In the fervour to achieve rapid business growth and profits, banks often find themselves exposed to risks that they cannot mitigate. These risks extend beyond individual institutions; they pose a potential threat to the broader financial system.
A CEO's tenure and individual leadership style can sometimes lead to irrational behaviour in setting overly ambitious business targets. This often stems from the correlation between a CEO's performance pay and the valuation of his/her stock-based compensation. As CEOs remain in their roles for longer periods, there may be a tendency to continually escalate performance expectations to maximise such financial gains.
In the public sector, the rush to showcase the bank as modern breaks its cultural backbone without much-needed and adequate change management. We recently saw this in a bank trying to go digital.
Challenges For Modern Banking Sector
The financial landscape is perpetually evolving, continually presenting new and complex risks. From the emergence of innovative fintech solutions to global economic fluctuations, the modern banking sector faces multifaceted challenges. The stakes are considerably higher as economic growth continues. Here, prudence is not just a regulatory mantra but a necessity.
Multiple conversations with risk officers across the banking sector reveals an interesting anecdotal worry. Very few actually have regular non-review personal interactions with their bank CEO to discuss risk management issues, learnings and innovations in the field; such time is rarer with their board members, excepting board meeting presentations. Most of their interactions seem to revolve around the compliance and business demands of testing risk elasticity to enable additional business growth. For a sector that prides itself in understanding risks, this is a cultural issue.
The need for comprehensive risk management cannot be amplified more. It is not merely a matter of adhering to regulations; it is a fundamental aspect of good banking. This is particularly true in a country where financial inclusion is a vital goal, and millions of consumers place their trust in the banking system. Prudent risk management is an assurance of the enduring stability and reliability of the financial institutions upon which countless livelihoods depend.
But then, if one looks broadly at the business strategies of the Indian banking system, there rarely seems to be any differentiation amongst competitors. All the banks seem to offer similar products, and try to acquire similar businesses or the same set of consumers. So, it becomes easier for the larger banking behemoths to churn more business, due to their lower cost of capital. What does that mean for the other banks? Does this add a newer element of business risk and eroding margins? Is this a race to the bottom?
Opportunities And Risks
In recent times, the Indian consumer profile has undergone a significant transformation, driven by an increasing consumption boom. This shift presents a double-edged sword for the banking sector. On the one hand, it signifies an abundance of opportunities, but on the other, it heightens associated risks. To strike the right balance, it's crucial to offer credit access while upholding responsible finance practices.
The banking sector’s casual approach to digital technologies is a larger challenge. Financial transactions that were once dependent on brick-and-mortar banks and cash have given way to the instantaneous and borderless nature of digital finance. Risks across this emerging technological spectrum have unimaginable consequences. A digital risk-based strategy is more crucial than a go-digital strategy.
Crises are unpredictable, yet CEOs are responsible for preparing their institutions to weather these storms. CEOs must develop comprehensive contingency plans that outline how the bank will respond to different crisis scenarios, from economic downturns to cybersecurity breaches. This is where proactive risk conversations are needed.
With some exceptions, most Indian banks are CEO-centric. But hopefully, the Indian banking sector will move away from having towering personalities overshadowing its institutions.
Banking has to be viewed through a socio-economic empowerment lens and it’s a routine business. A bank leader need not be glamorous, and can still shape a well-run and profitable bank. There are learnings from the past—in the pursuit of popularity and wanting to make news, many bank bosses pushed governance and their bank to the brink. With such leaders, the Boards were relegated to being an after-thought.
Regulators increasingly expect bank boards to maintain true independence and objectivity in assessing and approving business targets. The emphasis is on ensuring that these targets are grounded in sustainable growth strategies and available resources, rather than driven solely by the CEO and performance incentives. This approach helps to mitigate the risk of short-termism and excessive risk-taking, and aligns with the long-term interests of shareholders and the broader economy. Bank CEOs should symbolise consumer trust, and are not about the upper crust. After all, banking is not about emulating 007; it's about avoiding becoming a zero.
Srinath Sridharan is a policy researcher and corporate advisor. X: @ssmumbai. Views are personal, and do not represent the stance of this publication.
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