Banks set to improve capital efficiency: Leeladhar

In future there may be a fluid use of capital in banks, an approach that has been called the "just-in-time balance sheet" management, in which capital flows quickly to its most efficient use, according to Reserve Bank of India, deputy governor, V Leeladhar.

"There is the transition from capital adequacy to capital efficiency," he said. He was speaking to students of post graduate programme in banking and finance at the National Institute for Bank Management, Pune.

"The Basel II prescriptions have already put us on track for transition from the traditional regulatory and market measures of capital adequacy to an evaluation of whether a bank has found the most efficient use of its capital to support its new business mix. This transition in how capital is used and how much capital is needed will be a significant factor in return-on-equity strategy for years ahead and strategic plans may be required to execute this kind of approach," he added.

According to Leeladhar, there is the trend from balance sheet to off-balance sheet intermediation. While some will, perhaps, choose to migrate rapidly to off-balance sheet investment - or merchant-banking activities, others may stress volume origination which they can securitize and then manage for a fee, and still others may continue to position themselves as traditional banking retail players focusing on deposit intermediation.

Banking is no longer confined to 'acceptance of deposits for the purposes of lending' - today it refers to intermediating and managing risk.

He also hinted at consolidation among banks. "We are slowly moving from a regime of 'a large number of small banks' to 'a small number of large banks," said the deputy governor.

Every bank will of course, depending on its strategy, have to migrate to its best position in this new structure. Picking a market position and transitioning to it is one of the most significant strategic decisions a bank must make.

All types of entities can be highly profitable if they transition to the right market position and right cost structure to execute the strategy, he said.