Nov'19
The IUP Journal of Bank Management
Focus
The Global Financial Development Report (2013) states, �Ensuring equitable and transparent access to credit information allows customers to use their credit histories as reputational collateral, strengthens credit market competition, and enhances access to finance�. Credit information sharing institutions such as credit bureaus and public credit registries can overcome the problems of asymmetric information by (i) countering adverse selection; (ii) countering moral hazard; (iii) countering information monopoly; and
(iv) reducing over-indebtedness.
It strengthens the financial stability and credit market efficacy in two notable ways: (i) banks and Non-Banking Financial Corporations (NBFCs) depend on credit information sharing systems to effectively screen borrowers and monitor the risk profile of existing loan portfolios;
(ii) regulators depend on the credit info to comprehend the interrelated credit risks of the systemically important borrowers as well as financial institutions. Essentially, credit registries help regulators to conduct essential oversight functions, leading to diffusion of default risk and enhancing the efficiency of financial intermediation. Of course, in a truly competitive credit market, credit registries in a way ultimately benefit the deserving customers through lower interest rates.
Perhaps, one of the most important benefits of credit information sharing is that it lets borrowers foster a credit history and use the �reputational collateral� to gain access to formal credit beyond the established credit arrangements. Particularly, this is more advantageous for small enterprises and fresh borrowers with inadequate admittance to physical collateral.
The first paper of this issue, �Do Credit Information Sharing Schemes Matter to Bank Profitability? Evidence from Africa�, by Norman Adu Bamfo, investigates the profitability of banks in 41 African countries for the period 2004-2013 using the depth of credit information index to measure the extent of credit information sharing in Africa. The author finds that credit information sharing through private credit bureaus substantially enhances bank profitability, while other bank-specific factors such as capital adequacy, credit risk and management/operational efficiency also considerably explicate the differences in the profitability of banks in Africa. The author suggests that government measures and policies are required to endow an enabling financial environment that harnesses private information sharing to accelerate growth and improve bank profitability.
In India, payments banks face a distinct regulatory disadvantage. Payment banks are not allowed to hold public deposits of more than 1 lakh with them, and cannot lend money either. However, they must invest 75% of their demand deposits in government securities. In the second paper, �Can Customer Attitude and Expectations Shape the Future of Payments Banks in India?�, the author, Priya Solomon, analyzes the impact of customer awareness, value proposition of customers, expectations and financial needs on payments banks in India. The author claims that customer awareness, expectations, financial needs, and value proposition affect positively customer�s adoption and usage of services of a payments bank. Based on the study findings, the author opines that streamlining the operations of payments banks in India will help players to put in place people, processes, products and systems with strong analytics-driven marketing strategies, which can be easily scaled up in the future to operate as a full-fledged bank.
The third paper, �Does Size Matter? An Evaluation of the Relationship Between Asset Size, Operating Cost, and Profit of Scheduled Urban Cooperative Banks in India�, by Ashish Srivastava and Ashutosh Upadhyay, explores the Urban Cooperative Banking sector in India which is characterized by large heterogeneity in asset size. Analyzing the relationship between asset size, operating cost, and profitability in scheduled Urban Cooperative Banks (UCBs), the authors investigate the movement in total operating cost and profit in relation to variation in asset size after controlling for business, market, and environmental factors. The authors find that for the scheduled UCBs, size matters and growth in assets helps these banks to reduce cost and increase profit. They view consolidation and realignment as the way forward for UCBs, which can help reduce their heterogeneity and thereby aid in better positioning of its regulatory architecture.
Consulting Editor
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| Article | Price (₹) | ||
| Do Credit Information Sharing Schemes Matter to Bank Profitability? Evidence from Africa |
100
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| Can Customer Attitude and Expectations Shape the Future of Payments Banks in India? |
100
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| Does Size Matter? An Evaluation of the Relationship Between Asset Size, Operating Cost, and Profit of Scheduled Urban Cooperative Banks in India |
100
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Do Credit Information Sharing Schemes Matter to Bank Profitability? Evidence from Africa
This study investigates the profitability of banks in 41 African countries for the period 2004 to 2013 at different levels of credit information sharing using the depth of credit information index to measure the extent of credit information sharing in Africa. A fixed effects regression model was employed on unbalanced panel data from the Bankscope Database. The results indicate that credit information sharing through private credit bureaus significantly matters in enhancing bank profitability, while other bank-specific factors such as capital adequacy, credit risk and management/operational efficiency also significantly explain the variations in the profitability of banks in Africa. Government measures and policies are needed to provide an enabling financial environment that harnesses private information sharing to accelerate growth and improve bank profitability.
Can Customer Attitude and Expectations Shape the Future of Payments Banks in India?
India has traditionally been a cash-based economy with limited penetration of formal banking and financial services. The financial sector in India is witnessing a transformation with new payments banks being established in the country for achieving the dream of a fully banked country. The RBI, Indian commercial banks, the Government of India and other individual stakeholders have undertaken a number of initiatives in the past to promote financial inclusion. This paper tries to gather some insights on customer attitude and expectations that shape the marketing strategies of payments banks in India. The findings reveal that customer awareness, expectations, financial needs and value proposition affect positively customer�s adoption and usage of services of a payments bank. Streamlining the operations of payments banks in India based on the study conducted shall help players to put in place people, processes, products and systems with strong analytics-driven marketing strategies, which can be easily scaled up in future to operate as a full-fledged bank.
Does Size Matter? An Evaluation of the Relationship Between Asset Size, Operating Cost, and Profit of Scheduled Urban Cooperative Banks in India
Finding an optimal asset size and consequent scale economies remains a critical challenge for the cost efficiency and profitability of banks. For the Urban Cooperative Banking (UCB) sector, with large heterogeneity in asset size, an understanding of scale economies helps in improving their business model and also aids in benchmarking for consolidation. This paper presents an analysis of the relationship between asset size, operating cost, and profitability in scheduled Urban Cooperative Banks (UCBs). The paper examines the movement in total operating cost and profit in relation to variation in asset size after controlling for business, market, and environmental factors. It finds that expansion in asset size up to 87,983 mn leads to downward movement in conditional operating cost per rupee of assets. Similarly, it finds an upward movement in conditional profit before tax with an expansion in asset size up to the level of 43,462 mn. The paper does not find any benefit of scale economies on cost and profit beyond these levels. It finds no evidence of scale economies in large UCBs having an asset size between 100 and 500 bn. However, for a majority of small and mid-sized UCBs, opportunities for achieving scale economies through organic or inorganic growth are found. The paper finds no statistical significance of the environmental strength, arising out of the strong cooperative culture in certain states, on the scale economies in the UCBs.