INDIAN BANKS’ ASSOCIATION: ROAD AHEAD
DR A K SEN GUPTA

The Indian banking scenario is in a phase of growing confusion and chaos with plethora of players created since independence by the government from time to time many of whom have lost relevance in the emerging world of free-market economy and technological revolution. Some of them may, however, still have some residual social usefulness; for example, an institution like Regional Rural Bank may be needed even today to bring up the people below the poverty - line as it was the rationale when it came into existence in mid-70s. Similar is the case with nationalized banks. What, however, baffles is the increasing unequal competition among asymmetrical players on an uneven field that results in increasing frustration among many of the weaker entities. This is because many of these weaker players did not become so by their own action but were rendered so by deliberate design on part of their architect i.e. the government who had a political design to create an institution that could satisfy their agenda of social concern. This inequality is becoming more prominent after consolidation of new-generation private sector banks as well as the gradual opening up of the country’s financial system to foreign players consequent to the Washington Accord as well as other financial agreements under WTO. The e-enabled banking environment is going to change the entire complexion of Indian banking particularly with reference to customer service including payment mechanism. New sets of rules and regulations, products and services, mechanics of security and secrecy of operations, principles of business values and ethics are likely to emerge in next few years.

In the given background the role of the association of bankers in India namely, Indian Banks’ Association (IBA) assumes critical importance. No doubt, The IBA has come a long way. Starting with a modest membership of 22 in 1946, it today has more than 175 members spanning from commercial banks (public sector, private sector, foreign, urban co-operative) to para-banking institutions like developmental financial institutions, merchant banks, mutual funds and even housing finance corporations. The objectives of IBA also appear to be quite appealing. These include:

• Promoting banking principles and practices including the operational aspects like improving efficiency and effectiveness of the system and endorsing better cooperation & coordination among the members, and

• Disseminating information both among the members and general public about the performance as well as image creation.

Undoubtedly, the achievements of IBA in some of the aforesaid areas have been commendable. This is particularly true as regards dissemination of information. The annual publications of IBA including Performance Highlights of Banks, Indian Banking Review, etc., and the monthly IBA Bulletin containing the basic information related to various issues of banking practices are, no doubt, relevant and useful for general public including small investors. The other area in which IBA has done a commendable job is in respect of defining the industry standards in terms of operating practices by formulation of Ground Rules and Code of Ethics (GRACE) as early as in 1977 and the subsequent evolution of IBA Code for Banking Practices that came into effect since September, 1999. The step of formation of a panel of advisors in the year 2000 was another step in the right direction.

Having said so, it must be stated that much needs to be done for improving its effectiveness particularly in the context of changing environment.

Firstly, the much awaited organizational change suggested by the external global consultants in the late nineties never really took off. This was primarily aimed at infusing professionalism in the functioning of IBA. What one continues to see even today in IBA appointments (the Secretary and senior positions) is the direct interference from the government.

Secondly, the comparative analysis of IBA with similar institutions operating in other parts of the world like, British Bankers’ Association (BBA), Australian Bankers’ Association (ABA) and Japanese Bankers Association (JBA) reveals that there is ample scope for improvement in the functioning of IBA. The prime credibility of these other institutions has been their capability to influence the regulatory and legal framework and thereby becoming the voice of the industry in general. To give an example, the British Bankers’ Association communicates on a regular basis the industry’s views to the British government, Bank of England (the Central Bank), the City Regulators, the Institutions of European Commission (EC) and the governments & regulators all over the world. Similarly, the main activity of Zenginkyo (Japanese Bankers’ Association) comprises policy recommendations to the appropriate authorities on various issues concerning the industry. Some of the recommendations made by them in recent times include internationalization of Yen, guidelines concerning accounting for financial instruments, enacting a new adult legal guardian system, and so on. The global experience has, by and large, has been that Bankers’ Associations have been in a position to establish themselves as thought leaders and recognized voice of the industry. IBA has not been a success, to the desired extent, in this regard.

Thirdly, one would expect such an association to undertake continued research on various contemporary issues of importance to the financial industry. Some of these topics could be comparative efficiency of banks, impact of technology on banking & its practices, security-hazards and other related issues for on-line transactions, legal framework for electronic authentication, problems related to achieving capital adequacy norms taking into account the market and operating risks, performance indicators of the banks and development of rating methodology, making state-owned banks more efficient, application of customer relationship management (CRM) practices using technology platforms, etc. The findings of the same can be used for two purposes; to disseminate knowledge among banks as well as public and act as influence makers based on the same. IBA should have a concerted policy prescription of knowledge creation and knowledge dissemination through this research agenda. Again the output of IBA in this regard is below expectation.

Finally, some of the Banker - Associations have been quite successful in financial engineering and creation of new financial instruments. This has been the most significant developmental role of these organizations the world over. One of the instances in this regard is the development of London Inter-Bank Offered Rate (LIBOR) in various currencies including in Euro that was conceived by British Bankers’ Association (BBA). The other recent example is the creation of the concept of Sterling Overnight Index Average (SONIA) by the Wholesale Market Brokers’ Association (WMBA) in the London market in 1997 under the guidance of British Bankers’ Association. Similar is the case with Credit Information Bureaus set up under the aegis of Japanese Bankers Association. How to perform this incubator role is a major challenge before the IBA.

To sum up, there is need for the IBA to go much beyond the traditional function of voluntary association of banks and non-banking financial institutions and assume a developmental role. It has to consciously make efforts to emerge as the voice of the industry. Having done a great job in a hitherto regulated environment, how to innovate and act proactively in a de-regulated setting and influence the players as well as the regulator without a formal positional power is going to be the biggest challenge in the current millennium.

Dr. A K Sen Gupta
Chair Professor & Director of SIES College of Management Studies
and the Founder President of Finance Forum of India.
The views expressed in the article are, however, his personal.

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