A Banker’s Reflection: What Three Decades Taught Me
Technology will continue to change banking. Products will continue to multiply. But the basic principle of banking will remain unchanged.
Anil Kumar Sharma
Having spent more than three decades in the banking industry, I witnessed Indian banking evolving from the traditional public sector era to an age of aggressive private banking, technology, digital finance and easy access to credit. I have seen its growth, its challenges and, equally, the threats that have accompanied this transformation.
In the earlier days of public sector banking, banking was largely about deposit mobilisation, lending, relationships and trust. A customer would walk into a branch, meet the banker and discuss his financial requirements. The banker often knew the customer, his business and his family. Banking was slower, but there was a certain personal connect and responsibility attached to it.
Today, technology has taken banking almost to every household. Mobile banking, digital payments, ATMs, internet banking and instant credit have transformed the customer experience. Private sector banks have brought competition, efficiency and innovation, while public sector banks have also changed considerably to meet the new environment.
But every transformation brings opportunities as well as risks.
Profitability is the core objective of every commercial institution. A bank has to earn profits to survive, strengthen its capital and support economic growth. But in the race for growth and profitability, the scope of banking has gradually moved beyond its traditional core.
Banks today sell insurance, mutual funds, credit cards and several third-party products. Through subsidiaries and associated businesses, financial institutions have also entered securities and investment-related activities. Technology has made it possible to distribute these products to millions of customers almost instantly.
Here lies my concern as a banker.
The greatest strength of a bank is not its technology, its building or even its balance sheet. It is the trust of its customers.
When a banker recommends a financial product, the ordinary customer does not see him merely as a salesperson. He sees him as his banker. Therefore, the responsibility is much greater.
If that trust is used primarily to meet sales targets, there is a possibility of mis-selling. A customer may purchase a product not because he has fully understood it, but because he believes that his banker would never recommend something unsuitable to him.
This is where I see a historical parallel with the experience of Charles E. Mitchell and National City Bank during the Roaring Twenties. I am not suggesting that the circumstances of today’s Indian banking sector are the same as those of America in 1929. They are not. Our regulatory architecture, institutions and financial environment are vastly different.
But the behavioural lesson remains relevant.
When financial institutions become increasingly aggressive in selling financial products, when commercial interests and customer interests begin to overlap, and when market success is measured primarily by growth and profitability, the system must remain particularly vigilant.
When success stories become cautionary tales
India’s banking sector has also witnessed another phenomenon over the years. There have been institutions and prominent personalities whose innovative working models, rapid growth and spectacular success stories became subjects of discussion in business magazines and corporate circles. Their leadership styles were celebrated, their growth numbers were admired and their institutions were projected as examples of the new India.
But some of those celebrated stories eventually encountered the very systems, regulations and financial realities that had been bypassed, stretched or underestimated in the pursuit of rapid growth.
The headlines that once celebrated extraordinary growth can, with time, become cautionary tales about extraordinary risk.
This is not an indictment of entrepreneurship or private banking. India needs both. Nor should every institutional failure or regulatory action be interpreted as evidence of wrongdoing. Banking is a complex business, and circumstances can change.
But the broader lesson is important.
Growth achieved by continuously pushing the limits of a system may look brilliant during the boom. The real test comes when the cycle turns.
This was one of the lessons of the American experience of the 1920s.
The same principle applies to banking today. A rapidly expanding loan book can make a bank look successful. A high return can impress investors. A large network can create an image of strength. Aggressive cross-selling can increase revenue.
But the fundamental questions remain:
How sustainable is the growth?
How strong is the underlying asset quality?
How much risk is being accumulated?
And who ultimately bears that risk?
These questions may not make attractive headlines during a boom. But they become extremely important when the cycle changes.
As someone who has spent more than three decades inside banking, I have seen how performance pressures can sometimes shift attention from the quality of business to the quantity of business. Targets are necessary for any commercial organisation, but banking cannot become merely a numbers game.
A loan is not good simply because it increases advances. A financial product is not suitable simply because it increases fee income. And growth is not sustainable merely because the balance sheet is growing.
This is where the Great Depression continues to speak to us.
America’s Roaring Twenties demonstrated how optimism, easy credit, speculation and financial innovation could create extraordinary prosperity. But the crash demonstrated the other side of the equation. Once confidence disappeared, leverage worked in reverse.
India has an opportunity that America of 1929 did not have: the benefit of hindsight.
We have sophisticated regulatory institutions, prudential norms, capital requirements, risk-management systems, technology-based monitoring and a central bank with extensive supervisory powers. The lessons of earlier crises, including the global financial crisis of 2008, have strengthened the architecture of financial stability.
Yet institutions alone are not enough.
The first line of defence remains the banker.
Technology can analyse data, algorithms can assess risk and regulators can prescribe norms. But somebody still has to exercise judgement.
A banker must ask whether the borrower can genuinely repay. He must understand whether a financial product is appropriate for the customer. He must distinguish between genuine business growth and growth fuelled by excessive leverage.
Most importantly, he must remember that the customer sitting across the desk is not merely a source of business. He is the person who has entrusted the bank with his money and confidence.
After more than three decades in the profession, I believe this is where the story of Charles E. Mitchell becomes relevant to India.
We should not remember him simply as an American banker who became associated with the aftermath of the 1929 crash. We should remember the larger warning that history provides: when commercial incentives, financial power, market optimism and customer trust become too closely intertwined, the system can become vulnerable.
India should learn from the Great Depression before history forces us to learn the same lessons again.
Profit is necessary for the survival of a bank
Growth is necessary for the development of a bank.
Innovation is necessary for the future of banking.
But prudence and trust are necessary for the survival of the banking system itself.
After spending more than three decades in banking, my strongest belief remains:
“A bank can recover from a bad quarter, a bad loan or even a bad year. But once it loses the trust of its customers, rebuilding that trust may take generations.”
The story of Roaring America therefore has relevance far beyond America.
Markets will always have their booms and downturns. Technology will continue to change banking. Products will continue to multiply. But the basic principle of banking will remain unchanged: protect the customer’s trust, respect risk and never allow the pursuit of growth to become bigger than the institution’s responsibility.
(STRAIGHT TALK COMMUNICATIONS EXCLUSIVE. The Author is Columnist | Former Banker | Social Commentator)
