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Topic : Credit risk management in banks
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Credit Risk Management

By : Murali Ramamurthy, Product Manager, Canara Bank
Industry : Banking Functional Area : Business Models
Activity:  13 comments  24628 views  last activity : 03 22 2013 04:04:40 +0000
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Economy decides the progress of a bank.Lets know about some facts:

European banks will have to struggle and face competition from the US banks .The reasons for European Bank's decline is high costs, minimal price competition or innovation, and mediocre customer service.

European banks have to face declining economy.This has led banks to try to boost their performance by cutting costs.But they have to set up long term survival in the market.

Also , the banks cannot become efficient without implementation of technology .But neither technology, nor cost-cutting, nor the disposal of surplus assets will be sufficient to drive long-term growth. The banks need to renew their strategies. And they must start by focusing on organic growth, as opposed to growth through acquisitions.

Buying other banks is a passport to instant growth. But many acquisitions take up too much of top management's time for too long. Customer service tends to be neglected. And so does innovation, although innovation is precisely what is needed for organic growth: new products, new marketing capabilities and customer service skills, etc.

Renewing a strategy also means redesigning it at the international level. In Europe, with a few exceptions, banking is still a national industry. Even banks with a strong foreign presence are hampered by the lack of a clear international strategy. They tend merely to wait for the right moment and seize any opportunity that arises, neglecting strictly strategic considerations. European banks should be asking themselves what countries they can compete in best, what competitive advantages they might have in each country, and how resources and skills can best be transferred from the corporate center to their foreign subsidiaries.

Another key question is how much diversification a bank can tolerate. Currently, the trend is toward universal banks that offer every kind of service to every kind of customer. Yet there are limits to the range of services a single bank can provide efficiently. To date, the performance of some universal banks has been disappointing. Exactly what advantage they have over more specialized banks remains unclear.

The banks need to have a proper structure in their firm but some banks, retain structures that are at odds with their strategy. Their international activities are not consistently integrated. Many banks, for example, are still divided into business units such as "retail banking," "corporate banking," "advisory services," etc., along with an "international division."

Outsourcing and offshoring will play an important role in determining the form banks take in the future.Corporate governance issues pose another serious challenge. The many changes the industry has undergone make it imperative that banks executive committees be equal to that challenge.

There are certain aspects of the business that make banks special. Risk management is one of them. There is great complexity involved in operating in a regulated industry without any protection against competition. Market pressure is a clear threat to established banks. The need to make a profit may drive some of them to pursue unacceptably risky transactions. Banks need executive committees that understand this danger and have the necessary prudence and skill to deal with it.

The  bank's progress also depends on decision like , how much risk should a bank take when lending money to a customer in the hope of earning substantial advisory fees.

Banks also need qualified staff who can handle  sophisticated financial tools, concepts and valuation techniques accessible only to the initiated, and directors must have a very solid background in the business.

 

 

 
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13 comments on "New trends in banking"
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  Commented by  Suryanarayan Murthy, Asst Vice President (Corporate Finance), A Hydro Power Project    | 09 20 2011 08:01:35 +0000
Good insight ! I know a Senior Manager of a Bank who worked really hard to bring down NPAs. He used to work upto 9 pm. Within 6 months he turned the Branch as No.1 Branch and won awards !! 
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