Reduce state control

Updated: Jan 19 2005, 05:30am hrs

There are 90 scheduled commercial banks (SCBs) with a network of 54,275 offices, and total assets of Rs 19,750 billion. The total income of all SCBs in India increased 6.6% during FY2004 to Rs 1,838 billion.

SCBs net interest income as a percentage of average assets increased from 2.79% in FY2002 to 3.07% in FY2004. Net profit of all SCBs jumped 30.8% during FY2004 to Rs 223 billion. As a percentage of average assets, it has more than doubled from 0.54% in FY2001 to 1.21% in FY2004, due to a sharp rise in net profit from sale/revaluation of investments, decline in deposit rates, non-performing assets and intermediation costs and stickiness of lending rates.

Overall capital adequacy ratio (CAR) of SCBs has improved from 11.1% during FY2000 to 12.9% during FY2004, due to a rise in profitability and issue of equity shares.

Gross NPAs, as a percentage of gross advances declined from 8.8% at end-FY2003 (12.7% at end-FY2000) to 7.2% at end-FY2004 and net NPAs, as a percentage of net advances, also declined from 4.4% to 2.9% (6.7% at end-FY2000).


Despite VRS, public sector banks remain overstaffed, which may reduce their leverage to cut intermediation costs and lending rates.

Profit growth for SCBs is likely to be subdued in FY2005 because the upward movement in interest rates would reduce trading income.

Although industry concentration levels have declined because of reduced dominance of PSBs and emergence of private sector banks, consolidation is likely to increase concentration. Apart from the possible benefits of scale economies through mergers, SCBs also expect to exploit revenue scope and product mix economies by cross-selling different types of financial services. The trend towards universal banking may result in cost savings.

There has been a significant increase in retail lending portfolio with a growing income of the middle class, change in attitude towards credit, declining interest rates, fiscal incentives from the government, and low default rate and NPAs. Retail lending, may, however, increase the indebtedness of households, with implications for repayment in a downturn.

It may also crowd out bank credit for investment activities.

SCBs' excess investments in low-risk government securities has the risk of crowding out bank financing to the commercial sector. A large fraction of bank deposits are being deployed for holding government securities.

With the emphasis on agriculture lending, the I-T benefit of 7.5% of total income and 10% of the average aggregate rural advance may be raised to 15% and 20%, respectively. Infrastructure investment should receive a major thrust in Budget.
K Cherian Varghese,
Chairman & MD, Union Bank of India

fe Perspective

Voting rights should be made pari-passu with the shareholding in private sector banks

To encourage consolidation, allow private banks the benefit of carry forward and set off of accumulated losses

CII suggestions

Permit banks to raise long-term funds and exempt these from SLR and CRR

Allow deduction for initial contribution of capital by banks in asset reconstruction companies (ARCs) and exempt ARCs from tax

FICCI Wishlist

Reactivate project financing by strengthening development financial institutions so that long-term funds are available for a 10-15 year duration to the corporate sector at a lower 5-6% interest rate