A Hard Look In The Mirror

Written by Sourav Majumdar | Updated: Apr 10 2002, 05:30am hrs
In these columns, I have argued earlier about the need for consolidation in the Indian banking sector. I have discussed how, in the present changing scenario in Indian banking, it is imperative that private banks, which are not in the top bracket in terms of either size or profitability, need to come together and consolidate to create organisations of greater strength and size so that they achieve some critical mass. Let us now take a look at the issues which the countrys public sector banks are faced with.

The rules of the game have undergone a massive transformation over the last few years, be it in terms of capital adequacy, technology, the thrust on retail, branding, cross-selling etc. Banking as we knew it in the late eighties and even in the early nineties is obsolete. Against this background, last weeks Banking Summit 2002 organised by the Confederation of Indian Industry assumes enormous importance. The summit came at a time when the process of churning in the Indian banking environment has reached a frenetic pace, with the government and the Reserve Bank of India laudably keeping step with changes in the financial sector in the rest of the world and freeing many of the shackles for the banks.

The biggest names in the world of banking representing state-run, private and foreign banks spent two days discussing the imperatives for banking in India. The issues covered the non-performing assets overhang, technology, retail banking, risk management and corporate governance. And the summit clearly brought out the growing gap between the state-run and foreign banks. Whether in size, technology, or marketing strategies, it was clear that with the exception of a few, state-run banks were in urgent need of competitive strategies for survival.

What does the changing banking scenario mean for PSBs With the rules of the game favouring the forward-looking, fleet-footed players, what do the bulk of the state-run banks have with them as unique selling propositions With global banking behemoths like Citigroup, HSBC, ABN Amro, ING and others eyeing India more seriously than ever before, the time has come for the home-grown, sarkari banks to take a long, hard look at themselves. The knees may not yet be knocking, but there is a certain weakness which does not allow them to be fleet-footed.

And while the robust foreign banks are getting ready to storm the Indian financial system with renewed vigour, their Indian counterparts are still trying to rustle up some kind of meek counter-strategy. Raising the flag of nationalism, as one PSB chairman did at the CII summit to everyones horror, wont suffice. Todays foreign banks, mostly headed by Indians, are as desi in approach and strategy as any state-run bank. What is needed for the PSBs to survive is size coupled with soundness of strategy.

Consider the bare facts. Banking groups like Citi, HSBC, StanChart and AmEx have all been in India for anywhere between 100 and 150 years, and dont need to be taught the basics of banking in this country. They are well versed with the changing face of the Indian customer, his preferences, his tilt towards technology and the fact that he loves the bank to pamper him. And they are doing all that and more, with cutting edge technology, a range of retail and customised products, and marketing savvy. In size, some of them have global balance sheets of over $500 billion, and even a miniscule fraction of that, as ICICI boss K V Kamath said at the summit, can be enough to alter the face of banking in India if they chose to get more aggressive.

On the other hand, even the desi giants like State Bank of India, which has a balance sheet size of well over Rs 1 lakh crore, or even the new merged private sector ICICI Bank, which will have a combined balance sheet size of Rs 95,000 crore, look puny in the global context. And the rest do not account for anything at all. So where does that leave the rest of the PSBs

In todays world, being big in the Indian context is not big at all. Youve got to be a big boy of global size. And this is where the majority of state-run banks will get badly hit unless they begin to consolidate urgently. Mergers are now a necessity, and RBI needs to nudge the stronger among the state-run banks to come together to create much larger banking organisations in order to take on the foreign banks. Once they merge, their shares can be offloaded by way of a divestment exercise. Strength will have to come by size, not by the number of banks in existence.

For the smaller and weaker state-run banks, a balance sheet clean-up has to be undertaken on a war footing. And once they are cleaned up, they can even be offloaded to foreign banks interested in acquisitions. Judging by a recent conversation I had with the CEO of one of the big foreign banks operating in India, there will not be a dearth of interest from the foreign banks side in picking up smaller state-run banks since there is the ready benefit of reach. But unless the laws are amended quickly to bring down government equity in state-run banks, and unless they are given the freedom to come together and create organisations of global size, these banks may end up relegated to the Jurassic Park of the Indian financial system.