State and local banks unable to compete with foreign banks
Hundreds of bank branches can be found in India's capital, nestled behind metal grates in concrete buildings and tucked down alleyways off busy thoroughfares. Many of the offices are jockeying for attention with battered signs and offers of high rates for deposits and low-rate loans.
India's drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts said. Two-thirds of India's banking business is conducted through less than 5 per cent of its branches, and its growing corporate sector has headed overseas for financial advice and loans. Consultants at McKinsey estimate that some US$48 billion could be added to India's annual gross domestic product (GDP), bringing its growth rate on par with China's, if India's financial system were made more productive.
Powerful bank unions and politics, though, are making that impossible, and the issue will come to a head in the next few weeks: An umbrella group of nine bank unions is calling for a nationwide strike at the end of this month to protest a litany of complaints, including pressure to merge.
India's banking system has its roots in sometimes centuries-old regional banks that spread through acquisitions and as their customers migrated. The major banks were nationalised in 1969 amid promises of lending to rural areas and secure jobs, especially for the underclasses.
The legacy of banks as tools for social reform, though, is colliding with India's accelerating economic growth. An estimated 70 per cent of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are leaching benefits from faster growing parts of the economy, said political leaders and economists.
'We need a further deepening and widening through a reform of our banking and financial system,' Prime Minister Manmohan Singh recently told executives at a conference in Delhi, 'so that the underlying potential of savings and resources can be mobilised and deployed efficiently.'
Making changes, though, is proving difficult and slow. Despite India's big and rapidly growing middle class, and the global ambitions of its corporate sector, its banks remain tiny and their focus local. Only one, the State Bank of India, numbered among the world's top 250 banking companies ranked by assets, comes in at No 83, according to data from American Banker. In contrast, there are four Chinese banks in the top 35.
An attempt to lower the government's stake in public banks from 51 to 33 per cent and to allow them to merge with each other has been met with staunch resistance from the 750,000 public bank employees, who have strong unions.
As the country's fast-growing corporate sector takes off, the banks are being left behind. None of the multibillion-dollar cross-border deals that Indian companies have undertaken in recent months have relied on a state bank. Instead, companies are turning to Wall Street firms and global commercial banks.
Foreign private banks are also knocking on the door, hoping to lure high earners from the country that this year became Asia's biggest home of billionaires, knocking Japan from the top spot.
Ultimately, state and local banks may not be able to compete, leaving the country with a two-tiered system, with the largest companies and richest individuals putting their money elsewhere, the gloomiest critics said.
Suggestions for fixing the system include lifting lending requirements to direct assets from small businesses to the more profitable corporate sector, allowing more foreign ownership of Indian banks, and reducing state ownership in the banking system.
Right now, the largely state-dominated banking system funnels about 70 per cent of the net savings of the economy into government and state-owned enterprises, and finances a huge budget deficit, about 9 per cent of GDP, McKinsey said. Making changes necessary and reducing the government's dependence on these funds would require huge changes in the way that India thinks about its banking system, from a solution to social ills to an independent capitalist industry.
'If there ever was a time that India can afford to make some of those changes, it is now,' said Diana Farrell, director of the McKinsey Global Institute. The statement is 'not a prediction, but a plea', she added.
The government's insistence on holding a controlling stake in the country's biggest banks is 'what's holding up growth at the moment', said Amit Tandon, managing director with Fitch Ratings in Mumbai, and a former head of investment banking operations at ICICI Bank, one of India's largest private banks. Private banks, which make up less than a quarter of India's financial system, consistently outperform their government peers.
While all of the State Bank of India branches now have computers, less than half of these can communicate with each other. Customers who make a deposit at one branch wait 10 to 15 days before being able to receive it at another.
The State Bank of India, the largest government-controlled bank, has 9,000 branches, 1,000 more than the global financial giant Citigroup and its subsidiary CitiFinancial together, and some 205,500 employees.
Managers said they are not concerned about new competition from foreign banks. 'People have faith in the bank and the service is there,' said a manager in the Delhi branch. - NYT
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