The banking sector has an important role to play in the further modernisation of the Polish economy. We are facing numerous challenges, but a great deal of work has already been done. We have managed to get the bad debt problem under control. Banks have developed and implemented procedures for monitoring all areas of bank activity, with the emphasis on credit action. The majority of Polish banks have organised market observation systems and customer screening schemes. Since 1991 the inter-bank information centre on bad debtors has been in operation. Special reserves for non-performing credits have been created. Progress in the modernisation of bank branches is noticeable and the amount of modern technological solutions is increasing. All of these factors are cost-incurring and strongly influence the position of the various banks.

The previous year's results prove that economic growth is the strongest factor contributing towards the stabilisation and improvement of the position of banks. Increasing economic activity means more profitable credit contracts. It offers the opportunity to enter new markets, previously inaccessible due to high risk levels. GDP growth is accompanied by a decrease in inflation. The continuation of this trend is vital both for the further improvement of the Polish economy and for the preservation of bank capital values in real terms.

The second factor supporting development is competition. Each bank feels the presence of a Polish, and lately foreign, competitor. There are 21 foreign capital banks in Poland. Almost every one is a member of the Polish Bank Association and they act in accordance with Polish regulations. We consider competition an important factor, both to stimulate growth and rationalise costs. The condition of fair competition, however, is the application of the same rules to all participants in the market game.

Polish banks are facing an important challenge: they need to keep a competitive level of service fees and, at the same time, they have to bear the costs of developing and implementing new products and services, mainly in the area of electronic banking. Otherwise they are likely to lose their ever more demanding customers.

The crucial issue is the fast introduction of EDP (electronic data processing) into Polish banks. In the case of large banks the process is extremely demanding and time-consuming. The computerisation of medium-sized or large banks requires large amounts of capital. Bad organisation of the process can mean enormous losses. In Poland some banks are unable to computerise their operations on their own. The strategy for strengthening banking sector has to make provision for covering part of the costs by means of tax deduction, a decrease in dividend or the creation of advantageous credit lines.

The changes in the Polish banking system and the adoption of European standards require not only the development of traditional banking services but also demand fast adaptation to the latest world trends.

Presently no Polish bank acquires capital by means of its own bond issues, neither on the domestic nor on the European market. According to government forecasts, the Polish zloty is to become fully convertible fairly soon and then the Polish financial institutions will enter international ratings. Foreign capital inflow will then increase, together with the need for reliable information. In anticipation of this, at the beginning of last year the Polish Bank Association initiated the creation of regional ratings institutions.

The specialisation in banking services is not just moving in the direction of wholesale and investment banking. Small and medium banks are trying to find their niche markets and to offer their clients various tailor-made services which require the introduction of consultancy and addressed finance engineering.

Economic growth brings an increase in capital demand from companies. There are no doubts that the upward moving economy is encountering a financing barrier. For quite a long time we have been indicating the need to adopt a new Banking Law to ease the credit concentration requirements. The quality of credit risk management in Polish banks is constantly improving and there are no reasons not to adopt the EU solution in this area. Another remedy could be the acceleration of capital growth and of capital concentration. An increase in capital should follow the increase in bank profits.

The Polish banking community has proved on numerous occasions that it is not afraid of the consolidation connected with privatisation. The Polish economy is open to foreign investors and Polish banks are willing to accept information and technology inflows. The objective of privatisation should be the improvement of capital standing and of the quality of management. Consolidation can play a very important part in strengthening the banking sector, bringing economies of scale or synergy effects. Still, there are two conditions. The proposed solutions have to offer strong economic advantages and the consolidation projects cannot be forced upon banks. The experiences of different countries clearly show that hostile consolidation is an unprofitable business, giving results in the long run completely at variance from those expected. The crucial issue in the whole process is the preservation of the market shares of the consolidated entities.

Another challenge is the need for continuous personnel training. I have to stress that the quality of bank personnel at all levels has improved considerably in recent years. Still, in numerous banks methods and schemes of personnel training leave much to be desired. Banks need to have training schemes for every employee, including members of management and supervisory boards. The majority of training activities have to be undertaken by the banks themselves. There is, however, considerable scope left inter-bank schools, especially when it comes to organisation of training and seminars with foreign expert participation.

I have heard quite often that there are three essential success factors: people, procedures and technology. Well, this is true, but I have to stress the human factor plays a crucial role. The managing of a bank in times of transition is a demanding occupation. It requires imagination, flexibility and resistance to stress. Our observations allow me to state that the management boards of Polish banks are generally coping well with this strenuous task.

Although the most difficult stages of transition are complete, the Polish banking community still faces numerous challenges, but I am sure Polish banks can face them confidently.

Andrzej Szukalski has worked as a bank manager since 1967. In 1989 he became President of the Powszechny Bank Gospodarczy SA in Lodz. In 1996 he was appointed President of the Polish Bank Association.

The Polish Bank Association, founded in 1991, is a voluntary chamber of commerce-type organisation encompassing all Polish banks. It is engaged in various legal, economic, training and research activities, as well as numerous inter-bank initiatives. The Association participated in the creation of the National Clearing Chamber, the Bank Telecommunications Company and the Banking Card Issuers Board. The latest initiatives of the Association include the creation of a Futures and Options OTC Clearing system and Central European Rating Agency