State-owned banks, the unfashionable cousins in the banking business for the last 40 years, are now setting the pace
T N Ninan / New Delhi Feb 06, 2010, 00:05 IST
State-owned banks have been the unfashionable cousins in the banking business for the last 40 years. Initially, it was the foreign banks that set the pace — with better growth rates, superior profit numbers, and leadership in innovations. The foreign banks routinely bagged the best corporate customers and the fattest individual accounts. When new private, Indian banks set up shop, leadership passed to ICICI Bank for setting the pace, and HDFC Bank for quality benchmarks. The newer private banks, like Axis, also established excellent track records while becoming financial conglomerates in their own right — with different arms offering insurance, asset management services and investment banking. So the share of the state-owned banks in the total banking business suffered a steady decline, dropping from over 90 per cent to barely 70 per cent. One observer suggested recently that the tipping point had been reached, that the private banks had acquired scale, and they would now increase their share of the pie even faster than before.
Well, we may be in for a surprise, because it is the state-owned banks that may now be setting the pace. Over the past decade and more, they have dramatically improved their performance benchmarks. Non-performing assets (meaning bad loans) have dropped dramatically in relation to total assets — from the double digits to the very low single digits. Stronger balance sheets mean better lending practices. Crisis-ridden banks like Indian Bank and Uco Bank have managed impressive turnarounds, and some of the better ones like Bank of Baroda and Union Bank of India have re-branded themselves. There has also been a concerted drive to play catch-up by digitising operations, introducing convenience banking by installing more ATMs, and copying what the private sector competition offered, like at-par cheques. The state-owned banks also got more aggressive, offering the best rates on housing and other loans and pushing some private players (who typically have a higher cost of funds) out of the market.
It is no surprise, therefore, that the banker who has kept bagging awards in recent years has been the chairman of State Bank of India, OP Bhatt — who is celebrating this weekend what he says is the world’s largest banking digitisation exercise. Mr Bhatt, incidentally, was the banker who caused a fracas in the committee set up with Percy Mistry as chairman to suggest how Mumbai could be made an international centre. The issue which sparked off discord was Mr Mistry’s reference to the state-owned banks as SOBs. Now, it is the SOBs that may have the last laugh.
Along the way, the SOBs have improved their HR record; by offering flexible pay structures they are now able to recruit management graduates from some leading business schools. They have started getting into fee-based and advisory businesses, which helps improve profit margins. And they have the innate advantage of a more extensive branch network, which gives them access to low-cost savings deposits. In the wake of the financial sector earthquake of 2008-09, when even global leaders like Citi seemed in danger of going under, the safety provided by government-owned banks will also weigh heavier in many people’s minds.
None of this should suggest that the private Indian and foreign banks are easy targets. They all have excellent leadership, good business models, strong systems and a hunger for growth. They are also well capitalised — which gives them the headroom to expand their balance sheets quickly. But this much can be said safely: there is now a level playing field for strong competition in the banking sphere. (Disclosure: the Kotak Mahindra Bank group is Business Standard’s largest shareholder).
There is now a level playing field available both for SOBs and private banks but the services provided by SOBs are better than those of the private banks. Two examples are being given: (i) while the SOBs are adopting villages for all round development private banks prefer to remain inactive. Second, while the deposit rates in saving banks are similar in both SOBs and private banks, the private bank will start eating the deposit if deposit remain less than Rs. 5000 while deposit in saving bank a/c in SOBs will remain the same.
Content Guide
