Resourceful small banks: Operational soundness a must

Dr BK Mukhopadhyay *

Spiraling prices of essential commodities are currently leading to spurt in food price inflation, fluctuating liquidity in the system alongside lower-than-expected credit off-take, topsy-turvy industrial recovery. Lesser credit off-take continues to crimp the banking industry.

Therefore, the Government has to do a balancing act of sustaining economic growth on the one hand and maintaining price stability on the other hand. Side by side the monetary authority's prime role is to be maintained - steps necessary towards gradually weaning away the economy from its current dependence on accommodative monetary policy and make it market-driven with an aim to prop up growth and arrest inflationary pressure.

These may be the beginning of a reverse trend. The muted growth of credit is likely to be stimulated and buoyancy is restored. The growth of economy is expected to be faster with the increased demand of credit. It is of course commending that the RBI has started to withdraw liquidity and has taken a pragmatic view to exit from the accommodative monetary policy step by step.

The RBI is moving towards monetary tightening slowly and steadily so that growth is not affected. Thus, the inflationary pressure needs to be controlled without affecting the momentum for growth.

For small banks, performance in many of the controllable areas has not also been good so far as the HR Management is concerned, and a huge gap is noticed not to mention the lack of transparency in talent retention, which, in turn, has remained more restricted to paper works only.

Especially for the small banks [in public sector too] the need is there to better operational performances. One of such vital areas has been comparatively high cost-income ratio. The cost-income ratios of some of the small banks are still unfavorable [quite high] compared to the biggies and thus these small banks must improve upon by increasing the business rapidly.

Besides profitability, other vital indicators such as strength and soundness, credit quality, growth and efficiency, betterment of cost-income ratio - one of the top sub-criteria in the arena of profitability - occupies the central place.

Efforts must be on to move towards that direction so that within a reasonable time the ratio becomes nearer to the peer group level.The betterment, in turn, is hinging upon two vital wings - minimization of cost [interest plus operating] and maximization of income [interest plus non-interest].

The first area has been on the rise due to external factors as well as internal factors, while the second area reflects better picture emerged from the segments.

Targeting at better cost-income ratio the Banks have, no doubt, taken a number of positive steps to restrict the growth of operating expenses while at the same time increasing the net interest income as well as non-interest income. Cost-Income ratio is defined as Operating Expenses divided by the sum of interest income and non-interest income less interest expenses.

Cost-Income Ratio =



On this score the focus areas have been: increasing low cost deposits [CASA]; increasing quality lending in Retail, SME, Agricultural sectors; recovery of NPAs through rigorous follow up inclusive of recovery in Written off accounts; restricting avoidable expenses; increasing non-interest income through LC / LG business as well as para-banking activities - these initiatives could help the cost-income ratio to come down steadily.

Though a number of areas are there that registered good growth [include, among others: number of total branches is going up; business under CBS has been 100 percent; number of employees went up along with that of business per employee and that of profit per employee was up, yet there had been a decline in yield of advances.

Major reasons for decline in yield on advances were, among others - reduction of BPLR Lending to low yielding short term loan; increase in non-performingadvances resulting in falling interest earning on advances.

The overall position of the Banksshould reflect that the banking business indicators would be moving north in many areas whereas in number of other areas a fall can be resisted: Cost to income ratio, net interest margin, cost of deposits, cost of funds and return on assets. The NIM position is also to register a satisfactory trend.

The strategic Plan of the Bank should be a realistic and achievable one, which, in turn, could result in lowering the ratio.

To reduce the cost of deposits the Banks have to take a conscious decision to shed high cost bulk deposits. Of late there has also been a decline on this score and this has mainly due to non-renewal of bulk term deposits mobilized at higher rate earlier. Recently revised mode of interest payment on SB also reasonably expects SB to grow by larger volume. Rightly, utmost importance is being placed on boosting the CASA section. Hence fall in deposits cost is reasonably expected.

This, when added to comparatively lesser emphasis on term deposits, will jointly have impact on interest expenses [i.e. interest on deposits plus interest on borrowings]. Side by side, operating expenses on staff has been going up due to payment of arrears plus revised salaries' implementation. Rise in operating expenses other than staff expenses is also having a tendency to go north.

So, the total expenses [interest expenses plus operating expenses] are all set to go up. To counter such cost escalation the steps that are to be actively followed are also worth mentioning on this score: boosting the overall business; intensive recovery drive; curtailment of comparatively avoidable expenses; customer centric approach; full utilization of existing infrastructure; boosting staff productivity / skill up gradation through intensification of the Bank's own training system; quality lending - emphasis on agri / SME lending - better yield on advances; expansion of distribution channel

Merger for merger's sake does not and will not do the needful. Merger-amalgamation process must be goal oriented. The regional rural banks have been merged to form a single entity: has it solved the problem of non-recovery of loans, profitability, employee productivity or best utilisation of manpower?

Simply asking banks to merge does not serve any purpose if the goal itself is not well defined. It remains also a fact that privatization alone cannot solve the poor performing banks problems. Better is to locate the reasons - policy failures, leadership gaps, nepotism, unprofessional approach to the market and the like.

The need is very much there to follow a defensive marketing strategy as well so that the aging building does not suffer from unnoticed pilferage. Boosting a business is not rocket science. Reality is something where one has to keep pace with the changing needs and thus correcting the strategies to be followed.

What is more, one particular strategy is not going to necessarily give lasting success. As the very term strategy is borrowed from military science - the process followed should adhere to the situation warranted. So more effective efforts are to be there to better the overall performance. Banks' pragmatic market-oriented strategic plan could definitely help achieve higher growth targets.