk management and to institutionalize courses like actuarial sciences to impart knowledge and skill in this domain.
The conclave was concluded with a final word by Mr. Narang further showing a light on the future of banking and gearing up for the roadblocks ahead. He defined operational risk in terms of the aggregation of small mistakes that happen during the course of the normal working of the bank for reasons as simple as not knowing the customer among others.
He also touched upon optimum level for Tier I capital, hit on Bank's balance sheet due to implementation and tax conundrum with respect to operational risk.