Banking in a developing economy
S. ARUNAJATESAN
FINANCIAL INTERMEDIATION IN A LESS DEVELOPED ECONOMY — The History of the United Bank of India: Indrajit Mallick, Sugata Marjit; Sage Publications India Pvt. Ltd., B 1/I-1, Mohan Cooperative Industrial Area, Mathura Road, New Delhi-110044. Rs. 795.
There is a popular saying that the history of the State Bank of India is the history of banking in India. But after reading this book it is evident that the history of all the old and well-run banks, more particularly the public sector banks, reflects the history of banking in India. The authors while focusing on the United Bank of India have analysed a number of critical issues relevant to development of banking in the country. The issues range from absence of banking regulations act and the central bank as the regulator for a fairly long period in the early days, nationalisation of banks, priority sector lending, high level of non-performing assets, delay in judicial process, deposit insurance, capital adequacy norms, importance of prudent banking, frequent waiver of loan repayment, militant unions, technology adoption, human resource policy and autonomy. Perhaps each issue warrants detailed study and documentation. The authors have done an excellent job in crystallising the issues in clear terms so that the scholars and experts in banking may work further on those matters.
Case study
The origin of the United Bank of India is traced to Comila Banking Corporation, established by N.C. Dutta in 1914. His son also a lawyer of repute joined him. Both of them shaped the bank and guided its destiny. Many more small banks were merged with Comila Bank and it was named as the United Bank of India. The bank rapidly grew in size, spread its activities. It was one among the top 14 banks in India and was therefore nationalised in 1969. The bank which started as a town bank became a regional bank and ultimately a national bank with a dominant presence in the eastern and north-eastern region. Government ownership conferred certain privileges and advantages, but also caused several constraints. Before 1969 the role and functions of the United Bank of India, like many other sound private sector banks were strictly pure banking, customer service and profit, but the post-nationalisation period was complex, frustrating and painful.
Wide-ranging issues
The authors in their wisdom and experience have expressed the views on several issues. On the matter of capital adequacy norms, they are of the view that capital at 9 per cent or 10 per cent is of no guarantee for safety, if the risk management and lending norms of the bank are sloppy. Solvency depends more on sound policy, careful investment and lending with conservative approach. In fact, the recent crisis in the U.S. proved that the culprit is sub-prime lending and not inadequate capital. On priority sector lending, the authors’ views are that social banking is incompatible with commercial banking and dysfunctional. Social welfare and support to weaker sections are important but banks are not the appropriate instruments for this purpose.
The abnormal size of non-performing assets (NPA) at 7 per cent of the aggregate loans was the result of wrong credit policy and programme either enforced by the government or caused by temptation to make super profit. Even today NPA as absolute figure is rising although as a percentage to total advance has come down from seven per cent to one per cent. Further real position is distorted by purchase and sale of NPAs between banks and asset reconstruction companies and debt restructuring. The problem has worsened by the inordinate delay in judicial process in dealing with bank cases. The authors have also discussed the issues relating to staff union, staff productivity and bank merger. The book is certainly a valuable addition to the literature on banking and timely.
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