May'22
The IUP Journal of Bank Management
Focus
Banking technologies, such as immersive technologies (augmented, virtual, and mixed reality), are enhancing the client experience; blockchain technologies boost the efficiency of clearing and settlement systems; Robotic Process Automation processes volumes of unstructured data; Quantum computing carries out complex data operations; Artificial Intelligence (AI) protocols make better decisions; Application Programming Interface (API) platforms allow banks to espouse new business models; Prescriptive Security is used to sense visibility of cyber threats and to block them before they occur; and Hybrid Cloud presents innovative offerings, which are shaping the future of banking models. Thus, digital disruptions are the traditional role of the banks and nudging the banks to go for new business models. The game-changing digital disruptions that are shaping the future of banking models are the gamification of banking services, process automation, biometric technologies, and robot advisors.
Across the world, banking is being transformed with newer business models. Digital banks are proliferating across customer segments and are poised to substitute the outdated brick-and-mortar banks. The digital players with nonlinear business models have outperformed those emulating integrated models. Recent research shows that redesigning the business models into digital-only banks could grow their revenues by 4% per year. Following the trend, the Indian banking sector is gearing up to transform the business models with new advanced technologies; AI, Machine Learning (ML), Blockchain, and Robotic Process Automation.
The first paper, "Technological Evolution and Emergence of New Banking Models", outlines the technological evolution in banking spurred by major technologies leading to new business models. These technology-driven innovative banking models have offered improved customer access, a range of choices, greater convenience, and personalization. The author, Sarita Bhatnagar, views that technology proliferation led by fintech, APIs, AI, ML, big data, etc., has led to a significant transition in banking models. These new models are value-creating in meeting the customer needs.
The second paper, "Impact of Asset Allocation on Public Sector Banks' Performance" by Ashutosh Jaiswal, carries out an excellent appraisal of the credit allocation by the banks in India from 2005 to 2017. In this paper, the author notes that the Public Sector Banks (PSBs) substantially boosted their credit allocation, in the aftermath of the Global Financial Crisis (GFC) till 2013, as against the contraction of credit allocation by the Private Sector Banks (PVBs). Given that both the PSBs and PVBs were in the same macroeconomic environment and similar capital requirement norms and regulatory regimes, the substantial underperformance of the PSBs requires a thorough review of their corporate strategies and operational efficiency.
The 2008 Global Financial Crisis showed that banks with proper management of their liquidity risk and solvency could withstand the shocks of market turbulence. The third paper, "Probabilistic Interpretation of Insolvency Risk in Public Sector Banks in India", analyzes the measurement of the bankruptcy risk of PSBs in India during the period from 2010 to 2021 using the Z-index. The author, Farida Rasiwala, observes Capital Adequacy Ratio (CAR) and Return on Assets (ROA) are the key indicators in measuring the risk associated with banking. According to the analysis, PSBs displayed low risk, and the Z-index of Indian banks is on a positive trend.
The fourth paper, in this issue studies the performance of Primary (Urban) Cooperative Banks (UCBs) in India. The author, Ashish Srivastava, in the paper, "Leverage, Scale of Operations and Financial Performance of Primary (Urban) Cooperative Banks in India", studies a sample of 140 urban cooperative banks during the period from 2019-20 to 2020-21. The findings reveal that there is a substantial difference in terms of capital adequacy, leverage, and Net Interest Margin (NIM). The study observes that urban cooperatives with higher leverages do not essentially establish superior financial performance, but do gain in terms of their Return on Equity (ROE).
The final paper, "The Pandora Papers: How Anti-Money Laundering Procedures and Controls Should Have Flagged $300 mn Hidden in New Zealand Trusts" by Ehi Eric Esoimeme, provides an interesting discussion of the risk-based policies and measures to identify and control money laundering and illicit financing risks associated with Non-Profit Organizations (NPOs). Centered around the "Pandora Papers", the author illustrates the vulnerability of the banking systems in failing to flag the illicit fund transfers and the resultant losses.
Consulting Editor
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| Article | Price (₹) | ||
| Technological Evolution and Emergence of New Banking Models |
100
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| Impact of Asset Allocation on Public Sector Banks' Performance |
100
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| Probabilistic Interpretation of Insolvency Risk in Public Sector Banks in India |
100
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| Leverage, Scale of Operations and Financial Performance of Primary (Urban) Cooperative Banks in India |
100
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| The Pandora Papers: How Anti-Money Laundering Procedures and Controls Should Have Flagged $300 mn Hidden in New Zealand Trusts |
100
|
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Technological Evolution and Emergence of New Banking Models
The banking sector at present is witnessing significant changes, largely driven by technological developments. The banking ecosystem has undergone impactful alterations as a result of technological advancements in customer choice and access, as well as the increasing influence of fintech and other technology companies. Application Programming Interface (API) and open banking systems have led to the emergence of new banking business models. The paper traces the evolution of technology in banking, and the role of major technologies in bringing about changes in the banking ecosystem. It further explores the emerging banking business models. These models reflect the innovations in banking, resulting in increased customer access, choice, convenience, and personalization.
Impact of Asset Allocation on Public Sector Banks' Performance
The debate over performance differential between Public Sector Banks (PSBs)1 and Private Sector Banks (PVBs) in India is not new. The huge performance differential between PSBs and PVBs on GNPA (Gross NPA) of 14.8%/3.8% and Return on Assets (ROA) of -0.7%/1.2% (as of September 20182) continue to narrate the grim performance of PSBs. Through this study, we looked at how banks in India responded to the financial crisis of 2008, and its impact on their performances thereof, with specific focus on whether increased lending by PSBs led to their poor performance in subsequent years. We focused on the asset allocation strategies of banks in India for the period FY 2005-17, which covers the period of financial crisis, and measured their performances through indicators such as ROA, Return on Equity (ROE) and GNPA ratio (GNPAs/Advances). The analysis shows significantly divergent asset allocation paths taken by banks in India post the financial crisis of 2007-08, which shows that the PSBs indeed took the mantle of credit creation in the economy. PSBs significantly increased asset allocation to credit from 2007/08 in contrast to PVBs, and it continued up till FY 2013. Comparison of financial performance post FY 2013 up till FY17 shows significant underperformance of PSBs vis-a-vis PVBs. However, this study did not find any linkage between aggressive credit creation post the financial crisis (during 2007/08-2013) and subsequent poor performance of PSBs.
Probabilistic Interpretation of Insolvency Risk in Public Sector Banks in India
Banks play a vital role in channeling investors' savings. This paper investigates the probabilistic interpretation of the bankruptcy risk-evolved by Hannan and Hanweck (1988)-in Indian Public Sector Banks (PSBs) through the Z-index approach. Z-index has been used to determine the insolvency risk for 20 PSBs for the period 2010 to 2021. The secondary data was collected from the websites of respective banks and RBI. The data consists of 20 PSBs' Return on Assets (ROA) and Capital Adequacy Ratio (CAR). The results show that except Allahabad Bank, all PSBs' index is more than 10, offering a better financial position during the study period. Since the Z-index measured for SBI is highest among all the 20 PSBs, its financial soundness is reported to be at the top level. Therefore, there is no risk of insolvency for those banks with a high Z-index. The paper provides insights on trends of solvency position among the selected banks. It is helpful in improving the knowledge of banks' bankruptcy prediction and in analyzing their financial soundness. The paper reveals that bankruptcy could be due to poor management and improper investment estimation, leading to insolvency among the banks. A bank should focus on its ROA to improve its quality and avoid bankruptcy. CAR is also a sound indicator for a bank to maintain good solvency. Therefore, CAR and ROA are the most critical indicators to measure the risk associated with an investment in the banking sector.
Leverage, Scale of Operations and Financial Performance of Primary (Urban) Cooperative Banks in India
Primary (Urban) Cooperative Banks (UCBs) in India operate under the provisions of the Banking Regulation Act of 1949 - As Applicable to Cooperative Societies (AACS). Considering the large heterogeneity in their asset sizes and the absence of any regulatory cap on their leverages, the principal objective of this paper is to understand the interrelationship of their leverage and scale of operations with financial performance. The analysis, based on a three-year pooled data sample of 140 well-distributed UCBs, shows a significant difference across the capital adequacy, leverage and Net Interest Margin (NIM), based on the scale of operations, but due to heterogeneous and skewed distribution of UCBs in terms of asset size, the impact of the scale of operations on the financial performance does not manifest very clearly. It, however, shows that the scale of operations is unrelated to the incidence of non-performing advances. Further, UCBs with higher leverages do not show superior financial performance in terms of key financial variables. However, banks with higher leverage do gain in terms of their Return on Equity (ROE). These findings provide nuanced guidance to the UCBs and are also useful for regulatory policymaking on the subject.
The Pandora Papers: How Anti-Money Laundering Procedures and Controls Should Have Flagged $300 mn Hidden in New Zealand Trusts
This paper aims to discuss the risk-based policies, procedures, and controls reasonably designed to identify and minimize money laundering and other illicit financing risks associated with Non-Profit Organizations (NPOs). This paper uses the "Pandora Papers" to illustrate the vulnerability of the banking system to money laundering and other illicit financing risks associated with NPOs, and to solidify the hypothesis that effective implementation of risk-based policies, procedures, and controls can help flag illicit funds before a lengthy asset recovery process becomes necessary. This paper determines that adequate policies, procedures, and controls, if implemented, could help manage the money laundering and other illicit financing risks associated with NPOs, and ensure monitoring systems are set up to adequately detect suspicious transactions.