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The Rediff Business Special/The most criticised industry in 1999

Banking: from the year of making choices to the year of second generation reforms

Faced with the challenge of globalisation and technology, Indian banks spent most of 1999 preparing for the next millennium without knowing much how to carry their past baggage along.

The State Bank of India and Bank of Baroda are firmly set for privatisation. The Union government, being the majority owner, is equally prepared to lose 51 per cent stake in these banks.

If the government has to settle for an under 50 per cent ownership, it needs to change many statutes including the State Bank of India Act.

When Banking Secretary Devi Dayal announced that the government would change the laws to enable bank privatisation, interestingly, there was not much opposition from the unions.

Besides the need for autonomy, banks are heading towards privatisation since the government has shown no interest in contributing the additional funds required for improving their capital adequacy ratios.

The Reserve Bank of India wants the banks to have a CAR of nine per cent by April 2000 and ten per cent by 2001.

Most of the state-owned banks either need to go in for additional capital rightaway or are on the margins. Moreover, they need additional capital for expansion of their business and profitability as competition from new-generation private and foreign banks hots up.

Competition is also coming from development finance institutions or DFIs like ICICI that are converting themselves into universal banks, rather than restricting themselves to their traditional role.

The sincere efforts by the government to strengthen its state-owned banks through recapitalisaton of funds, without giving much autonomy in functioning of these banks, could not bring the desired results. For there were agitations by bank employees and institutions against the privatisation policy of the government.

Contrary to the privatisation objective, several loss-making old private banks were merged with public sector banks during the year while a few new private sector banks could not survive on their own and decided to merge themselves with large reputed private banks.

TimesBank merged with HDFC Bank. Talks are on to merge Centurian Bank and the Bank of Punjab with big ones like IDBI Bank and ICICI Bank. The Bank of Sikkim has been merged with the Union Bank of India. The State Bank of Banares was merged with the Bank of Baroda.

Growing competition has led to squeezing of margins of banks from their past limited area of borrowing and lending. Most of the PSU banks showed decline in various profitability parameters in their financial year ended 1998-99 over the previous year.

For instance, the SBI's return on assets dropped from 1.11 per cent in 1997-98 to 0.51 per cent in 1998-99, its return on equity from 21.17 per cent to 10.27 per cent while the percentage of its non-interest income to gross income declined to 14.67 from 15.08.

Situation was not all that different for the old private sector banks for whom the biggest problem is non-performing assets and the inability of their owners to pump in additional funds to meet the CAR norms of the central bank.

The Bank of Madura, Bank of Rajasthan, South Indian Bank, Vysya Bank, Karur Vysya Bank, Karnataka Bank and Dhanalakshmi Bank fall under this category of banks facing an uphill task.

So far as the new generation private sector banks are concerned, the consolidation phase began with HDFC Bank taking over TimesBank. There are reports that the ICICI Bank is negotiating with the Bank of Punjab and Centurion Bank for the takeover. Among them, HDFC Bank and the ICICI Bank remained the fancy of investors in the stock market since it is believed that these are the banks to watch even while the consolidation phase picks up.

The technology drive was led by the private sector banks along with ICICI which now calls itself a universal bank. ICICI has the distinction of being the first Asian bank to get a listing on the New York Stock Exchange for its American Depository Receipts. Its banking arm, ICICI Bank, has remained pro-active on the Internet banking front.

ICICI's growth plan is not based on the traditional brick-and-mortar expansion. Its plan is to leverage the Internet for expanding businesses and go where the business is in the emerging industries like fast-moving consumer goods and information technology.

The PSU banks may be slow in computerisation, but the realisation is fast coming that unless they modernise, they would perish. The old opposition from the unions against branch modernisation has completely gone. The Reserve Bank of India is putting additional pressure and wanting these banks to link up their branches through VSATs and the Internet.

Along with technology, these banks are exploring new business areas like the credit cards.The SBI-GE Capital joint venture is perceived to be the biggest threat to the monopoly of Citibank in the plastic money market.

While the ICICI and its managing director K V Kamath hogged the limelight, the other two development finance institutions -- the Industrial Finance Corporation of India and Industrial Development Bank of India remained in the news mostly for wrong reasons.

High level of non performing assets had hit the bottomline of these DFIs so much that at least one of them found it hard to get subscriptions for its rights issue. While the IDBI has commissioned management expert Mritunjaya Athreya to write the future strategy for the bank, the government holding of 72 per cent is said to be the stumbling block for the IDBI to getting aggressive with required autonomy.

The RBI-appointed Verma Committee on weak banks was one of the features of Indian banking in 1999. The committee had recommended recapitalisation of the Indian Bank, Uco Bank and the United Bank of India to the extent of Rs 55 billion subject to 25 per cent voluntary retirement scheme implementation.

The Confederation of Indian Industry went a step further and suggested closure of these banks, stirring the hornet's nest. The apex chamber had to ultimately withdraw its recommendations after the agitated bank employees turned the tables on its president Rahul Bajaj and other leading industrialists by blaming them for bulk of the NPAs.

While 1999 would go down as the year of making choices for the banking industry, it is in for trying times ahead, times full of challenges and opportunities, as the country adopts the second generation reforms.

UNI

OTHER YEAR-END REPORTS

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