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Paradigm shift in banking
The Indian financial service industry has remained stable in the recent past. Moody’s Outlook for the Indian banking system as of September 2017 is stable, although on the back of improved prospect for asset quality.
Brief overview of the report
Managing stressed assets possess a growing risk to the Indian economy
Due to the inadequate leverage of multiple options to manage stressed assets and NPAs, a few banking behemoths like public sector banks have suffered the most so far. Respective industry players can fund these assets during the cash generating projects life cycle. These players are those with large capital under their asset management arms, or well settled players in the industry where stressed assets belong. By analyzing the different options available, and tweaking NPA resolution rules (with the introduction of new policies), the Indian economy is gearing up to resolve the issue of NPAs. For speedier recovery proceedings and settlement of debts, the Insolvency and Bankruptcy code (IBC) has been introduced. The code provides the insolvency resolution process, or liquidation as two paths to recovery of stressed assets. Most standard restructured loans are now NPA. Our report brings to the forefront our view on steps required for successful implementation of the IBC.
Introduction of Indian Accounting Standards (Ind AS)
Another measure which would impact the business model and performance of banks is the proposed introduction of the Indian Accounting Standards (Ind AS). With the industry seeking advocacy and standardization, ensuring robust implementation of the Ind AS is critical. An organization-wide transformation to ensure the business model of the Bank is in line with the changing laws and policies of the Indian banking industry, and the need for coordinated efforts of stakeholders that will drive the successful implementation of Ind AS, are also discussed in this report.
Introduction of Goods and Services Tax (GST)
Recently the Indian economy has seen a massive change in its indirect tax regime with the introduction of the Goods and Services Tax (GST). Its biggest impact is the shift to decentralized registration in financial services, in turn requiring robust operations, IT and accounting systems. Two questions we are hearing often are:
- the requirements under the GST
- its impact across the financial services spectrum
The GST regime is bound to increase compliance across the Indian economy. Though the impact on FSI is not that significant, the effect over other commercial transactions/industries is slowing financial transactions, and hence, the effect on banking. The report covers the new requirements of GST and its effects on the banking, leasing, insurance, stock broking services, asset reconstruction companies and asset management companies.
In the banking environment it is imperative that risk related activities are completely understood, including their potential rewards, stress scenarios and the various governance related aspects. Risk governance is the paradigm under which an organization can take steps towards achieving risk related objectives. The underlying premise is that by increasing the focus of the board on risk management and elevating the status of risk executives, risk will be better managed leading to fewer surprises, scandals and insolvencies. In the long run, banks with strong risk governance should achieve higher risk adjusted performance. The Board holds the primary responsibility to guide the banks for the quantum and the type of risk that it is allowed to be undertaken as part of the banking operation. Risk culture mandates the same message to be consistently communicated across the entire organization and forms the guiding principle for every department and its employee’s responsibilities. Such a coherent and consistent risk culture is critical to an orchestrated functioning, especially for large banks. Strong risk governance begets an impactful risk culture.