The Financial Express celebrated the best in Indian banking at the FE Best Banks awards held in Mumbai on Saturday. The fact that we are still able to describe a bank with the adjective is indeed a tribute to the many Indian banks which have shown exceptional resilience in tumultuous times. Pranab Mukherjee struck a similar congratulatory note in his speech at the awards ceremony. He, in fact, went one step further in patting RBI on the back for its role in maintaining the stability of the Indian banking system. The finance minister was hardly alone in expressing this sentiment?the tone of self-congratulation was evident across the wide spectrum of the Indian banking sector. The problem, of course, is that while Indian banking has stayed afloat in the last ten months?which is more than can be said about a large number of their counterparts in the developed world?its success is exemplary only when compared with the dismal state of banking elsewhere. This is not the same as arguing that Indian banking is the best in the world.
Let?s face it, Indian banks survived the crisis partly because they were not exposed to complex financial instruments, but also because they have disbursed credit extremely cautiously. They have also, over the last ten months, charged borrowers extremely high interest rates, completely out of sync with the policy rates set by RBI. The last time RBI policy rates were this low, prime lending rates were much lower than they are now. It isn?t any good for the economy if the banking system stays afloat but in the process of doing so, squeezes the real sector down to an unacceptably low level of growth. By all accounts, credit is still too expensive for a real sector which, at this stage, is arguably feeling the effects of the economic slowdown more severely than the financial sector. The banking system will truly deserve a pat on the back only once it starts channelling credit more aggressively and more cheaply to the sectors which really need it. In this context, it is also important to note that while RBI may have done a commendable job of regulation?again this was more a result of instinctive caution than grand design?it hasn?t done anywhere near as well on monetary policy. There still remains a strong case for further cuts in the interest rate in the monetary policy tomorrow.
