Editorial: Banks in discomfort

With the inflation rate close to 8 per cent, businesses have adopted a wait and watch attitude. This explains the sluggishness in the credit offtake, which cannot be good for the banks. There is some indication that the worst of the inflationary bout is over and C Rangarajan, head of the prime minister's economic advisory council, has predicted a deceleration in prices in around three months. If that should happen and oil prices do not keep piercing the stratosphere, then the Indian economy should settle down to a growth rate of 8-9 per cent and banks can expect to see credit growth pick up again. But we have to wait for that to happen. Right now life is not entirely comfortable for banks. They have just put behind them a non-spectacular quarter with lower operating margins than in several earlier quarters. The bottom line has been dressed up with slower provisioning but this cannot go on. So how the economy stabilises after losing some of its peak momentum of the immediate past will be important for the banks.

The immediate future holds both a plus and a minus. With interest rates not expected to go up right now, bond yields will also see no change. This should help shore up the treasury performance of banks. But what can really affect the banks adversely in the long run is the farm loan waiver. As was feared when the announcement was first made by the government, anecdotal evidence from banks indicates that they are finding agricultural borrowers starting to think that loans don't have to be repaid. Also, the signals on the government making good what is waived are mixed. What the banks have written off before the government announcement will not be reimbursed. Possibly, only non-performing loans not yet written off will be made good. Indian banks have in recent years made enormous investments in deploying information technology, which, if properly leveraged, should improve their cost-competitiveness. In fact, the more aggressive new private banks which are venturing out globally are discovering this to their pleasant surprise. This is a strength which should be built upon. The banking sector, earlier mostly public sector banks, has taken enormous strides in cleaning up its act through the 1990s. The accelerated growth of the current decade has enabled it to build on this foundation while remaining healthy. It will be calamitous if these gains are lost in trying to grapple with the current agricultural crisis.