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Banks, being financial intermediaries, essentially intermediate between the opposing
liquidity needs of depositors and borrowers. In the process, they function with an
embedded mismatch between highly liquid liabilities on the one side and
less-liquid and long-term assets on the other side of their balance sheets. Over and above this
balance sheet conflict, they also stand exposed to a wide array of risks, such as market risk,
transformation risk, credit risk, liquidity risk, forex risk, legal risk, operation risk and reputational risk.
The ongoing process of `globalization' has only further accentuated these risks.
Nevertheless, risk per se is not bad. Indeed, without risk there is no return. So, what
matters most for banks is not avoiding risks but taking risks prudently and managing them
diligently. Effective management of risk is a must, particularly for banks which operate with highly
leveraged balance sheets. Otherwise, risks can rattle banks and even throw them out of business in no
time. And, along with it, the depositors too would be put to terrific trauma, besides disrupting the
very financial system of a country. Hence the banks need to adopt sophisticated risk
management systems. It is in this context that the concept of
`Asset Liability Management' (ALM)the art of manipulating a bank balance sheet and income statement to achieve the desired goal of
growth, liquidity, profitability, and service to the communityhas entered
the banking system as a
risk-management tool.
However, ALM, in the Indian context, is still at a nascent stage. Against this backdrop,
the authors, Suman Chakraborty and Subhalaxmi Mohapatra, of the first paper, "An
Empirical Study of Asset Liability Management Approach by Indian Banks", have undertaken a study
on the implementation of ALM in Indian banks with a specific focus on the correlation
between assets and liabilities of the Indian banks in terms of understanding the nature and
strengths, determining the components of assets, defining the variance in liability and vice versa, and
the impact of ownership on ALM practices in banks by taking a sample comprising
nationalized, private, and foreign banks and using statistical tools such as multivariate statistical technique
and canonical correlation. Their findings revealed that ownership and structure of the banks had
a significant bearing on ALM practices. Most of the Indian banks, unlike foreign banks, are
found to be liability-driven banks. The private banks are however found to be highly aggressive in
using short-term funds for long-term investments in their pursuit of profits. Amongst Indian
banks, State Bank of India and its associates have shown the best asset-liability maturity pattern.
It is commonly perceived that the conventional `credit market' should undergo a
major change in favor of innovative organizational approach to meet the challenges posed by
the twin problems of "non-viability and poor recovery performance" of present day rural
credit institutions, if Indian banks are to cater to the credit needs of small farmers,
agricultural laborers and people living in the margins of the urban society. As a result, microcredit
has made an entry into the Indian banking system. These loans are essentially small in nature,
with no collateral and are meant for income generation through market-based
self-employment. They are mostly disbursed upon formation of borrower groups, both among the rural
and urban poor; disbursements to such groups are routed through NGOs, and each member of
the group is used as a lever for recovering the loan from the other group member.
Microcredit loans, though essentially meant for self-employment projects, are sometimes used by
the borrowers for consumption as well.
That aside, there is an argument that microcredit is still not reaching the poorest of
the poor. One of the reasons for such poor penetration of microfinance could be lack of
basic marketing information about these "bottom of the pyramid" customers by the credit
institutions. Against this backdrop, the authors of the second paper, Dave Webb, Nunik Kristiani and
Doina Olaru, "Investigating the Key Criteria for Micro Loan Provider Selection: The Case of the
Poor in Kedungjati, Indonesia", have attempted to identify the "what and how the marketing
and the non-marketing stimuli of the micro loan product affect the ML provider choice"
in Indonesia. The study revealed that "the reputation of micro loan provider must be high
in the minds of BOP customer" for a BOP customer to opt for his services.
Commonsense dictates that this finding equally holds good for any microfinance provider of any country.
In the next paper, "Cost-Benefit Analysis of Commercial Banks in the Global Age:
Strategies for Fund Management", the authors, R K Uppal and Rimpi Kaur, have undertaken a
cost-benefit analysis of funds mobilized as deposits and loans and found that public sector
and private banks are the "beneficiary of mobilized funds through borrowings", as it is found to
be half the cost of deposit mobilization. Similarly, their returns on investments are found to
be higher than returns from loan portfolio. Based on their study, the authors have also
suggested strategies for better management of funds.
The next paper, "Data Envelopment Analysis of State and District Cooperative Banks
in India: Exploratory Results", by N Ganesan, assesses the relative efficiency of 30 state
cooperative banks and 20 district central cooperative banks from all over the country, using DAE
technique and presents the findings.
In the next paper, "Repayment and Overdues Determinants of Agricultural Credit:
Some Results for Commercial and Cooperative Banks", the authors, S Gandhimathi and
S Vanitha, have made an attempt to identify the factors which discriminate bank
borrowers into defaulters and non-defaulters, and using logistic regression analysis have assessed
the probability of farmers turning wilful and non-wilful defaulters and presented their findings.
The authors, Evangelia K Blery, Stamatina Mitsi, Mirsini-Anna Perdiki, Eleni Rouva
and Katerina Finitsi, of the next paper, "Customer Retention in the Greek Banking Industry:
Some Survey Evidence", have assessed the influence of service quality on customer loyalty
in the Greek banking industry and presented their findings, which incidentally are in line with
the literature.
The authors, Roopam Kothari and Narendra Sharma, of the next paper, "Banks'
Stock Performance During 2007-2008: Some Evidences", have assessed the weekly performance
of banking stocks vis-à-vis S&P CNX Nifty during July 1, 2007 to June 30, 2008 and
presented some interesting and curious findings.
The authors, A Ramachandran and N Kavitha, of the last paper, "Profitability of
Indian Scheduled Commercial Banks: A Case Analysis", have made an attempt to identify the
factors that have a high influence on the profitability of banks, adopting step-wise multiple
regression analysis, and based on their findings recommend diligent monitoring and controlling
mechanism of certain vital `ratios' for ensuring profitability.
-- GRK Murty
Consulting Editor |
