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Monday, July 28, 2014

Banking Research -I

The State is undergoing a process of liberalization of markets, privatization of ownership and globalization of the economy. The stress that these changes have caused to the Indian economy during the last five to six years is perhaps more than what has been experienced during the past 50 years put together.
Banking is no exception to this phenomenon. In fact, banking by virtue of its intimate association with the pursuit of wealth by every citizen in one way or the other had to face much of the brunt of these changes. This together with the changing needs and ever-growing expectations of the information-rich customers, fast growing competition from within and outside, ability and the ease with which corporate clients can today move across borders in search of finer interest rates and the resulting threat to the banks’ spreads have simply made banking quite formidable.
It’s not that these structural changes are unique to India for globalization and the technological advances made under computation and communication had changed the very style of management across the globe. World over, managements are re-orchestrating their  management style not on their own volition but because non-linear explosive economic growth is calling for a move away from computations to connections; technology to knowledge; solutions to innovations; value chain to value system; customer satisfaction to customer success; and competition to collaboration. Resultantly, organizations are today looking for knowledge workers who are in the habit of continuous learning and willing to apply their learning to actions.
To stay competitive in an ever changing market scenario, banking leadership has to innovate new ways of managing funds: it has to move away from fixing problems to chasing opportunities; from perfection to creating wealth by imperfectly seeking the unknown; from reengineering to re-creation and from optimization to sensible and deliberate disequilibrium.
All this calls for a corpus of research and analytical work and its easy availability to the leadership so that, they could take well-informed decisions. It is in appreciation of this need to promote research activities on bank-related issues both in academia and banks and to build and document such corpus and make it available to the bank leadership for using such findings as industry benchmarks, an attempt is being made here to present a gist of a select few research papers that address some such critical issues. Let us take a look at  some such  articles that have a relevance to Indian banking scenario:
“Emerging Challenges in Indian Banking” by MG Bhide, A Prasad and Saibal Ghosh maps the banking sector reforms launched in India and their beneficial impact on the overall performance of the banking system during the nineties. It also analyses the current weaknesses of the Indian banks vis-à-vis the reforms launched and highlights the need for supporting reforms in the rest of the financial sector. The authors have evaluated the efficacy of prudential measures introduced by conducting a stress test of credit risk and estimated the loss of interest income to be around Rs. 21.55 bn.  The authors have concluded the study with a caution: “Tread a careful middle path between the excathedra overzeal for intervention and a complacent belief in the ability of the banking system to self-rectify its deficiencies.”
In the recent past, Value at risk model has almost become a standard measure of financial market risk.  But with the increased size and diversified trading accounts at many of the large commercial banks, it is increasingly being felt that VaR models are not structurally capable of accurately measuring the joint distribution of all material market risk factors as well as the relationships between the joint distribution of all material market risk factors  and trading positions. Against this backdrop, Jeremy Berkowitz and james O’ Brien—authors of the article—“How accurate are value at risk models at commercial banks?” have for the first time analyzed the distribution of historical trading P&L and the daily performance of VaR-estimates of six large US banks and found that VaRs are less useful as a measure of actual portfolio risk.
With the adoption of stringent provisioning norms in the banking sector, the concern even among researchers for problem loans has gone up.  The other area of concern is the productive efficiency of banks. Allen N Berger and Robert De Young in their article—“problem loans and cost efficiency in commercial banks” have analyzed the intersection between the problem loan literature and the bank efficiency literature.  Using Grange-causality techniques they have tested four hypotheses regarding the relationships among loan quality, cost efficiency, and bank capital.  Their findings have revealed that the inter-temporal relationships between problem loans and cost efficiency run in both directions. The data suggests that rise in NPAs is usually followed by decreases in measured cost efficiencies, which could probably be due to the increased spending on credit monitoring and enforcement of securities. The data further suggests that bad management practices not only results in excess expenditure but also in poor monitoring practices that eventually lead to increased NPAs. The authors suggest that cost efficiency as an important indicator of future problem loans and problem banks but caution that these are only inferences drawn based on statistical association.
Customer relationship management has almost become a fad in the global marketing scenario. Although, much has been said as to how CRM can improve the performance of business, there are very few set of practical guidelines on how to design and implement CRM successfully. Against this background, Adam Lindgreen and Michael Antioco have addressed this problem by discussing a CRM program that has recently been designed and implemented by an European Bank in their article “Customer Relationship Management; One European Bank’s Experiences”. They have, by employing a case study method, collected empirical evidence to identify as to what constitutes a good CRM practice. The study has also revealed the shortcomings of the CRM programs. 
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