Changing risk climate in banks

Innovations, diversification and the entry of integrated technology have transformed the landscape of banking world over. So is the case in Sri Lanka. Due to the increased competition, banks have been striving hard to adapt best practices in banking both in product diversification and dispensing quality of service. 

Focus on globalization; cross boarder exchange of banking products and services with supportive state-of-the-art technology has added new dimensions in banking. Government-owned and private banks are coexisting competing with each other. It leads to better quality of services. The bank customers, who were earlier glued to the local formative system of manual banking, have begun to experience the merits of modern online banking infrastructure. 

Providing more convenience at click of mouse and the debut of hybrid products have brought change. Building flexibility in assets and liability products is the need of the hour to stay competitive in markets. The new generation of bank customers demand more liquidity and ease in accessing banking services. Non-funded banking products too are becoming more flexible and borrower friendly with added features. In the whole process, banks are becoming more sensitive to customer needs. 
The social transformation is also pointing towards greater need to satisfy customer comfort, convenience and lifestyle upgradation that calls for financing individuals apart from lending to productive sectors of the economy. Globally consumer financing has picked up pace and Asia too has fallen in line with the new tilt towards financing lifestyle needs. 

Banks traditionally known to finance productive sectors with robust security find a different enterprise in evolving products for individual needs. Every such change invites differentiated risks for banks and financial intermediaries. Banks have to plan to cope with the emerging risks. 

Rising risk sensitivity in banks

Such new-age banking with focus on diversification of banking products and services akin to international standards is sure to bring with it corresponding risks. The integrated set of risks inherent in the innovative range of products and services needs to be better managed at the grass root level. The rules of risk management have to be well perceived in the current context and gradually rewritten. 

Financial risk is in the transient stage everywhere in the financial world. The regulators and banks are constantly engaged in calibrating risk mitigation strategies to meet the impending higher uncertainty and volatile markets. For example, when a bank invests in corporate bonds bearing different ratings, the chances of risk of defaults will also be different. 

Banks need to learn the nuances of precisely reading inherent risks in the basket of business to be able to manage it effectively. When a bank obtains deposits from public and promises to return it with interest, the deployment of these resources, as far as possible, should be able to provide better risk adjusted return compared to its cost to eventually remain sustainable in the long run. 

Perceiving changing risks

Therefore, perceiving the nuances of risks in business, the deployment strategies have to be so carefully aligned as to satisfy the stakeholder value on a durable basis. But in business situations there can be hardly any risk-free application of funds.

Moreover, with technology connecting the universe of financial system, the risks seamlessly transcend national boundaries exacerbating the degree of risks with which, banks may not be familiar. It is essential that more than looking at the existing business and risks, banks should be sensitive towards incremental rise in business and its inherent risk component to gauze its impact on the bank’s fundamentals. 

While the business risk in banking is crossing boarders threatening the risk adjusted returns and profitability, the customer aspirations too are undergoing transformation, which cannot be unnoticed. Banks exist with customers and they need to be served with compatible products and services. In such a challenging operating environment, banks have to balance risk and yields to ensure profitability of business net of risk. In the process, line management of banks have to be more risk sensitive to be able to identify, measure and mitigate the different kinds of risks. 

Rapid diversification poses more risks

Due to the shift in the demographic profile of nations, more youngsters are entering the customer base. As a result, the customer needs are tech savvy, needing increased efficiency levels to serve them. In order to expand business, banks are focusing more on marketing products and services aligned to different customer segments. 

Moreover, banks hitherto operating in ‘sellers’ market’ have moved to ‘buyers’ market’. Banks used to offer what is in their basket of products and services. But now banks are required to align their range of products and services to suit the new requirement of customers. In such fast transforming milieu, the governments and central banks too have been persuading banks to expand the customer base by pursuing inclusive banking. Banks are also required to diversify and move from ‘urban mindset’ to include ‘rural mindset’ in increasing penetration of banking services in the hinterland calling for change in risk perceptions. 

Change of target customers and change of geographies also can sometimes increase the risk sensitivity. Unless the digital literacy and financial literacy of customers are made compatible, even any ignorance on the part of customers in using technology-led products and services can land banks into greater risk.

The onus of banks therefore is to educate its customers on the usage of technology-led delivery channels such as ATMs, Internet banking, mobile banking, debit/credit cards, point of sale (POS) terminals and many more gadgets now used by banks as alternate delivery channels. Each mode of such service brings with it some attendant risks to be managed by the banks. 

If customers do not realize the sanctity of passwords and it is compromised, banks land into more operational risk. Customers can always claim that all consequences of password protection have not been clearly explained and it led to loss. In order to protect customer interest, even central banks call upon banks to make good the loss, sometimes even when the lapse is on the part of customers. 

Banks should be more sensitive towards changing the risk profile when there is change in target group of customers and geographical coverage. Banks need to put all checks and balances in place to protect customer interest and at the same time be able to manage the risk. 

Transition increases risks 

Moreover, in such a fast transforming banking landscape and changing government and central bank priorities, banks may have to traverse a different growth path that may trigger new kinds of risks. Customers having experienced the change in the level of computerization have begun to demand more convenience and quality of customer service akin to the global standards. Thus, across the globe, integrated technology and centralization of data has brought disruptive banking. 

‘Anywhere banking’ ‘any time banking’  proliferation of ‘self-service banking kiosks’ ‘round the clock banking’ are some of the features of the new-age banking. The onset of integrated universal ATMs, cash accepting machines, cheque deposit machines, centralized cheque clearances, centralization of call centres and many more such technology aided innovations in the design of banking structure. 

Move toward digital business model led to centralization of transaction data at a central hub. In order to better manage banking risks, dissemination of risk sensitivity and a deeper understanding of risk repercussions by the line management will be essential. 

(Dr. K. Srinivasa Rao is Director of National Institute of Banking Studies and Corporate Management (NIBSCOM), Noida, India. The views are his own)