How are Indian Banks Doing?

chillibreeze writer — Subramaniam Mohan

Banks in India have had a chequered history. The big business houses that took root in the early part of the last century also spawned quite a number of Commercial Banks in those times. The Birlas started their own Bank in Kolkata and the enterprising Chettiar business community of Tamil Nadu formed theirs in Madras. Coastal and Dakshin Kannada regions in the south also gave birth to several banks, as did Punjab and Maharashtra.

These banks had the financial backing of the business families that started and ran them, who also lent their stamp of trust to these banks for gaining public confidence. The banks gradually grew in size and their operations started expanding geographically and functionally. People who used to hoard their savings within the confines of their homes and occasionally invest in jewellery started realizing that these banks could be trusted with their hard-earned money. Remember, we are talking about those times a century back, when banks were not as ubiquitous as they are now. To lure house-hold savings into the hallowed portals of a commercial bank was no mean task, but the home-grown Indian banks were quite adept at it.

What started as small enterprises that took deposits from the public and used that money to lend to business houses have now grown to larger than life mega-institutions and have become an integral part of the Indian financial system. Today, our own State Bank of India and Punjab National Bank are quite capable of holding their own against their foreign cousins. True, one may not find add-ons like valet parking, plush interiors and channel music inside a desi bank branch but, as SBI would like to put it, one can certainly expect “pure banking & nothing else” from them. Their services come cheap when compared with a foreign bank, even though wags may quip that quality and service level too come at a discount. Well, critics will always carp but they too can’t wish away the pan-India presence and universal acceptability and the range of services on offer of our Indian banks. In comparison, the Citibanks and Stancharts come nowhere close.

But the ride to stardom for these banks was not smooth all the way. The path was strewn with hurdles and pitfalls, some of their own making and some, courtesy state policy. The nationalization of major banks in 1969 was a watershed in their history, altering their course forever. Indira Gandhi, the then Prime Minister, saw a huge opportunity to harvest political gains out of this move and overnight, 14 banks were nationalized and their entire assets and liabilities vested with the State. The avowed objective of this exercise was to facilitate access to the hitherto ‘elite’ banking services to the masses and to channelize the bank’s resources for productive purposes. Banks that were once accused of lending against tangible securities and only to corporate houses, were now directed by the State to pursue need-based lending. Government sponsored poverty alleviation programmes were funded through banks’ deposits through loan-melas and directed credit. What was once the ‘private preserve’ of big corporate houses now unwittingly became the preserve of the ‘neta-babu’ combine. Banks morphed into extended Government arms for public spending with a welfare objective and their basic commercial character was quietly buried. The ‘profit’ word for them went out of fashion and they became well and truly entrenched into socialism. They had come a full circle from their formation years.

Or so people thought! The circle was only half complete, as the banks realized in the nineties. International capital adequacy, income recognition and asset classification norms had come to be accepted globally by this time and our banks could not escape the heat for long. Our banks, used to the shelter of a protective environment of the State for more than two decades, could no longer have that luxury and they were asked to gradually fend for themselves and not to expect doles from the Government. The new accounting rules ensured that income from dud loan assets would no longer go into their kitty but worse, back-breaking provisions had to be made for the same. This double-whammy bled the banks so severely that many of them went into the red and remained there for several years.

On the flip side, the banks learnt the right lessons from the crisis. They stopped taking for granted state protection and went all out to tone up their skills and efficiency. And succeeded quite well too. The umbilical cord with the mother state was not yet fully cut but the spoon-feeding had certainly stopped. The hand that cradled them all along now occasionally started spanking too. And the grown-up banks stopped crying, well almost. They are all back to robust health now, all 27 of them, except for the occasional bouts of flu and cold, certainly not life-threatening. Certainly not “systemically” risky, as the experts would love to put it.

Now this is where the full circle stopped, for the Indian public sector banks. The clear portents are that they can only move up and ahead from here, as a group, and going around in circles is improbable. During all these decades, it would be interesting to observe what was happening on a parallel front in India and worldwide. Meaning, the venerable edifices of Wall Street and the big daddies of Frankfurt. Some of the biggest banks on the globe have their roots in the US and Europe. Each of their total assets and profits are several times bigger than all our Indian banks put together. So much so, that State Bank of India, for all its huge network, does not even figure among the top fifty of the world banks. These big banks from US and Europe, along with those from Japan, have irrevocably made their places of domicile, the financial nerve centres of the world such as New York, Frankfurt, London and Tokyo. These banks were all creations of private enterprise and are run by skilled financial brains and have become benchmarks for efficiency and excellence. From mere financial entities peddling plain-vanilla banking products, over the years, they have developed a complex array of mind-boggling products in wholesale & retail banking, wealth management, derivatives and what not. From mere financial intermediaries, they have evolved into all powerful engines of growth that drive the world economy. They can make or break markets, they even lend to sovereign governments and they are active 24X7 throughout all time zones. Some of them even aver that they “never sleep”!

And quite a few of them do not let even governments sleep, as we see today! This extended insomnia started a couple of years back, with the “sub-prime” crisis, to which every financial daily worth its hue of pink has devoted tones of newsprint, around the globe. Sparing the jargon, the sub-prime crisis global banks got into, was a result of reckless lending to unworthy borrowers against mortgage securities that were not worth the piece of paper they were executed on. Smacking their lips in anticipation of huge interest margins, these banks bent over backwards to out-lend each other against home mortgages. The going was good as long as the housing boom lasted but the bubble grew too big and burst some day. Defaults swamped the system and the deluge of foreclosures became too hot to handle even for the biggies in the business. Slowly, one small bank after another started to collapse under its own weight of sticky assets. Fannie Mae and Freddie Mac, who many in India once assumed to be burger or pizza outlets, became household names for all the wrong reasons. They folded up quietly, unable to bear the onslaught of this sub-prime, and were bailed out by the Federal Government in the US. The unthinkable started happening – the US, the last bastion of capitalism, began shedding its shroud of “laissez faire” and embraced the sick banks with loads of taxpayers’ money! The contagious effect spread to other banks and institutions, slowly but surely. Lehman Brothers collapsed, Wachovia sputtered and the surviving ones too had to take huge hits in their balance sheets. The US administration came out this time with a bigger bail-out package of $750 billion to inject capital into the system and nurse the banks back to health. Time only will tell if this will succeed.

The devastation is now complete and we are right now witnessing a deadly calm after the storm. Governments and banks worldwide are now left to lick their wounds, pick up the pieces and start all over. The world was already susceptible to cold whenever the US sneezed even in the best of times. But these are not the best of times and the US’s sudden seizure has paralysed the global economy. Zero and negative growth rates are not longer something to be ashamed of. Economies have shrunk, industrial output has slowed down, jobs are vanishing and the world is well and truly into a recession.

This again brings this discussion to where it started – the Indian Banks. Could anybody in their wildest imagination have believed that our Indian Banks could survive this catastrophe? But yes, they have. Strangely, it is the Indian Public sector banks, the much-maligned, much-ridiculed poor cousins of their private and foreign counterparts that have weathered the onslaught much better. Even the biggest private sector player in India is facing testing times trying to keep afloat its overseas subsidiary that is caught in the storm. Its public perception too has taken a beating, denials notwithstanding. On the contrary, the Public sector banks, brought up in an ambience of sloth and subservience, their work-culture ruined by belligerent unions which sprung up during the years of rapid expansion following nationalization, their systems and processes archaic and bureaucratic and their very vitals destroyed by political interference, have shown admirable resilience in coping with the crisis.

The high-street type critics have explanations for these. They might argue that the Indian banks can just not fail because of the implied sovereign guarantee. They are wrong. There are instances of even Public sector banks going bankrupt in India (New Bank of India). Only the Government did not let the failure infect the system and it promptly merged the failed bank with a bigger one. And the bigger one could easily digest its prey and is still in fine health. In any event, what is better? The State washing its hands off the financial system and allowing a systemic crisis to develop full blown and wake up too late to do anything fruitful (like in US) or a Government taking up ownership stake and providing dollops of sustenance when required? One would do well to remember that bank failures hit the savers and share-holders more and it is their interest that should be of prime concern.

The other common argument offered as explanation for the Indian banks’ weathering the turmoil is that the Indian financial system is not fully integrated into the world markets and hence the insulating effect. They got it wrong again. No growing economy in the world can be fully insulated from the global crisis, since with economies growing, trade expands, cross-border migration of labour and skills increases, controls dismantled and markets mingle. India is no exception. Hence the insulation theory does not hold water.

What is it then, that can at least partly explain our banks’ relatively good show? Perhaps good managerial skills, perhaps the right dose of government and Central Bank’s intervention, perhaps better prudence in estimating and managing risks. Or a combination of all. Most important, the sine-qua-non of Indian banks is still profits despite the all pervading socialistic preaching, but certainly not greed. The US banks perhaps have a lesson or two to learn from our desi banks from all this.

One moral dilemma that still would plague the US State and society is this – has capitalism failed? Have they got it all wrong all these years? Do they need to change track now and shed some old baggage? One hopes they don’t have to. The crisis is the handiwork of a greedy lot trying to take advantage of a liberal ethos. Like a few adolescent kids getting hold of a Mercedes Benz and blasting off at full speed. And crashing! But it’s not the automobile’s fault.

And the Indian side’s dilemma? Decades of socialism and discrimination have driven away bright minds from the country, the motivation to succeed has taken a beating and the incentive to perform is just not there. Ask that silent faceless minority who have been running our public sector banks, and one will agree. Just when the banks started to change tack, adopt best global practices and were getting ready to give the foreign banks a run for their money, comes this ‘bank-failure’ thunderbolt. May be the Indian Banks should unlearn whatever learnt thus far and should crawl back further deep in to the comfortable arms of its mother and the protector – the Government!

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—About our writer:

A banker by profession and a general interest writer by hobby, Subramaniam has published several articles – fictional pieces included – in newspapers. Economy, finance and banking are topics that interest him, but he does not wish to be typecast.

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