A lot has been said about the relationship between banks' capitalization and their risk-taking behavior. Conventionally, it is felt that banks that are well capitalized are normally averse to take asset risk. The reason is obvious: the option value of deposit insurance declines for such banks. There is however a flaw in this conventional wisdom, for the ownership of bank and its management are two different entities. The managers would always have a different incentive in mind while subjecting the banks to greater risk, i.e., their performance bonus. On the other hand, shareholders want their bank to leverage more, for it maximizes their wealth. Thus, the three agencies associated with bankingthe regulators, the shareholders and the managershave their own incentive for exposing a bank to different levels of risk. There are however not many studies that have addressed the agency problem and its impact on the ultimate risk-taking behavior of a bank.

Against this backdrop, the authors, Thomas D Jeitschko and Shin Dong Jeung of the paper, "The Effect of Capitalization on Bank Risk in the Presence of Regulatory and Managerial Moral Hazards", have made an attempt to incorporate all these three categories of incentives of three agentsregulators, shareholders and managersto determine the risk-taking behavior of the banks. They have also taken into cognizance four distinct assumptions under risk-return profiles. Their combined model demonstrated that the banks' risks can either decrease or increase with capitalization, depending on the relative influence of the three agents in determining asset risk and the assumptions made under risk-return profiles. The findings also revealed that the three agents regulators, shareholders and managershave different incentives that result in differing optimal risks. For instance, shareholders prefer the bank to increase the risk level, since their benefit maximizes with the shift of risk to the deposit insurance. Whereas the manager, in the fear of losing his private benefit of control in the case of bank's bankruptcy, remains conservative in determining asset risk vis-à-vis the share holder. The paper also demonstrates the differences in risk capitalization relationship among publicly and non-publicly traded banksthere is a negative relationship between capitalization and portfolio risk in the case of privately-held banks with high capital, while it is positive in case of publicly-traded banks with high capital. There is however, a weakness in the study: the sample size is small, for the authors have used only one year data. Nonetheless, there is immense need for similar studies on Indian banking.

A comparison, in terms of `user perception' about the retail banking services offered by public and private sector banks, has been carried out by R A Ravi, and the findings are presented in his paper, "User Perception of Retail Banking Services: A Comparative Study of Public and Private Sector Banks". The study revealed that customers perceive public sector banks as `good for safety of investments', `confidentiality of transactions' and `good will'. However, they harbor an element of concern with regard to their `services under mobile banking', e-banking and Internet banking - operating an account from anywhere - lack of infrastructure facilities such as parking facilities, cafeteria, ATM etc., handling customer grievances and the very ambience and decor of the branch premises. In the case of private sector banks, their politeness and hospitality; speed, accuracy and promptness with which a service is delivered; confidentiality of transactions; variety of services offered; good will and promptness in offering information sought for are considered as their strengths while heavy service charges, fines and penalties and lack of parking facilities, etc., are considered as their weaknesses.

The authors, Geetika, Tanuj Nandan and Ashwani Kr. Upadhyay, of the paper, "Internet Banking in India: Issues and Prospects", have reviewed the current status of Internet banking in India and also analyzed the perceptions of users about Internet banking by using a survey method. The survey results revealed that there is a significant difference in the perception of `users and non-users' of Internet banking about security. The non-users are identified to have more concern about `security' than the user group. It is the brand name and the excellence in service provided by a bank that had influenced a customer's choice for a particular Internet banking service. As the authors have themselves rightly pointed out, there is a need to carry out the study with a larger sample size for arriving at dependable understanding about the customer's perception of Internet banking.

Banking essentially involves delivery of services that should satisfy customers. With the entry of private sector banks, the `customer focus' has gained importance. Against this backdrop, the authors, Aruna Dhade and Manish Mittal of the paper, "Preferences, Satisfaction Level and Chances of Shifting: A Study of the Customers of Public Sector and New Private Sector Banks", have attempted to identify the perceptions of customers that define selection of a bank, the service features that satisfy customers and the banks on which customers would be changing the banks, by conducting a comparative study taking State Bank of India as a representative of public sector bank and ICICI, IDBI, HDFC and UTI (AXIS) banks as representatives of private sector banks. The findings revealed that the `care for a customer', and `easy accessibility of the services' are considered as the factors that influence the customer's choice of a bank. Dissatisfaction in areas like `processing time taken for account handling' is found to be the cause for SBI customers' shift to other banks, while in the case of private banks, it is the `proximity of bank to the residence' of the customers that is found to be a cause for customers shifting to other banks.

It is a matter of common sense that banks' profits depend on how their loans are priced vis-à-vis their cost of funds and operational costs. Thus, loan pricing assumes greater significance. The paper, "Pricing the Prime and Bank Lending Rates", by Ganti Subrahmanyam discusses important techniques of pricing of banks' prime lending rate using an illustrative example. The author avers that the present value approach to loan pricing is an all inclusive method that even takes care of value assignment to the deposits maintained by a prospective borrower with the bank.

- GRK Murty
Consulting Editor