Saturday, Nov 22, 2003
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By C. R. L. Narasimhan
The primary business of banking is the creation of credit. A very basic observation such as that is at the core of the Reserve Bank of India's 's Report on Trend and Progress of Banking in 2002-03 that was released recently. Elaborating the theme, the RBI says, "While narrow banking (like trading in gilts) could be appropriate at times of easy liquidity, the macro-economic performance of the banking system in the long run would hinge on its ability to fund industrial and other enterprises.'' The central bank 's exhortations as well as its elaboration are rooted in the developments over the past year. The economy is bouncing back after the drought-hit agricultural economy dragged down the GDP growth to 4.4 per cent in 2002-03.
(Both official and non-official estimates of economic growth for the current year are bullish with the recent mid-year Economic Review predicting a rate above 7 per cent). Industrial recovery has also been seen. However, credit offtake from the commercial banking system, an important indicator, is still not commensurate with the level of industrial growth. Despite there being a pick-up towards the end of the last financial year, there has been a negligible increase in credit offtake during the year. Non-food credit increased by 5.7 per cent (Rs. 38, 524 crores) compared to an increase of 7.4 per cent (Rs.39, 844 crores) in the corresponding period last year. Banks did shift a portion of their assets into advances but their preference for pouring money into gilts (far above their statutory requirements) continues unabated.
In a falling interest rate regime such a "play safe attitude indicative of their (by now well-documented risk) aversion has ironically paid rich dividends. They could sell their portfolios and reap capital gains. Almost a third of the commercial banks' operating profits in 2002-03 came from treasury income. But with interest rates reaching a plateau there will not be many more opportunities in booking gains on investments. Will they now turn to lending, their most traditional activity, to boost their incomes? There are many reasons as to why that may not happen.
There are serious legacy issues having to do with the inhibitions of public sector banks, which no policy statements of the Government or the RBI have so far addressed squarely. Risk aversion a trait associated with bankers is real despite some laudable steps being taken by the present Central Vigilance Commission to encourage genuine commercial taking. The RBI Governor has said that a commercial banker should not be treated as a bureaucrat under the Prevention of Corruption Act. Unfortunately the fears of bankers are genuine and there are no corresponding incentives to take risks.
It is no accident therefore that credit is available in a meaningful way only for the top corporates (they borrow at sub-prime rates) while the medium and small-scale sectors are deprived of their legitimate shares.
If, as the RBI has correctly identified, there is stickiness in the banks' rates, the real sufferers are only the medium and small enterprises.
Even if the banks get round to implementing major reform measures (as they are frequently exhorted to), tackle NPAs and all, implement technology-based solutions, they may still be averse to lending leave alone at attractive rates to all but their highly rated clients unless the basic causes for their risk-aversion are tackled. Which brings into focus the other significant exhortation of RBI to enhance their levels of non-fund based activities to supplement their interest incomes.
Indeed with their traditional role as financial intermediaries being threatened by the day, diversifying into other areas besides lending to boost their non-interest income has been the only practicable solution.
Two points are however relevant here: (1) Disintermediation covers many players besides commercial banks. The competition is therefore intense. (2) Will not risk-aversion stand in the way of public sector bankers maximising their potential in the non-traditional areas too?
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