EDITORIAL

Valuation Vortex
How undervalued are Indian banks?

Banker Of The Year
ICICI Bank CEO & MD K V Kamath

Innovate & flourish
Bankers are tweaking their products to attract customers. Will they bite?

The Urge To Merge
The only option left for weak & small co-operative banks is to merge with bigger peers

The Vanishing NPAs
Banks bounce back in 2005-06, posting a growth in net profits and reducing NPAs

Database
All the data you wanted on banks

Database on Co-operative banks

Database of PSU, Foreign & Private banks

AK Khandelwal: There is absolutely no doubt that the banks in India would certainly participate in the growth story, but let us get down to certain basics. Today skill sets are moving even at senior levels from public sector banks to other banks. We have to create skill sets and possibly go for alliances with other banks and look at this sector a little more carefully.

There has to be a collaborative approach between banks, government, regulator on infrastructure financing. As such infrastructure projects are quite risky in terms of completion and deadlines and, therefore, the banks run additional risks of timely completion of these. There are three kinds of risks – interest rate risk, liquidity risk and asset liability mismatches.

How do we go about this? The RH Patil Committee has already raised the issue of long-term funds. That is the key problem. I have requested the RBI governor to set up a study group on how to tackle this problem.

Naina Lal Kidwai: We need to make a dramatic change in the way we are dealing with banks and banks’ relationship with corporates to ensure that the growth momentum can continue. The formal financial institutions attract only half of India’s household savings... We have got about $200 billion tied up in gold and we don’t have products like gold deposits which can attract that saving. The same financial institutions allocate more than half of the capital that they attract to the least productive areas like the state-owned enterprises, agriculture and unorganised sectors. This means that only 43 per cent of the commercial credit is going to our most productive growth areas. We have an issue in terms of how we raise capital and allocate it. We have great banks, many of which are present here, but we still have an issue in terms of the robustness of the sector.

We have got about $200 billion tied up in gold but we don’t have products like gold deposits which can attract those saving Naina Lal Kidwai, country head, HSBC India

Among the top 10 banks in the world, there are two Chinese banks but there isn’t even a single Indian bank among the top 50. We have a fast growing economy and the companies are truly becoming global but there is no global bank.

We have a vibrant equity capital market but we don’t have a vibrant corporate bond market. If we don’t tackle that, the small lender will get squeezed out because the large lenders will depend on the banking system The inter-relationship between the markets and the access to funds is another critical area which I believe will need to be addressed. Finally, we still have an archaic payment technologies. We do need to ensure that all of us work on the same technology platform which enables quick and easy systems across the board. We could, in fact, be looking at some base technology platforms which will enable us to consolidate.

VP Shetty: There are problems of capital, consolidation, long-term debt requirement, skill sets and the best practices. The banking system has grown five-fold in terms of total business over the last few years. The baseline growth of 7 to 9 per cent in the next five years naturally calls for huge investments. It also calls for huge amount of savings to be channeled. I am sure that the banking system can meet these challenges.

KV Kamath: We had similar constraints in 1996 in an environment which was much more gloomy when Indian industry was rapidly going downhill. We recognised the need for infrastructure and wondered where this money was going to come from. Our ability to borrow then was not probably what it is today. The banks were not as prepared in terms of meeting opportunities as they are today. I start with the proposition that yes, we can meet the challenge. That India is going to grow at 10 per cent to me is given. That it will grow for the next 10 years is also given. Six years back we could pose the same question to the manufacturing industry: Can it sustain the growth? It was collapsing then and now the Indian manufacturing industry is a global force. The firms are hugely competitive and they have done it the hard way. They have literally cleaned up the shop floor and re-geared themselves up, improved productivity and efficiency, cut costs, done everything that needed to be done absolutely well.

The real challenge is banking the unbanked 600 million people in India who really don’t have access to banking K V Kamath, MD and CEO, ICICI Bank

In the last four years, corporate India’s growth was in the 20-30 per cent range. This is what is creating a spur in terms of what banks need to respond in this context.

There are two challenges. One is the corporate challenge. The second and the bigger challenge is banking the unbanked 600 million people in India who really don’t have access to banking.

Resources will always be constraint in a growing economy of our size. But given the fact that there is a strong global interest in India, we can blend domestic and global access. Our corporations have had a free access to both global capital – equity as well as global debt. We need to get this sort of access to banks so that they can manage their balance sheet better. We need to shore up the capital.

The next challenge is increasing the operational and technology efficiency. The government or the RBI cannot do anything about this. We have to do this. I entirely agree with Naina when she says that this is probably the right time to have technology consolidation. This is an area where the majority shareholder, the Government, could actually talk to its wards. Consolidation has to happen and this is unavoidable even though we will move at our own pace. If we have diverse technology platforms then the process will be pushed back by another five years.

We are not going to solve the problem by saying that we have a skill sets problem. We have developed online training material and we could create a large pool of human capital. A small step has been taken by us and I am sure other banks will take similar steps. The other challenge is creating reach and distribution to reach the unbanked. The solutions that are required here are completely different from what we have in urban India. It has to be a partnership model.

Some elements required for the growth are in place and others are being built. We need to grow in an inclusive manner and it is not an impossible challenge. I just want to remind myself that six years back we thought growing a retail market was impossible. Indeed, every bank has now taken steps to grow the retail consumer credit market. At this point, inclusive growth for the 600 million unbanked appears to be an impossible challenge. If we take care to scale ourselves properly, get the right technology, the right people and then talk to the decision makers to create a hybrid model of partnership which can reach out to this mass, I think we will succeed.

HOME    Business Standard • November 2006