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A Robust Scorecard
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Since the global credit crisis of 2007, banks in the developed economies have had to be bailed out with government largesse (some still need it); banks in emerging markets, on the other hand, looked in good shape (though there have been some noises about government support for a few Chinese banks). Indian banks, on the other hand, have shown some remarkable resilience in the past four years.
Let's start with the strength of their balance sheets. Almost all banks are more than adequately capitalised, well above the regulatory minimums prescribed by the Reserve Bank of India (RBI). If anything, Indian banks are well placed to meet new and more stringent capital standards that will be applicable soon — the Basel III norms — ahead of schedule.
Poor quality assets, or non-performing assets (NPAs) in banking parlance, are well within manageable limits. More importantly, over 70 per cent of potential losses in balance sheets from NPAs have been provided for; in many banks, the provisions for losses is close to 100 per cent, so there will be no life-threatening shocks. Thanks to the central bank's close supervision, the effects of the global credit crisis never reached these shores.
The survey underlines an important element in the banking system: by and large, growth and profitability, even among the most aggressive banks, has been consistent and sustainable. In fact, the jury that decided the awards — which they selected based on the rankings emerging from the survey — posited sustainability and consistency of performance as a criterion, and found that our banks' performance demonstrates just that.
Across the many parameters outlined in the methodology of the survey, the analysis showed consistent performance across the three-year period. It is no accident that the majority of the nominees for the awards end up on the shortlist year after year: that is what consistency is all about.
But the analysis threw up some challenges as well. Take bank profitability. The upward trends in profits have been maintained, but most of it comes from Tier 1 and Tier 2 cities. Banks, like insurance companies, fear adverse selection in making loans, so play it safe.
Yet, there is enormous potential in rural markets and in Tier 3-6 towns, where the right business model can generate enormous (and sustainable) returns. Most banks have had bad experiences with directed credit, the losses from which they have had to write off. In coming years — the next two or three to be precise— the opportunity to direct that credit strategically is too big to be ignored. Some, like the winner of the Most Socially Responsible Bank award — our hat tip to financial inclusion — already do it well and successfully.
The Governance Dividend
Each year, public disclosure standards are improving. Banks are listing on stock exchanges, which requires greater disclosure to investors and shareholders. That will continue, since banks will need capital to finance lending, and public markets are the best place to get them. Stock analysts track the banks closely and publish reports; after all, banks account for a big chunk of market capitalisation.
The RBI also requires greater disclosures and prudential supervision is strong; banks themselves have shown greater willingness to share data. The survey showed, for instance, that the proportion of off-balance sheet items has been growing, something the central bank takes note of carefully, as does the analyst community.
Technology platforms and cloud computing, allied with greater Internet penetration can create entrepreneurs in semi-urban and rural areas. Till that happens, mobile payment systems, even for small transactions can play a big role in bringing financial services to the unbanked.
Apart from increasing financial literacy, banks will have to invest in technology literacy programmes as well. But that is an investment that can lead to enormous payoffs. As more people use banking services, the high costs of cash transactions will come down; and in rural India, those costs are very high.
Allied with the government's unique identification (UID) number project, the possibilities of mobile telephony platforms are also endless.
But banks themselves — and their managements — need to do more to take their business further, and proactively. Most
open branches in the hinterland because regulation requires it. Few banks have consciously taken decisions to go beyond the minimum requirements.
|Click here to view 'Sustainable Growth'|
A study of data collected by the RBI shows that taken statewise, credit deposit ratios are quite lopsided. In many a state, just about 50 per cent of the deposits raised in it are deployed back as credit; instead, it funds entrepreneurs in another state. True, there may be no opportunities available, but are banks looking harder?
The recent downgrade of the nation's largest bank posed some troubling questions; are banks growing too aggressively? Many enlightened ones we spoke to during the course of putting this special issue together have been aware of some of the risks of that aggression.
The survey showed varying degrees of volatility in the parameters chosen for putting together the analysis, particularly growth parameters. That appears to suggest that many banks are looking for guidance and direction in managing potential operating and business risks. Others are addressing them directly.
Overall, however, the survey showed balance sheet resilience, solid provisioning and sustainable profitability. Perhaps most surprisingly — and this is endorsed by the RBI's own analysis — most small banks have, despite their aggression and desire to break out into the national scene, very strong balance sheets. The state of Indian banks, like the state of our republic, is strong.
(This story was published in Businessworld Issue Dated 28-11-2011)