FINANCIAL SCENE
Govt banks assert themselves
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At a time of global crisis there is safety in government ownership
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The fact that Indian customers are opting for PSBs over private and foreign banks with their superior ‘ambience’ and ‘capabilities’ is a telling commentary on how developments abroad can radically alter well entrenched preferences.
The global economic crisis shows no signs of abating. The financial sector of the developed world where the global economic crisis originated is worsening by the day.
Central banks, governments and several others are agreed that unless some stability is imparted to what seems to be a highly fragile sector in developed countries there is no possibility of an economic recovery. With no tested policy antidotes availab
le, everyone is whistling in the dark, quite unable to fathom the depth of the crisis.
State control revival
In advanced countries, the only course of action open to policy makers is to strengthen the role of government in the financial sector, through better regulation and, more immediately, by pumping in large amounts of money.
Banks that are increasingly dependent on government handouts are effectively coming under the control of the state. In the U.K. almost 80 per cent of the RBS (Royal Bank of Scotland) group is now owned by the government.
In the lexicon of bankers of those countries, nationalisation was something long forgotten.
It is now staging a comeback with a vengeance. There is a growing body of economists who think that nationalisation of leading financial institutions is the only way to save them. Although economists make a fine distinction between government control and nationalisation, the fact is that governments in those countries already have a sizable say in banks which, not so long ago, were the role models for the staid public sector banks to follow.
Resilient Indian banks
The debate over the extent of government ownership of banks in advanced economies does not have an immediate relevance for India. Banks here have been resilient in the face of the global meltdown.
Amazingly there has been no panic in the Indian financial sector even remotely resembling the turmoil in the West. Solvency of banks has never been in doubt although there were concerns of liquidity of ICICI Bank for a brief spell. The RBI did well to scotch all incipient rumours quickly. It is to the credit of the RBI that the banking system in India has been functioning normally even as fires continue to rage in developed economies. But government ownership has helped in many other ways.
Public ownership helps
Public ownership has helped banks gain in business volumes. According to the RBI’s Third Quarter Review, public sector banks recorded an identical 24.2 per cent growth in deposits on a year-on-year basis in early January 2008 and 2009. Deposits growth in foreign banks was sharply lower — from 34.1 per cent in January 2008 to 12.1 per cent a year later. Private banks too witnessed a much slower pace of growth, down from 26.9 per cent to 13.4 per cent.
While foreign and private banks have recorded positive growth albeit at a much slower pace, it is likely that they did not get their share of incremental deposits.
Gains new customers
However, there are reasons to conclude that existing depositors by and large stayed with them and did not rush to close their deposits and run to the safety of public sector banks. In other words, public sector banks have gained new customers, who would in the normal course have gone to private or foreign banks. Anecdotal evidence in September-October last year, however, indicates a large flight of deposits from private banks to those owned by the government.
In credit too, a similar pattern prevails. PSBs have considerably increased their rate of growth to 28.6 per cent in 2009 from 19.85 per cent in 2008.
Foreign banks and private banks which had expanded their credit by 30.7 per cent and 24.2 per cent, respectively, in 2008 saw a major deceleration, 16.9 and 11.8 per cent, respectively, as on January 2, 2009.
Obviously lower deposit mobilisation has translated into fewer fresh loans.
What are the lessons from the flight of business to government owned banks? At a time of global crisis there is safety in government ownership. When iconic names such as the Citigroup — among the world’s largest and most ‘aggressive’ banks — tumble, customers including those with foreign banks, have reasons to turn cautious. Indian customers may still be in the learning process — after all, the myth of foreign and (later) private banks’ superiority is well entrenched in their psyche.
Only a year ago, few would have visualised banks like Citi, Bank of America or Merrill Lynch incurring heavy losses that drove them to the brink, and being forced to receive handouts from the U.S. government.
The fact that Indian customers are opting for PSBs over private and foreign banks with their superior ‘ambience’ and ‘capabilities’ is a telling commentary on how developments abroad can radically alter well entrenched preferences. Only time can tell whether the PSBs can drive home the advantages.
C. R. L. NARASIMHAN
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