By Siddhant Raj Pandey
The financial sector now operates in a more competitive environment than before. In the wake of greater financial deregulation and global financial integration, the biggest challenge before the regulators is of avoiding instability in the financial system.
One of the major areas of development in the past two decades in Nepal has been that of the Banks and Financial Sector. The Nepali banking system has witnessed a series of reforms in the past like deregulation of interest rates, reform measures in public sector banks, albeit unsuccessfully, and increased participation of private sector banks and access to finance. It has also undergone rapid changes, reflecting a number of underlying developments. This trend has created new competitive threats as well as new opportunities
Given the competitive market, banking will, and to a great extent already has, become a process of choice and convenience. The future of banking would be in terms of integration. For example, Banks having a common pin to transact in a strategic alliance in the form of code sharing. Technology will prove to be the differentiator in the short-term, but the dynamic environment will soon lead to its saturation and what ultimately is the key to success is better relationship management.
With growing competition and convergence of services, the customers stand only to benefit. At the same time, emergence of a multitude of complex financial instruments is foreseen in the near future. There will be a need for professionally trained relationship managers. Customer Relations Management (CRM) will be the focus of attention for management. The success (or failure) of any bank would depend not only on tapping the untapped customer base but also on the effectiveness in retaining the existing base.
Stringent regulatory directions and guidelines will be the norm. Guidelines may be issued for risk management, asset classification, and provisioning. Technology has made tremendous impact in banking. Any Branch Banking System (ABBS) and Anywhere Banking have become prolific. The financial sector now operates in a more competitive environment than before. In the wake of greater financial deregulation and global financial integration, the biggest challenge before the regulators is of avoiding instability in the financial system.
RISK MANAGEMENT AND BASEL II
The future of banking will undoubtedly rest on risk management dynamics. Only those banks that have efficient risk management system will survive in the market in the long run. The effective management of credit risk is a critical component of comprehensive risk management essential for long-term success of a banking institution.
Although capital serves the purpose of meeting unexpected losses, capital is not a substitute for inadequate decontrol or risk management systems. Coming years will witness banks striving to create sound internal control or risk management processes.
With the focus on regulation and risk management in the Basel II framework gaining prominence, the post-Basel II era will belong to the banks that manage their risks effectively. The banks with proper risk management systems would not only gain competitive advantage by way of lower regulatory capital charge, but would also add value to the shareholders and other stakeholders by properly pricing their services, adequate provisioning and maintaining a robust financial structure.
CONSOLIDATION
Consolidation, which has been the recent issue, will be entertained further in the future. Mergers and Acquisitions are expected to add value, which would be reflected in terms of greater breadth of products, depth in delivery channels and efficiency in operations. However, there will be resistance and the process will be slow.
The Benefits of Consolidation:
1) Economy of scale
2) Basel-II will require additional capital.
3) Risk mitigation due to diversification of the merging banks.
TECHNOLOGY
There is an imperative need for not mere technology upgradation but also its integration with the general way of functioning of banks to give them an edge in respect of services provided to their constituents, better housekeeping, optimizing the use of funds and building up of MIS for decision making, better management of assets and liabilities and the risks assumed which in turn have a direct impact on the balance sheets of banks as a whole. Technology has demonstrated potential to change methods of marketing, advertising, designing, pricing and distributing financial products and services and cost savings in the form of an electronic, self-service product delivery channel. These challenges call for a new, more dynamic, aggressive and challenging work culture to meet the demands of customer relationships, product differentiation, brand values, reputation, corporate governance and regulatory prescriptions. Technology holds the key to the success of Nepali Banks.
Internet, wireless technology and global straight-through processing have created a paradigm shift in the banking industry. The explosive growth of both the Internet and mobile and wireless technology is revolutionizing the way the financial industry conducts business. The overall wireless technology market is expected to grow profoundly in the coming years.
The regulatory environment will be more stringent in the coming months. Self Regulation of the Banks will be expected and the central bank will have to show maturity and enhance its supervisory capacity.
There will continue to be swifter turnover of personnel in banks. But at the same time, skilled personnel from other disciplines will enter banks in increasing numbers.
Factors like skills, attitudes and knowledge of the human capital play a crucial role in determining the competitiveness of the financial sector. The quality of human resources indicates the ability of banks to deliver value to customers. Capital and technology are replicable but not the human capital which needs to be treated as a highly valuable resource for achieving that competitive edge.
The challenges will continue to be competition due to limited market, retention of customers and unless volume is increased the possibility of profitability due to shrinking margin will be limiting.
In order to counter these challenges it is important to have a well equipped R&D department with a focus on region specific campaigns rather than national media campaigns. The future will also depend on strategic partnerships with local financial institutions in the rural sector for market penetration.
CONCLUSION
It is increasingly evident that the economy offers opportunities but no security! Therefore, the future will belong to those who develop good internal controls, checks and balances and a sound market strategy along with investment in talent.
(Pandey is the Chief Executive Officer of Ace Development Bank Limited. This article is based on his presentation at a programme organised during the Money Expo 2011 held at Kathmandu early September 2011)
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