The Reserve Bank of India?s (RBI) Report On Trend And Progress Of Banking In India (2001-02) is as important for the sheer value of the statistics it contains as it is for the signals the central bank sends through it to the country?s banking and financial system. In these times, where banks are increasingly under pressure to innovate and chalk out their own differentiators, the RBI report has important warning signals and pointers to the future. It is important in this context to consider, very broadly, some of the issues which the central bank raises.
The RBI makes it clear that the Indian banking environment has changed virtually unrecognisably. While new avenues for banks have opened up, they have brought with them new risks as well, which the banks will now have to contend with, and overcome. A crucial element of this change, then, will have to be how banks deal with the new systemic risks and adapt themselves internally to them. In this context, the RBI has correctly pointed to the need for greater, and ?dynamic? provisioning by banks. It has cited the international levels of provisions as high as 140 per cent, and compared that with the 42.5 per cent cumulative provisions by state-run banks to underscore its point. Full provisioning, the RBI has said, needs to be a priority corporate goal for these banks. Clearly, in the new environment, banks will have to look ahead and adapt their provisioning practices to suit the requirements of the times. Like RBI rightly points out in the report, the seeds of the problem of non-performing assets are most often sown in times of an upswing, and the disastrous effects seen when the going ceases to be that good.
The other thing which RBI?s report makes clear is that state-run banks need to be much more dynamic in terms of their business models in these times. Some statistics which the report provides will underscore this point. The total net profits of 19 nationalised banks before adjusting income from recapitalisation bonds stood at Rs 2,095 crore in 2000-01. This fell dramatically to Rs 299.61 crore, the moment the interest income from these bonds was taken away. In 2001-02, this picture changed rather perceptibly. While total net profits of nationalised banks before adjusting interest income from such bonds had grown to Rs 4,851.75 crore, that after adjusting such income was also much higher than the previous year?s figure, at Rs 3,058.67 crore. Does this mean that the state-run banks had finally been able to shrug off their dependence on recap bond interest incomes and had come into their own? Not quite. It must be remembered that the year 2001-02 was a year of hefty trading profits, where banks made windfall gains in the government securities market, taking advantage of softening interest rates. According to RBI?s figures, the net profits of scheduled commercial banks increased a whopping 81 per cent over the previous year ? at Rs 11,572 crore ? a large part of which could be attributed to gains from securities trading. Further, bank-wise data for securities trading for 2001-02 also showed that such gains accrued not only from the sale of existing securities, but also from the active churning of portfolios.
The point, therefore, is simple. The year 2001-02 was an aberration if one looks at the trading profits. This year, too, such profits may come the banks? way, with interest rates heading south. But that only means the banks are not making adequate profits from their core banking operations. All the signals RBI has sent through this detailed and excellently crafted report need to be viewed very seriously by the banks. With margins under pressure, banks need to get back to their drawing boards and re-draw their strategies in the strictest sense of the term. If it is to be retail-driven, there has to be a differentiator. And so on. Looking to regulatory inspiration for business strategy can never be a path to success. State-run banks, in particular, must realise that, and also take a cue from what the stockmarket, where some of them are listed, thinks about them. The contribution of bank stocks to the total turnover of the National Stock Exchange increased from a puny one per cent in 2000-01 to 1.33 per cent in 2001-02. Isn?t that signal enough?