Key takeaways from the International Banking Summit organised by Financial Times and Yes Bank

S. PREM KUMAR

We often hear entrepreneurs and CEOs talk about how one needs to focus on doing the ‘right thing’ internally and not worry about too much about what is happening in the external environment. However, it is extremely crucial for leaders to deeply understand these financial and economic conditions around the world. More importantly, organisations need to internalise – as processes – this understanding and embed this into their risk analysis framework.

On October 15th and 16th 2012, several entrepreneurs, bankers, regulators and government authorities gathered to analyse the economy from the perspective of the banking and financial services world. Some excerpts from the summit:

The Context

Coping with global economic volatility and a new regulatory landscape – How should banks respond?

The Panel

William Blackie, Head of Investment Banking, South Africa, Standard Bank

M. Damodaran, Chief India Representative, ING Group and former Chairman,

Securities and Exchange Board of India

Victor Massiah, CEO, UBI Banca

Haseeb Drabu, Economic Advisor, Essar Group

Shubhada Rao, President & Chief Economist, YES Bank

Victor Mallet, South Asia Bureau Chief, Financial Times

“Major constrain to growth will be the current status of Infrastructure in India. This will be addressed through PPP, where private investment is expected to go to 50% during 12th plan from 37% during 11th plan”

-DR. MONTEK SINGH AHLUWALIA, DEPUTY CHAIRMAN, PLANNING COMMISSION, GOVERNMENT OF INDIA

Key Takeaways

• While the US is a $15 tn economy and China is a $7 tn economy, the Eurozone as a $17 tn economy collectively is a significant player
• Other emerging economies such as Africa are becoming increasingly attractive for investments with characteristics similar to early stage development seen in China and India
• In India, interconnectedness has increased since the introduction of capital account convertibility, leading to higher volatility in the real economy, in turn impacting the financial sector as well
• Indian regulators have been prudent and proactive in enabling banks to grow while managing risks via defined frameworks
• Reinventing the entire regulatory architecture is not possible, and enforcement of existing regulations is critical
• “Better regulation”, rather than “more regulation” is the need of the hour
• A regulator should not be in a denial mode, but fix issues in time and use better regulation as a tool for effective regulation
• Regulations need to also acknowledge unique characteristics of economies rather than attempt to deploy uniform regulations globally. Increasingly, regulations also need to move away from being number-oriented to being understandable and effective in terms of their effectiveness
• In India, a Regulation Review Authority spanning across regulatory boards is being discussed to review effectiveness of existing regulations including sunset clauses to phase out archaic norms.

The context 

Regulators’ Roundtable: Tackling the Dual Mandates of Reform and Stability

The panel

Subir Gokarn, Deputy Governor, Reserve Bank of India

Anne Le Lorier, First Deputy Governor, Banque de France

Ricardo Franco Moura, Senior Advisor to the Board, Central Bank of Brazil

Anoop Singh, Director, Asia and Pacific Department, International Monetary

Fund

Henny Sender, Chief International Finance Correspondent, Financial Times

“ India, as a country, needs to focus on four key things: make our firms much more competitive in global markets, move resources from agriculture to services or manufacturing, reduce friction to businesses at Central and State level and finally, enhance productivity in agricultural sector.”

– N.R. NARAYANA MURTHY, FOUNDER AND CHAIRMAN EMERITUS, INFOSYS

Key Takeaways

• There will always be a trade off between financial stability and reforms/ growth. However, financial stability is an essential condition to achieve long-term economic growth
• The monetary policy, growth and inflation continue to remain linked; however, the complexities in today’s world protract the transmission effect
• Discounting inflation for growth can turn out to be a big mistake
• Focus on austerity without emphasising on growth will not work
• Impact on India from zero interest rate policies in US – In 2010, QE led to increase in oil prices. However during that time there was an underlying perception that economies are recovering in a robust manner. In today’s situation, fundamentals have gone weaker and the impact of QE is still debatable. Even if there is a causal impact of QE on commodity prices, the growth in US can bring in positive externalities
• Typically, commercial banking model does not fund the long-term (10-25 year) capital requirements. Channels of long term funding are under developed in emerging economies including India
• Domestic investor base should be expanded further for long term investments through pension funds, insurance funds etc
• How to invest Asia’s excess savings within the region itself and channelise it for infrastructure financing remains a challenge
• BASEL III will increase the overall cost of capital, however, with increased capital buffer and higher perceived safety, the cost of capital will eventually come down
• Dollar will continue to remain the reserve currency as it’s the de facto choice, and it is better to deal with a known regime
• Deleveraging in European banking system is happening through retaining equity earnings/ equity raising, and no / limited credit growth
• While protectionism can be beneficial for some subsections of the economy, it could be worse for the economy as a whole