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Banking Sector:Gearing up to Emerge Stronger, by Dhurjati Mukherjee,22 December 2005 Print E-mail

ECONOMIC HIGHLIGHTS

New Delhi, 22 December 2005

Banking Sector

Gearing up to Emerge Stronger

By Dhurjati Mukherjee

Indian banks are set to play an even more important role in the country’s economy. At the recent BanCon 2005, the Finance Minister said that banks’ contribution to national income (GDP) would have to increase from 25 per cent to 50 per cent in the coming years. This would only be possible by raising the size of the banks.

Chidambaram was optimistic that the average rate of return on capital has been 32.8 per cent for Indian banks compared to 16 per cent in China and 19.9 per cent in Singapore. He has been urging for quite some time the need for consolidation among banks.  He pointed out that only 22 Indian entities figure in the top 1000 banks of the world. State Bank of India ranks 83rd; in Asia, however, its position is 11th among the region’s top 25. The largest bank in China, six times as large as SBI, has grabbed the 11th spot among the world’s leading banks.

The consolidation of Indian banks has raised a controversy and most unions have not accepted the idea. Gurudas Dasgupta, M.P. and General Secretary of AITUC, has rejected the idea on the ground that monopolistic growth in the banking sector was not needed and thus not welcome.

Meanwhile, McKinsey has drawn up a dream picture of the Indian banking industry in the year 2010. The sector is expected to employ 1.5 million people and the loans to GDP ratio would be more than 100 per cent. It will, however, need investments of around $600 billion as also certain regulatory changes. The market capitalization of the banking industry is expected to grow from Rs.1700 billion at present to Rs.7500 billion by 2010. A growth rate of 20 to 25 per cent has been envisaged which, judging by current trends, may not be too optimistic a projection. But this may require mergers between private sector and public sector banks for greater consolidation, toeing the line of the Finance Minister.

Though consolidation of banks may have its proponents and opponents, it is a fact that the Indian banking sector has a stronger financial profile than Chinese banks or for that matter banks in most Asian countries, according to a study by Standard & Poor’s (S&P) and its subsidiary CRISIL. In its report titled Indian Top 20 Banks, the two agencies have concluded that Indian banks are stronger on key fundamentals, including credit quality, pre-provisioning profitability and capitalization. Yet, the credit ratings on Chinese banks are higher because of the readiness of the Government to provide substantial resources through capital injections and the sale of the banks non-performing assets to Government-owned asset management companies.

Though the two banking systems share certain attributes such as operations in high-growth environment, the Indian system is subjected to relatively tighter restrictions on foreign ownership and other matters. In both these nations, the state-owned banks dominate the sector, accounting for 70-75 per cent of financial assets in India and 55-60 per cent in China.

Presently Indian banks gross non-performing assets stand at an estimated 8-10 per cent of loans as on March 2005 compared with 30-35 per cent for Chinese banks on December 2004. Indian banks have other strengths too. Although the risk management framework of banks in both the countries is still developing, the report ranked Indian system higher than that of China.

It is being argued, and quite justifiably, that to meet the large infrastructure projects banks have to grow in size. The financing needs for infrastructure development are high and banks could play a vital role in financing such investments, whether in power, roads or telecom sectors. According to the Finance Minister, Indian banks require $11 to 12 billion of Tier-I capital. Keeping this in mind, the Government has moved to liberalize banking laws and the Reserve Bank of India is framing guidelines that will enable banks to raise capital through hybrid instruments.

Indian banks appetite for capital is expected to drastically increase over the next five years to meet the huge demand for credit. Moreover the implementation of Basel II standards is also expected to exert pressure on capital requirements. It has been estimated by various sources, including the Finance Ministry and also J. P. Morgan that over Rs 55,000 to Rs 60,000 crores might be required by banks over the next five years.

Meanwhile, the Government is serious in implementing banking sector reforms and helping the PSU banks to emerge big and strong. Long back, the Reserve Bank of India had suggested the need to impart flexibility for changes in ownership, help mergers/acquisitions, improve corporate governance and motivate the work force so as to improve the functioning of these banks to international standards.

Amalgamation of two public sector banks even without changing their ownership or character and allowing them a better chance to become an Asian champion should be encouraged. In fact, banks need to incorporate changes in their functioning and adopt themselves to the changing economic environment as also the changing demands and needs of the customer.

Technology is an area where more attention needs to be given in the banking sector and this was emphasized by the chiefs of State Bank of India and HDFC Bank at the recently held Infocom 2005 at Kolkata. In this connection, the SBI chairman announced that it has tied up with the TCS to form a joint venture company, C-Edge Technologies with an authorized capital of Rs 40 crores, to provide technology platform for regional rural banks and co-operative banks in the country.

Indian banking has undergone a paradigm change and, in the coming years, it will have to cope with fresh challenges, especially in increasing efficiency and adoption of modern trends of e-banking, as also in making available more credit to the country’s economy. The diversified requirements of a high-growth economy would have to be kept in mind for which the banking industry has to step in with the required resources, especially at such a juncture when the GDP is poised for an 8 per cent growth. However, repayment would have to be strictly ensured so that profitability of the banks is not hindered.

From current trends, the top 10 banks are poised to grow at a fast rate to cope with the competitive dynamics of the present day market. However, this would not be enough for a country of India’s size and dimension and, as such, amalgamations would be necessary to add strength to middle-level banks. ---INFA

 (Copyright, India News and Feature Alliance)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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