[sbinews] The Writing On The Wall - The Financial Express
- From: rspai@xxxxxxxx
- To: sbinews@xxxxxxxxxxxxx
- Date: Wed, 19 Nov 2003 05:56:18 +0500
Dear Colleagues,
Reproduced below is a thought-provoking column on profitability in Banking.
Regards,
R.S.Pai
The Writing On The Wall
(The Financial Express -19-Nov-03)
PSBs must look beyond trading profits, traditional lines
SOURAV MAJUMDAR
It’s not the first time the Reserve Bank of India (RBI) has sent out early
warning signals to the public sector banks (PSBs). And it certainly isn’t going
to be the last. The latest RBI Report on Trend and Progress of Banking in India
2002-03 is particularly significant because it marks the completion of 10 years
of banking sector reform in India. And taking off from that, RBI’s report
dwells on several aspects — positive and negative — of the Indian banking
sector, issuing warnings wherever required.
If, after 10 years of reform, the PSBs are yet to read the writing on the wall,
it is a reflection of the fact that having been used to years of being
sheltered, they are still taking time to understand the nuances of the new age.
The clear signal which the RBI, under the stewardship of governor Yaga
Venugopal Reddy, now seeks to give PSBs is that the time has come for them to
shake off the lethargy of the past and get their act together, or face the
consequences of competition which a decade of reform has brought about.
RBI says in the report that its analysis clearly shows that much of the
increase in profits of scheduled commercial banks in India has come about
thanks to trading profits, a fallout of the continuing decline in interest
rates. But this is not banking as we understand it. And therefore, profits
which aren’t happening on account of the banks’ core activity of lending need
to be viewed with caution.
“It is in this context that the Reserve Bank has been emphasising that high
profitability emerging from gilt trading should not lull banks into a state of
complacency,” argues the RBI in its report. To the extent that the state-run
banks’ stock market performance is a result of this growth in profits, the
profits from gilts trading and the rise in the banks’ stock prices are also
inextricably linked. And while this is a reality in today’s context, the
central bank in its report has clearly shot off the required warning. If banks
did not lend during times of downturn and avoided what RBI calls “problems of
adverse selection”, then equally they need to recognise that while partaking of
the benefits of a low interest regime through trading profits is all right, a
bank’s primary job is to lend, and support industrial activity and growth. This
is what RBI advises the banks to get back to doing.
Pointing to the fact that trading profits have helped banks to shore up their
bottomlines and provide for non-performing assets (NPAs), RBI reminds them that
the “primary business of banking is the creation of credit.” Also, while the
banks are enjoying the fruits of the lower interest regime on the trading
front, the linkage between the debt and equity markets (with stock prices
rising on expectation of trading profits by banks) also means banks have to
take greater care in managing interest rate risks.
The good news, of course, is that a combination of factors has led to a
significant decline in NPA levels. From as much as 15.7 per cent at end-March
1997, gross NPAs have declined to 8.8 per cent as at end-March 2003, through a
combination of upgradations, recoveries and write-offs. This is now being added
by the SARFAESI Act, popularly known as the Securitisation Act, which has
errant borrowers getting back to the negotiating table with banks.
But while things are looking better in general, and the return of the feel-good
factor may spell better days for PSBs, the key issue for them is how they would
now face competition from the aggressive new generation private and foreign
banks. RBI, as regulator, is acutely aware of this challenge, and has done its
best to prepare the state-run banks on this front. The private and foreign
banks are positioning themselves, the RBI report says, as one-stop shops for
financial services. Against such a background, PSBs would need to look beyond
just their traditional avenues of income and go into non-fund based, value
added services to augment their non-interest incomes. That would also require
better technology and a change in mindset. Simply put, PSBs have to get
nimble-footed and creative if they have to win the race in the new banking era.
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