The exit of two high profile CEOs—Charles Prince of Citi and Stan O’Neal of Merrill Lynch, thanks to an estimated $400- billion global subprime mortgage losses— is a stark reminder as to how a lack of understanding of risk can pose a big problem for the banking sector.
The Indian banking sector can’t afford to stay unconcerned for too long. After all, it does have its own ambitions of going international.In fact, the largest bank in the country—the State Bank of India—has acquired banks in Kenya, Indonesia and Mauritius in the last two years. The secondlargest bank, ICICI Bank, is aggressively creating size to become a bank of global size to tap opportunities in the global marketplace.
There may be little to fear—just yet. A 119-page report titled Indian Banking: Towards Global Best Practices, done by McKinsey & Company on behalf of the Indian Banks Association (IBA), reveals that Indian banks compare favourably against global credit and risk best practices. It also says that Indian banks have done remarkably well so far in increasing shareholder value, allocating capital effectively and also contributing to the country’s GDP growth.
The report, however, points to fostering financial inclusion and managing the high intermediation costs of over 5 per cent (as against 2.9 per cent in the US and 3.4 per cent in China). Take, for instance, Indian urban centres, which today account for 60 per cent of the total saving deposits, despite only 27 per cent of the population residing in urban locations. “There is a need to foster financial inclusion to tap the remaining 73 per cent of the customers fragmented across 650,000 villages in India,” points out the McKinsey report.