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The Rediff Business Interview/ M N Dandekar

'We offer certain services that cannot be matched by foreign banks'

Set up in 1946, the Indian Banks Association, IBA, comprising the managements of public sector banks, has emerged as an important, influential and effective link between the bank employees and the government. Over the years, the IBA has metamorphosed into a voluntary service organisation representing various constituents of banking and finance industry: public sector and private sector banks, urban co-operative banks, development financial institutions, federations of agricultural banks, mutual funds and district central co-operative banks.

In this interview with Sahil Meena, IMA chief executive and secretary, M N Dandekar, describes the current status of banking services in India and the need to enhance its development.

What is your view of the current state of banking services in India?

The latest debate on the banking industry started in 1991-92, when the first Narasimham Committee talked about changes in the banking operations. Of course, the panel didn't look at the balance-sheets at that time. They wanted interest collection to be on the basis of cash. These were called prudential norms.

So the move toward sound banking started with the cleaning up of the balance-sheets. In fact, till then, banking was a regulated activity: the interest rate, deposit advances, charges, etc, were all regulated. Competition was also limited. The industry consisted of public sector banks with a few private and foreign banks. Use of technology was also very limited.

Now, with liberalisation and globalisation in the air, the need of changes in the banking sector is felt strongly. Soon after the 1991 crisis situation, several public sector banks State Bank of India, Bank of Baroda, Bank of India, Dena Bank, Oriental Bank and Corporation Bank went public, in a bid to boost their capital and assets. This signalled a change in approach. It brought about share-holders' participation in banks.

In terms of services, what kind of changes have taken place since 1991?

Banks today have the freedom to quote their depository rates and deal in sale of bullion, a service banks provide besides the traditional ones. From 1994-95, banks has gone in for computerisation of their branches in big way.

More than 3,000 branches have been computerised. By 2000, we will computerise 6,000 branches across the country. Now we are looking at telephone-banking, Internet-banking, etc, but all that depends on our communication network. If the communication network is strong, all these things can be introduced.

Thus, now you have a new and clean image of banks. Some banks like Corporation Bank have initiated a new system where one can present a cheque to some other branch by way of digital transmission. The customer's signature will get electronically approved from the place where the account is established and finally the payment will be made over there. A few private sector banks already have these facilities. It should be noted that everything comes at a cost, it's never free. So these issues have to be taken into account.

Still, compared with banks in the West, Indian banks lag behind in the adoption of the Internet and other technologies. Why?

Communication infrastructure in India is still not the way it is in the West. Our networking is still not that wide and is dependent on lease lines which frequently give way. The V-SAT system (very small aperture terminals) is excellent, it doesn't have any problem of line breakdowns, etc, but it will take time to introduce this system on a larger scale.

Ultimately, networking is the key. If we have the communication networking properly, we will be able to do that. Another issue is of cost, its training and internalisation. Now we are not talking of branch computerisation, but of total bank computerisation.

That said, let me add: computerisation will be done at places where volumes are high. We are not going to rural and semi-urban places where volumes are minimum. So, it is done mostly in metropolitan centres.

What is your view of the response of Indian banks to competition from foreign banks?

Under the agreement with the World Trade Organisation, foreign banks are allowed to open 12 branches in a year. In 1998-99, they did not open any single branch. This, of course, depends on the amount of business. The permission was given basically to stir the existing banking sector into expansion / broadbasing activity.

For example, if a local branch of a bank is fully networked, computerised and in a position to process data faster, other banks in the neighbourhood will be forced to follow suit. In case of nationalised banks in rural and semi-urban areas, they have loyal customers, depositors and other patrons. Resources in public sector banks are not the problem; but in the West, banks have to hunt for resources. Resources are our strength. Therefore, nobody wants to be left out; everyone wants to catch up with computerisation.

Is India moving from cash to plastic money?

I don't think so. Plastic money is not very visible, contrary to the popular perception. We've only three million credit cards now, but that is because of our culture that does not encourage borrowing.

The plastic money business has a lot of rough edges. Defaults and excess charges are a major worry. Good marketing, customer education and so forth are required.

The banks need to identify credit card customers properly and do the back-office work well. Credit bureaux have to be established to house wide-rainging data on customers and business opportunities.

In fact, for the last one year, the IBA is working on the concept of credit bureau. We have consulted the Reserve Bank of India and are in the process of setting up a group. Once done, the group will usher in consumer banking in a big way.

Talking of customer satisfaction, why is there this perception that customers of foreign banks and private sector banks are better served than others?

There is a difference. Customer satisfaction in public sector banks and others is not comparable. Foreign banks don't allow you to open an account with Rs 100. You need Rs 60,000 to open an account with foreign banks and Rs 5,000 for private banks. I'm not complaining, mind you. So they have a different clientele, that is my point.

Public sector banks have a social responsibility. They cannot demand Rs 60,000 or Rs 5,000 from customers as the minimum amount for opening an account. We offer certain services that cannot be matched by foreign banks. In fact, foreign banks won't be able to cope with those volumes!

It is not that public sector banks are not sensitive to the need to offer efficient customer service. Efforts are on to improve it. The staff are being offered various training programmes.

Which growth area holds the maximum promise for banking industry?

Retail banking. Today, it is corporate banking, no doubt, but corporate customers have other alternatives. Morever, the field is becoming highly competitive. But retail banking is the only area where banks can provide services for consumer banking, retail deposits, advances, shares, etc. These are all growth areas.

How deep do you think foreign banks will penetrate in India?

I feel foreign banks will remain on the periphery. They will look at metros, cities, towns and port-towns. They will concentrate on export-import business.

Do you agree that banking services have by and large improved after the advent of foreign banks in India?

Yes definitely. See, no one likes to be called "useless". Generally, people tend to shape up in the face of competition. The presence of banks with global-scale exposure in India is bound to improve the general attitude to work in all banks. So will computerisation.

What other services will Indian banks offer in the days to come?

The Gold Bonds Scheme has been announced in the Budget. New converse-banking is also coming up. Housing finance will grow very substantially, what with imminent changes in laws related to land tax, urban land ceiling.

What about vehicle loans?

I'm not against car loans. After all, that is a kind of business, a paying business at that. At the same time, air-pollution is a serious issue, you can't ignore it. Car loans should be taxed. The government should tax the car loans and use the money to improve environment.

Is it only a thought or is the IBA planning to make this an issue?

It's not the IBA's duty to tell people what to do and what not to do. It's my personal opinion.

How do you visualise banking services in the next five years?

I expect to see small, even tiny but very efficient banks. Their back-office work will be done somewhere else, data will be processed and transferred faster, balance-sheets will be prepared quickly, asset-liability management will improve.

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