Strong Banking policy

Ashish Kaul
Strong Banking policy is the first step towards a stable economy and India desperately needs one more than 40% of the population does not have bank accounts and only about 15% have received some form of bank credit.
The World Economic Forum currently ranks India 37th  in financial development, behind other large emerging economies like China, South Africa, and Brazil making a strong case for a need of pathbreaking private banking policy for India.
In 2008, when the global banking industry was being shaken by the tremors of the unfolding financial crisis, only one bank in India felt the aftershocks, and this, only because one of its overseas subsidiaries had made an opportunistic bet on debt issued by the failed investment bank Lehman Brothers. While the market valuations tumbled but their businesses were not affected and their balance sheets remained healthy. The primary reason for India’s strong and steady presence can be traced way back to the principles of trade and commerce during Indus Valley civilization beginning sometime around 2300 BC, developed in two major city areas along the river valleys of the Indus, Ravi, and Sutlej, just beneath the Himalayan Mountains in modern Pakistan and Northeast India. Several efforts have been made to decipher the Indus seals, but none have truly succeeded this far; there is some notion that these seals could have been used as markers in trade situations, or that some may have represented family names. The genius behind the advanced architecture of the Indus civilization carried over into a thriving agricultural and trade based economy. The Indus people used the plentiful rivers surrounding them much to their advantage, the Indus the most spectacular of the three rivers. The people of Indus prospered on the foundations of an agriculture based system of irrigation and fertility.  From every crop that a farmer grew, a large portion of it had to be paid into public granaries thus ensuring trade and commerce was well woven into market and social conditions. There are guesses that this centralized granary might have been the economic equivalent of our modern State Banks.
The Indian banking industry is evolving rapidly, and is at the threshold of explosive growth. Changing customer needs, technology-enabled disruptive business models, and a progressive regulatory environment are driving fundamental shifts in the industry, fuelling innovation and forcing banks to reconsider their business strategies. Indian banks, like institutions in other markets, resist fundamental change through innovation. Recent innovations by banks, such as lean mobile branches, solar-powered ATMs, and “tablet-based” banking do not really challenge the status quo; they simply improve existing customer access and convenience.  Apart from technology planning, India needs to revisit banking norms and introduce a strong banking policy with a longterm view. India has strong market fundamentals to move up the ranks of the largest economies in the world, most Indian banks are significantly smaller than their global counterparts. Though Indian banking has been steady but the banks in other emerging economies like China have surged ahead and hence only one bank from India is ranked among the global top-100 in terms of asset size.  India has produced some of the fastest growing private banks like IndusInd Bank and ICICI who have a tremendous opportunity to harness the wide scope of poor services across vast areas of the country’s rural hinterlands where more than 40% of the population does not have bank accounts and only about 15% have received some form of bank credit. The World Economic Forum currently ranks India 37th out of 55 countries in financial development, behind other large emerging economies like China, South Africa, and Brazil.
The business composition of banks in India has seen significant changes over the last two decades, but the rate of change has been more measured. Lending to industrial borrowers, including construction, constituted well over half of total bank credit during the mid-nineties. This ratio has now come down to 44% in 2010 and most of the decline has been absorbed by consumer loans, which doubled in share to nearly 20% during the same period. Among industrial borrowers, the banks have the most credit exposure to utilities. This reflects the number of power generation projects that have commenced construction in recent years. .Though the growth in consumer credit has been most evident in urban areas, in recent years semi-urban and even rural areas are seeing excellent growth in this segment. Home mortgages account for more than half of all consumer loans, as housing demand and home prices have increased substantially since the nineties. Also, rising consumer aspirations are driving increased credit demand for purchasing automobiles and durables. However, Indian consumers are more cautious when it comes to credit card debt, which has a share of only 3% of all consumer loans. Interestingly, total credit card outstanding has declined in recent years, though aggregate consumer spending has continued to grow. Though some of the country’s younger banks have fast growing asset management and insurance businesses, the industry’s bread and butter is still industrial lending. Asset Backed Securities and Collateralized Mortgage Obligations are still unheard of in the country, while Indian lenders warmed up to the idea of teaser rate mortgages only after the global financial crisis. So far, they do not appear to be any worse for it. The Indian banking industry is also well capitalized and capital ratios are above the global average. The average tier-1 capital adequacy ratio of the Indian banking industry is above 10%, when compared to the Basel III norm of 8.5% including the contingency buffer. The average total capital of banks in India stood at 14.5% as of March 31, 2010, compared to the Basel III requirement of 10.5%.
Like in most other emerging economies, the share of consumer credit remains very low in India, despite the recent growth. Average income levels are still very low and subsistence spending takes away most of the personal incomes of the lower income groups. This leaves very little earnings surplus available for debt servicing and reduces their creditworthiness, and banks will be hesitant to lend to them. Hence, the marketing efforts by banks to promote consumer finance products and services are now mostly limited to cities and towns where there is a larger concentration of higher income customers. However, as average income levels are expected to rise further, the number of potential bank customers with sufficient earnings surplus will also grow. Though the growth of income levels is likely to be measured and the potential loan size will remain small, the aggregate market size for consumer credit will become larger because of the large population size. This market will be made more attractive by India’s demographic advantage of a relatively young population, who are likely to see faster income growth. Besides, younger customers are generally considered to be more receptive towards new financial products and services.
Today, despite strong financial values India still remains behind in the race of economic superiority and has dependence on FDI in various segments like retail because of paucity of a progressive banking policy which can alter the commercial landscape of India.
(The author is  management and business process restructuring professional with 20 years experience with leading global conglomerates)

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