Need To Scale Up Risk Management Levels - Mustaq Ahmed, CMD, Jammu & Kashmir Bank

Risk management in Banks has reached a significant maturity level and various measures are needed to further scale it up to international best practices. The implementation of Risk Based Supervision (RBS), focus on enhancing the human skills in banking industry, risk based audit practices are the areas that shall help in creating an environment sensitive to risk practices.

How will the entry of new banking players change the banking landscape in India? 

The entry of new players will intensify the competition in the banking industry. There will be a surge in new technology-driven products, services and concepts. This will lead to higher service quality standards, competition in interest rates (particularly on savings accounts) and segment specialist banking for attracting or retaining customers.

There will be more competition for highly skilled HR personnel, with banks vying for the extra talent- ed. Looking out for newer markets would provide an impetus to financial inclusion.

What is your take on allowing a hike in FDI in the banking sector?

Well, this will improve the efficiency of the Indian banking system, ensure better capitalisation of banks and propel new technologies and technology-driven offerings further into mainstream banking. It will instill greater competition in the banking system and increase productivity and efficiency.

Are Indian banks adhering to prudential risk management norms followed globally? 

The globalisation of Indian banking has attained a significant level and importance. Day by day, banking transactions, capital requirements, liquidity, credit and other risks are growing in complexity and evolving to get at par with the best banking practices around the world. Indian banks have been aggressive in adopting prudential risk management practices. As India is a member nation of the WTO and a signatory to the Basel Accord, the RBI has been making an active effort to ensure financial health, safety and transparency in the Indian banking system.

What are the further steps we need to take to strengthen our risk management? 

Risk management in banks has reached a significant maturity level and various measures are needed to scale it up further to match international best practices. The implementation of Risk Based Supervision (RBS) a focus on enhancing human skills in the banking industry and risk-based audit practices are the areas that would help in creating an environment sensitive to risk practices. 

An important aspect of these will be improvements needed in data quality. Moreover, as Basel III has raised the bar for capital and liquidity, banks in India will have to use innovative ways to reduce their Risk Weighted Assets (RWAs). This will also mean realigning their asset-liability portfolios and a focus on business areas that consume relatively less capital.

How do you see the interest rate scenario panning out ahead in FY14? 

The recent measures to tighten liquidity to stop the fall in the rupee is certainly going to impact the interest rates, giving it an upward spike in the short term, though going forward the rates are most likely to stabilise. Positive factors like a timely and adequate monsoon and the fact that inflation is within the comfort levels should certainly work in its favour. This tune could go awry only on account of global policy spillover effects, if any.

What are the opportunities and challenges for banking sector players going ahead? 

The greatest opportunities shall emerge from the global aspirations of Indian corporates, the rising middle class (which is estimated to account for one-third of the total Indian population in the next 20 years), the increase in income levels of rural India, the expected surge in micro, small and medium enterprises (MSMEs) which already account for 45 per cent of country’s total industrial output, the immense need for infrastructure development across the country and the emergence of a new generation of tech-savvy customers. All this shall lead to a manifold increase in the demand for retail banking, mortgage loans, wealth management, online banking, forex products, infrastructural credit and so on.

The coming years shall also witness the emergence of some stiff challenges for Indian banks. The entry of new players, both foreign as well as Indian ones, will increase the competition in the already highly competitive industry. We may also see acquisitions of some of the Indian banks by the foreign banks or their subsidiaries.

Maintenance of higher amount and quality of capital, upholding of asset quality, maintaining a competitive edge (particularly in technology), development of a viable solution for financial inclusion and holding on to quality human resources will be some of the major issues confronting the industry.

Do you believe that there is more unlocked potential in the rural sector? What are the specific challenges in the rural areas?

 The rural sector still remains untapped to a large extent. There is a huge opportunity for the formal financial sector to grow, merely by achieving greater outreach and meeting the portion of the demand that is currently being met by informal sources. 

Rural banking, however, presents some unique challenges which need to be tackled. The biggest challenge is the development and implementation of efficient business models to provide banking services profitably in rural areas, particularly the unbanked and underbanked ones. Banks are still pursuing financial inclusion as a regulatory requirement rather than treating it as a business model.
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The Business Correspondent (BC) model is still in the experimental stages and there are various challenges associated with the model. The viability of the BC model has remained a critical issue. Further, most of the accounts opened by BCs have remained non-operational. Technology also remains an issue. Another big challenge is posed by the lack of financial literacy and awareness among the rural populace. Access to financial services and financial education must happen simultaneously to unlock the potential in rural sectors as we have been doing through a network of our Rural Self Employment Training Institutes across the state.

Also, we at J&K Bank see financial inclusion as a mantra for future growth and are actively pursuing it on a mission mode basis.

What kind of potential do you see in the online banking business? 

Online banking is the future of banking. The cost efficiencies that online banking brings to the providers and the convenience it provides to the consumers are going to gradually propel this medium as one of the primary channels of banking. Not surprisingly, we are witnessing a surge in the online banking numbers. However, certain issues with regards to security of this medium and customer confidence still remain, and these need to be addressed. 

What is your outlook on loan book growth for FY14? Which are the sectors that will spearhead this growth?

We have been consistently growing above the industry averages and are confident of continuing on similar lines. For FY 2013-14, we are targeting a growth of 25 per cent in advances. We have a highly diversified credit portfolio and the projected growth is going to be anchored by most of the constituent segments. In particular, we expect housing, business, medium and small enterprises, agriculture, infrastructural projects and export-oriented business to be the major drivers. 

What are your thoughts on value creation for shareholders? 

Value creation means maximising free cash flow in the long term. It should not connate short-term profit maximisation, as otherwise it will fail as an appropriate approach to judge alternative strategies, optimise resource allocation and appraise subsequent performance.

The premise of shareholder value is that if a company builds value, the stock price will eventually follow. The objective is to build value and then let the price reflect that value. 

What are your expectations on how your bank would fare on major financial matrices such as NIM, CASA and NPAs by the end of FY14? 

The Net Interest Margin (NIM) has appreciated to 4.15 per cent in Q1 from 3.84 per cent recorded for the corresponding period of the previous year. Similarly, the Return on Assets (RoA) has increased to 1.89 per cent from 1.68 per cent. So our asset quality is within our expectations. 

At 0.14 per cent, our Net NPA Ratio one of the best in the industry. Our CASA will only get better. So, overall we hope to fare much better on all the key financial matrices.

Online banking is the future of banking. The cost efficiencies that online banking brings to the providers and the convenience it provides to the consumers are going to gradually propel this medium as one of the primary channels of banking. Inevitably, we are witnessing a surge in the number of online banking. However, certain issues with regards to security of this medium and the customer confidence remain which need to be addressed.

What are the corrective measures being taken by the bank to reduce its NPAs? 

In this regard, we work with a dual approach of preventive and curative management. We have framed a risk management policy to ensure sustained growth of a healthy loan book while identifying and managing the risks in all components of credit portfolio. 

The bank uses a set of early warning signals so that prompt corrective measures are taken to a arrest slide, if any, in the asset quality.

Besides, curative measures are used to maximise recoveries through recycling of NPAs. Securitisation and SARFAESI are also being used to effect recoveries. The bank has been regularly introducing One Time Settlement (OTS) schemes, so that the NPA accounts which cannot be revived are settled at the earliest. We also use the mode of Lok Adalats for settlement of NPA cases. The help of DRTs is also enlisted for effective recovery. 

Thus, the bank is proactively mapping its NPAs, and this remains a focus area.

Going ahead, which sector do you think would put pressure on the asset quality? 

How company is handling the demand in these sectors? We feel few sectors may put some pressure on the assets quality which include coal-based power projects, Toll Based Road Projects, Aviation Sector, Solvent Oil Extraction, Shipping, Film production & Commercial Real Estate sectors. Bank has put financing to such projects at low priority. 

However, in case of coal based power projects having credible management & 100 per cent tie-up of coal supply and CRE Developers having satisfactory dealings with the bank, we may consider financing under these sectors.