The people-profit balance

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: The theme of this year’s Best Banks survey by The Financial Express couldn't have been more appropriate, timely and relevant. “Banking for the Billion” has found strong resonance in headline financial news. The State Bank of India has opened its 10,000th branch—it’s now the world’s second largest bank by branch numbers. And millions of farmers are supposed to benefit from, as American and European trade negotiators are muttering, a $15 billion (that’s globalization-speak for Rs 60,000 crore) subsidy (we are calling it bank loan waiver). Inclusive banking, the topic this collection explores extensively, with some of the best banking brains contributing, could have hardly found a better news context.

Indeed, the two stories — SBI’s 10,000 branches and the bank loan waiver for farmers — catch the tension that defines, energizes and complicates Indian banks’ attempted transition to global scale modernity: how many people can banks reach out to and what, in cold financial terms, are the effects of inclusion on asset quality.

When the question comes up can people and profits be served together by banks, the answer cannot ignore the data that access to non-institutional credit is on the uptick since 1991. That is, roughly from the time India started liberalizing, moneylenders and other non-banking credit sources are lending more and more. This is almost counterintuitive; you would expect banks to replace non-banking agents as the economy modernizes. Therefore, banking for billions, aka, financial inclusion, is a project invested with the special urgency — a trillion-dollar economy can’t really be playing host to increasing number of moneylenders. But pell-mell branch expansion may not serve the purpose either. If only because the addition to staff strength is a big, immediate cost item when profitability of new branches is an uncertain medium term possibility. Is technology — internet banking, mobile banking, ATMs — an answer? But how do you use technology in India’s 600 rural districts?

We hope this collection of analyses, put together on the occasion of FE’s Best Bank awards, identifies the right questions and provides at least a few pointers to how banks can viably reach a billion people.

Needless to say Ernst & Young, our doughty knowledge partner, has, as always, asked all the right questions and crunched the data as painstakingly and fairly as they always do to come up with the list of the best among India’s banks. We divide banks into categories that are now familiar to those who follow FE Best Bank awards: public sector, old private sector, new private sector and foreign.

Interestingly, the survey was conducted when global and Indian good times were rolling. By the time we publish this, the credit squeeze in the US threatens to choke growth across the world. Well, that’s the market. But the basic conclusions about banking fundamentals haven’t changed in the financial whirl. That is an indication of both the staying power of the Indian economic story and of India’s banking system.Strength and soundness and credit quality are two of the parameters in this survey. These are important every year. But when banks cope with turbulence these parameters acquire special importance. Let’s put it this way: When interest rates climb, how successful are banks from keeping loans going bad?