Bank Management

MBA
IIMC
Oct – Jan 2020
Praloy Majumder
1
 CEA’s views on banking
• Large parts of the current slowdown is because of problems in the banking
sector. NPAs, risk aversions and decline in corporate lending had an impact on
investment which led to slowing of growth which in turn led to drop in
consumption. This again led to lower investment,”- CEA on July 22nd , 2020
• The government’s Chief Economic Adviser K.V. Subramanian on Sunday said
that India’s banking system is proportionately smaller than the size of the
economy and it needs to grow for the country to become a $5 trillion economy
• More banks will enhance competition in banking and bring down the cost for
consumers
• Laying emphasis on adoption of technology, he said, there is also a need to
focus more on data analytics, artificial intelligence and machine learning as
banking has become more technology driven.
• Citing a study, Subramanian said technology can play a key role in both scale,
and quality of lending.
• By investing in data analytics and technology, it is possible to actually defeat
the nefarious designs of wilful defaulters by using proper data, because there
are enough leading indicators available, he added.- August 23rd 2020
 Comparison of developing and
developed economy
Median value ( Developing Economy Developed Economy
between 2000-
2020)
Vietnam China India Indonesia USA UK
Domestic credit 95.82% 125.04% 48.94% 36.42% 183.70% 136.47%
to Private Sector (
% of GDP)
Domestic Credit 95.82% 124.96% 48.94% 25.92% 52.12% 136.24%
to Private Sector
by banks ( % of
GDP)
Banks NPL to 2.28% 1.25% 5.12% 2.43% 1.85% 2.38%
total gross loan (
%)
GDP growth rate 6.55% 9.13% 7.23% 5.07% 2.28% 2.23%
( %)
GDP at Current 262 14343 2875 1119 21374 2827
USD ( billion) as 3
on 2019
 Pace of economic
development and bank credit
Phase I Phase II Phase III
( GDP Value from USD 700 ( GDP Value from USD 100 ( GDP Value from USD 3000 billion to
billion to USD 1000 billion ) billion to USD 3000 billion ) USD 6000 billion )
China
Domestic credit to Private 92.53% 111.12% 124.41%
Sector by bank /GDP

Time taken to reach to the 3 7.1 3

next phase ( years)

GDP growth rate 9.58% 10.50% 10.15%

India
Domestic credit to Private 45.63% 50.15% Yet to cross phase II
Sector by bank /GDP

Time taken to reach to the 2.8 13

next phase ( years)

GDP growth rate 7.66% 6.98%

Indonesia
Domestic credit to Private 32.45% ( **37.75%) Yet to cross Phase II Yest to Cross Phase II
Sector by bank /GDP

Time taken to reach to the 7.3

4
next phase ( years)
 RBI Governor’s views on
banking in recent times
• The quality and ingenuity of technology should match our aspirations of acquiring
scale and diversion of business across the globe. The focus of use of technology should
shift from ‘transactions-based’ to ‘business-oriented’. We have a pocket full of
technological tools like big-data, artificial intelligence, machine learning to leverage
upon , in order to be able to compete with the global players in reaping the benefits of
‘creativity’ looming large all over- RBI Governor on August 27,2020
• It is fundamental to reform the culture of governance and risk management systems.
• There will be newer risks with newer business models. Remaining overly risk-averse
may seem to be a measure of self-immunisation; but will be self-defeating as it would
affect the bottom lines adversely. The risk management system should be
sophisticated enough to smell vulnerabilities brewing within the various businesses
well in advance and should be dynamic enough to capture looming risks in sync with
the changes in external environment and best practices.- August 27th , 2020
• Operational risk is the areas of concerns – resulting in frauds , cybersecurity risk –
August 27th 2020

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 Which one is safer ?

Transaction Balance sheet

Based Lending Based Lending

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 NPA level of Banks
• Axis Bank 4.72% ( NPA) ;
• ICICI Bank 5.46% (NPA) ;
• Kotak Mahindra Bank Limited : 2.7% ( NPA)
• Indusind Bank Limited : 2.53%
• HDFC Bank Limited : 1.36%
• Yes Bank Limited : 17.3%
• IDFC Bank Limited : 1.99%
• RBL Bank Limited : 3.45%
• Bandhan Bank Limited : 1.43%

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 NPA level of Banks
• Federal Bank Limited : 2.96%
• Lakshmi Vilas Bank Limited : 25.40%
• Dhanlaxmi Bank : 6.89%
• KVB Bank : 8.34%
• Catholic Syrian Bank : 3.51%

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 NPA level of Banks
• SBI : 5.44%
• BOB : 9.39%
• Canara Bank : 8.84%
• UCO Bank : 14.38%
• CBI : 18.10%
• Indian Bank : 10.90%
• PNB: 14.11%

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 Information asymmetry and delinquency

Quality manpower Use of technology

New generation Private Sector Bank

(NPvSB) : Pre 2014

Standardisation of Better use of

process information

www.disseminare.com

10
 Information asymmetry and credit quality

Public infrastructure of data : Private players did build competitive

Inadequate advantage

Borrowers business model : Not under Borrowers have incentives to repay

threat and margin is adequate loan and take more loan

Lenders capability to judge borrower : NPvSB is able to build up a model for

Huge differentiation selection of borrower in a better way

www.disseminare.com

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 Information asymmetry and credit quality

NEFT and RTGS NACHS UPI

CRILC Credit Bureau RBI lists

MCA, EPFO etc GST News analytics

www.disseminare.com

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 Information asymmetry and credit quality

▪ Increased data sources

▪ Regulatory requirement
▪ Deteriorating of traditional borrower’s position

Reduced advantages derived from information

asymmetry by NPvSB

www.disseminare.com

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 Change in market dynamics and importance of behavioural aspect

Macro-economic business Country specific issues : Recent

environment changes in India

Increased competition Judiciary activism

Softer commodity prices Increased awareness

Change in business model Increased transparency and

compliance

Requirement of increased Government initiative to connect with

efficiency people

Diminishing return in business Reduced forced lending in PSU banks

www.disseminare.com

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 Two important events …..

• 2 G Scam :
• 8 October 2010 : The Supreme Court has asked the Government to respond to CAG report over the irregularities of
Rs 70000 crores scam of allocation of 2G license
• 14 November 2010: A Raja Resigned ;
• 17 November 2010 : Supreme Court slammed the then PM Manmohan Singh’s silence on 2G Scam ;
• 29 November 2010 : Ratan Tata approached Supreme Court over Niira Radia’s tape
• 2 February 2011 : A Raja got arrested
• 9 February 2011 : CBI arrested corporate officials of JV firm between Local company and Abu Dhabi’s Etisalat
• 11 February 2011 : Supreme Court gave special status to the case and allocated the case to a special court and
instructed the arrest of all beneficiaries
• 13 February 2011 : Banks lending to real estate developers could come to grinding halt as two large real estate
companies were found connected with 2 G scam
• 02 February 2012 : Supreme Court ordered the scrapping of 122 telecom licenses
• 02 February 2012 : Indian banks ruled out any major hits on their books of accounts

www.disseminare.com

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 Two important events …..

• Coal Scam :
• July 1992 : Coal blocks allocated to selected entities
• March 2012 : Draft report of CAG accuses stupendous amount of windfall gain by the beneficiaries
• August 2012 : The final report pegged the loss to the exchequer to the tune of Rs 1.76 trillion
• March 2012- October 2012 : Several politicians and businessmen name surfaced in association of coal scam
• September 2012 : The Supreme Court begins monitoring of CBI probe
• March 2013 : The Supreme Court asks CBI director Ranjit Sinha not to share details of its investigations with the
government
• April 2013 : Parliamentary standing committee slams the allocation process. Ranjit Sinha admits of sharing the
information of investigation with the then law minister
• May 2013 : The then law minister Aswini Kumar resigns
• June 2013 : CBI filed FIR against Navin Jindal and Dasari Narayan Rao
• August 2014 : Supreme Court declared allocation of coal block illegal
• September 2014 : Supreme Court cancelled coal block license
www.disseminare.com

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 Change in market dynamics and importance of behavioural aspect

Increased difficulty in Lack of clarity of the

doing business business future

Weak legal enforcement Availability of credit due to

for defaulters increased competition

Increasing propensity to default

www.disseminare.com

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 Change in market dynamics and importance of behavioural aspect

Borrower
behavioural
Increased propensity to aspect would
default change

Borrower’s
financial aspect
would change

Continuous processing of information to track these two aspects

would be key to keep the quality of credit portfolio intact

www.disseminare.com

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 Change in market dynamics and importance of behavioural aspect

• Borrowers are manipulating financial aspect :

• Bankers are looking at financial aspect
• Borrowers cannot manipulate most of the behavioural aspect :
• Behavioural aspect is inherent in nature
• Behavioural aspect can give a fair idea in the borrowers action
• Processing of behavioural signals would help lenders to get a clear idea about the future intention of the
borrower
• Depending on robustness of models , lenders can take appropriate action :
• Restructuring
• Exit
• Enhancement of requirement

www.disseminare.com

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 Impact of liberalisation .....

20200 Public and Private Companies

www.disseminare.com

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 Importance of EWS : Corporate Banking

Category A Professionally managed company : TCS , Infosys , ITC

Category B PSU Undertaking : ONGC , IOC , LICI

Huge Private companies : Reliance Industries Limited ,

Category C
L& T ; Hindustan Zinc

www.disseminare.com

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 Impending danger

Increased
Increased
level of
transparency
digitalisation

Higher
COVID 19
leverage
uncertainty
companies

www.disseminare.com

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 Two impending danger

System driven NPA by

GST E Invoicing
RBI

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 Let us look some of the past events

L&T Infotech bagged CBTD EDPMS system implemented

project in October 2016 in 2014

IDPMS system implemented in IDPMS system implemented in

2016 2016

Raids of GST authorities on 1474 exporters claiming Rs

Exporter in 2019 2000 crores refund go missing

www.disseminare.com

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 Let us look at some of the high profile cases

• REI Agro
• Sterling Biotech
• Gitanjali Jewellers
• Rotomac Industries
• ABC Cotspin
• Nirav Modi
• Geetanjali Jewellers
• Café Coffee Day

www.disseminare.com

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 What is the solution

Company Name 26
Game theory approaches to lending

Lender
L Borrower
W

L
 COVID 19 : Riskiness of different
categories of borrowers
High Higher Highest

Pre COVID 19 Large

MSME Mid corporate Corporate

11.30% NPA 18.70% NPA 19.10% NPA

Riskiness of
Borrowers
Post COVID 19

Highest