Nottingham University Business School

Undergraduate Programs

Financial Economics

Re-strategizing Commercial Banks

ID:
20200379

WORD COUNT:
1515
Since the 2008 GFC, the banking industry has faced low credit growth,
deleveraging, increased compliance and regulation requirements, damaged
reputation, and low-interest-rate. However, the industry is going through a
transformation in recent years. The Covid-19 pandemic has accelerated this
transformation (Romānova and Kudinska 2016).
         Although these trends and developments are making the financial services
in various economies much more diverse, inclusive, efficient, and competitive
than before, they may also create challenges and threats to the financial
institutions. This paper aims to discuss how these commercial banks can re-
strategize to survive these challenges.
Discussion
Challenges and Threats Faced by the Banks
Low-Interest Environment of the Commercial Banks
         Since the commencement of the financial crisis, there have been concerns
regarding the financial sector’s soundness. The present macro-economic
situations and the unseen low-interest-rate present a challenging environment
for financial institutions. Due to the weak economic growth and lower expected
real ROI, the interest rates have been dropping since the early 2000s across the
world. The banks have increased their risk appetite because of the adverse
environment of low-interest rates (Kuc and Teply 2019).
Increasing NPL during the Covid-19
         The banking sector’s health remains the main concern for the makers of
the economic policy. The lending of banks has become critical for households
and businesses to survive in periods of uncertainty and crisis. However, the
economic impacts of the covid-19 have highly contributed to the increase in the
defaults of the households and corporate debt, which is eroding the banks’ asset
quality. Since the Covid-19 crisis continues, the banks are likely to face a
substantial increase in the NPLs because of the rise in the defaults of the
company and households and will be to increase their provisions and allowance
of the loan loss. This deterioration in the quality of banks’ assets and
performance of earnings could limit the capabilities of banks to absorb the higher
losses of loans over time, reducing their ability of intermediating credit and
support recovery (Ari, Chen and Ratnovski 2020).
Introduction of the Digital Banks
Digital bank implies much more than just getting paperless. The leading players
are now offering enhanced customer experience and are delivering more efficient
and faster services compared to the traditional banking system. A myriad of new
competitors is entering the market with innovative and technology-driven
deviations from the conventional model of banking. Along with this, the attitudes
and preferences of the customers are primarily changing, since they are making
quicker decisions, and have access to the various offers, which is leaving the
banks to struggle for customer loyalty (Anand and Mantrala 2019).

Figure 1: New Banking Model Challenges the Traditional Banking System

(Pastore, Pratz and Desmarés 2021).

Figure 2: Digital Banking Readiness Index (Pastore, Pratz and Desmarés 2021).
Re-Strategizing to Survive the Challenges
         These threats have compelled banks to re-strategize to gain more profits.
Commercial banks need to adopt the following strategies.

Strategies for Minimizing the Impact of Low-Interest Rate Environment

         The treasurers of banks can play a significant role in preventing the
adverse effect of the interest rates. This can be achieved by taking measures in
areas such as identifying and understanding all the relevant risks. By
implementing the measures to stabilize and shore up the net-interest margins’
components, including the client-related and structural elements, and more
actively cooperating with the senior management to assist the business in the
adverse interest rate environment. A reporting system can also be used that can
help in modeling, capturing, and stimulating funding, liquidity risks, and interest-
rate. The data architecture and IT for the reporting must create transaction-level
transparency across the legal companies. However, only stabilizing the interest
margin will not be enough for bringing significant and sustainable growth of
income. The banks should take a strategic approach to manage their growth
(Brei, Borio & Gambacorta, 2019).

Strategies for Minimizing the Impact of NPL

         The basks can employ different measures to reduce the reported NPLs,
such as loan restructuring, legal recovery, sales to third parties, and write-offs.
Moreover, there are three sets of policies that are required to face the challenges
of increasing NPL due to the continuing and any further crisis. It requires a
strong supervisory and regulatory framework, as it will help the banks to
suitably identify the NPLs and the credit losses provisions that is the initial step
for any resolution strategy of the NPL. In absence of a strong supervisory and
regulatory framework, the reported quality of assets and risk of the financial
strength indicators are becoming disconnected from the economic realities,
confusing efforts of the policymakers in measuring the extent of the issue and
delaying the timely response of policy. Further, the banks require to
operationally get ready to resolve the bad loans’ volumes. It requires completely
functional financial and human resources. It is important for the banks to
develop the internal policies for resolving and managing NPLs and must adopt
the methods to compare the recovering under different scenarios of resolution
and to assess the viability of distressed borrowers. Moreover, it is important to
have credits rights and insolvency frameworks for the resolutions of the NPLs
(Thedocs.worldbank.org. 2021).

Strategies for Minimizing the Impact of Impending Introduction of

Digital Banks
         The banking institutions must create a unique experience of the digital
product that would turn into brand loyalty by the customers. It could be initiated
by auditing the existing system and product (Bhasin and Gulati 2021). For
gaining customer trust and brand reputation, a technology-driven strategy is a
primary initiative that banking institutions should take for eight varied reasons.
These are timeliness, comprehensiveness, 360-degree surveillance, efficiency,
risk sensitivity, record-keeping, ability to learn and focus on the individual
customer (Zhao and Richards 2021).
         Behavioral data analytics is the solution based on the risk model, which
incorporates the comprehensive behavioral profile of every single customer,
along with the wide range of the other variables, to create the template against
which the transactions taking place in their accounts can be evaluated and
compared automatically. This can help in enhancing their ability and sensitivity
to differentiate between frauds and legitimate transactions. The technology used
in this includes machine learning and big data technology (Shankar et al. 2021).

Conclusion
         To conclude the banking industry is facing different challenges and threats
over the past few years. These threats have been intensified during the
continuing period of the Covid-19. It has necessitated the banks to re-strategize
to continue their operations sustainably and consistently for the long term. It
has been analyzed that the treasurers can play vital role in stabilizing the
enormous challenges posed by the adverse interest rate environment. They
must take a more comprehensive approach to use the tools against the adverse
banking environment. Further, it has been analyzed that the banks can employ
several measures to reduce the reported NPLs. Lastly, the digital banks are now
the new reality, which the banking institutions must understand and should
accordingly place themselves. They must follow the integrative banking
approach because it helps them to maintain their competitive advantage and
profitability. 

Reference
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