The banking sector is facing tremendous stress. On the one hand there are the repercussions of a global slowdown and the aftermath of the credit crisis. On the other, lies the immense opportunity that India offers. Gunit Chadha, managing director and CEO, India for Deutsche Bank spoke with Akash Joshi of The Financial Express on the emerging scenario and how his bank intends to keep its success going. Excerpts.
Reforms in the banking sector are always spoken about, more so in the current environment. What are your views on the direction of reforms?
Even as we await further banking reforms, an area of immediate focus is financial inclusion. Financial inclusion is imperative as banks, in search for growth, find profitable ways of addressing the rural and less affluent segments, which have traditionally been banked outside the banking system. By partnering with micro-finance institutions and NGOs and aided by suitable technology, banks could integrate remote financial outposts in our country in a cost-efficient manner.
The current business environment also raises several questions for financial services providers. Is universal banking the answer? Should the business model be built around storage or around distribution? Will clients want to do deal with financial supermarkets or from single product providers?
Credit bureaus should become more robust by adding more data and content, which will automatically address issues of delinquencies in consumer finance and consequently improve collections; Asset Reconstruction Companies (ARCs) could move on to perform a deeper role; allow settlement mechanisms that allow multilateral netting amongst different counter party exposures; strengthen the registrar and transfer end of the business, etc. Such measures will not only reduce systemic and market risks, but also augment our ability to fully realise the immense potential of the Indian economy.
This is a time for difficult choices. It is the right time to strengthen domestic financial markets so that when the next wave of global opportunities comes, the Indian financial services sector is well positioned to ride the crest.
Deutsche Bank has recorded strong returns in the previous year, what would you attribute this to?
I think its a convergence of a few trends. One is the change in the global transformation at Deutsche Banks strategy. It got heavily focussed in India in the last year and that meant we bought in more capital in the country, we increased our credit positions. Also, it coincided with the confidence and ambition of corporate India and the growing positive sentiment of Indian mid-cap companies.
One of the things that held us in good stead was that we built our businesses around clients, as against proprietary trading businesses. We also hired serious talent over the year. To give you an example, when I joined, there was one managing director and now we have 26 of them in India. Also, as a strategic focus, we targeted the mid-cap segment, where there was a strong demand for capital, solutions and private financing. And we have done this with pristine governance in line with regulations. Its not been just building a strong business, but also about doing that with a focus on ethics.
What are some of the challenges and opportunities you see for the banking sector in India and also globally?
The financial sector globally is passing through a challenging phase. As the world economy contends with the threat of recession and inflation, central bankers the world over are taking various measures to counter it. In India too the Reserve Bank of India is at the forefront of tackling inflation through prudent and well-moderated monetary policies.
The turmoil that the subprime crisis brought in its wake has encouraged banks to turn their focus inwards i.e rationalising costs, raising credit standards and pricing risk more appropriately. Accordingly, in the coming years, the big focus for banks will be risk management. Market intermediaries, too, will have to focus on addressing systemic risk in the market place. Banking is not only about providing financial capital but also possessing intellectual capital. The difference between financial capital and intellectual capital is more effective risk management and constant innovation. As the Indian financial industry matures, clients will look for banks with a high degree of intellectual capital, which enables them to dimension risk and opportunity - on a global level - better than competitors.
The other challenge for the banking sector is deepening the onshore credit markets. Regulation will play a key role in strengthening domestic markets by creating a regime that matches the worlds most advanced markets in terms of transparency, ease of execution and risk mitigation. The regulators have responded well in this regard. The QIP market was developed in response to Indian corporates raising funds through the ADR/GDR route. Similarly, proposals to develop a currency derivatives market and on shore REITs will further aid the process of onshoring. On the derivatives front there may be a more conservative approach, which is understandable in todays context. However, the ongoing efforts to develop the capital markets would really bear fruit when the debt market witnesses a substantial revival. There is a real need to broad base the debt market by attracting and facilitating the entry of retail investors. At the same time, as has been seen in the equity markets, foreign institutional investor participation could go a long way in deepening the on shore debt markets. The potential implementation of some of the recommendations of Dr RH Patils committee on debt market reforms are being keenly watched by the industry.
Going ahead what are the strategies the bank intends to adopt, given the uncertainties that exist?
Our businesses have been around origination and distribution and it is not about storage. We originate risk, but dont stay with it, which I think has been a smart idea. And even amidst the global crisis, there is a recognition that Deutsche Bank has stayed ahead of the curve.
Our approach right now is that both, us and our clients, stay with defensive postures. We will look at stresses that are emerging, we will augment the talent pool and also businesses that are emerging and we look at our risk management systems. So that when the times come to go back from defensive to offensive, we are fully geared to seize the opportunity.
