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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