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Assurance of public ownership

The annual policy statement of the Reserve Bank of India highlights a significant trend in the distribution of banking business among different categories of banks. Over the past year, public sector banks have mobilised substantially more deposits and correspondingly lent more than either private banks or foreign banks. Despite increased competition in the reform era that began in the early 1990s the government-owned banks managed to retain their predominance in the market . However, until last year their share was coming down both in deposits and advances and, more sharply, in the non-traditional areas. Foreign banks and a few of the newer private banks have excelled in non-price competition and bested the public sector banks in technological application. They seemed to be winning in the battle of perceptions. All the strengths of public sector banking — a wide network of branches, a large pool of skilled manpower, and most importantly the tradition of financing small and medium enterprises and agriculture — came to be questioned as these banks were asked to take a U-turn in the way they conducted their business.

Now, there has been a dramatic shift. According to the annual policy statement, deposits with public sector banks recorded a growth rate of over 24 per cent in March 2009, as against the 23 per cent the previous year. Foreign banks and private banks have seen a decelerating trend. In the case of the former, the rate of growth has come down sharply from over 29 per cent in March 2008 to just 7.8 per cent a year later. The deposits of private banks grew by just 8 per cent last year, sharply lower than the almost 20 per cent recorded in 2008. An analysis of credit growth reveals a similar picture of government-owned banks coming into their own. These developments in India mirror the changes taking place abroad in the wake of the ongoing financial crisis. In the United States and other developed economies, not only regulators but bank customers are discovering the virtues of government ownership. In face, nationalisation is being considered as a means of rescuing some of the large, ailing banks. Already in many countries, governments have become the largest shareholders. In India all banks — public, private, and foreign — have shown resilience in the face of the worsening financial crisis abroad. Yet the perception that many large global banks, some of them having a significant presence here, are in deep trouble has been a good enough reason for many customers to seek the safety of government-owned banks.

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