The Hindu Business Line : Private banks: Profitability easier to invent than reinvent

If the banking sector has an NPA level of 3-4 per cent of GDP, and is still "improving dramatically," it is because a "large number" of banks made huge `treasury' gains, which they used judiciously to "clean up" the system. Private banks, relative newcomers, did not have much spring cleaning to do.

THE Managing Director and CEO of ICICI Bank, Mr K. V. Kamath, was certainly telling the truth when he attributed much of the bank's success to its ability to successfully "reinvent itself".

This is particularly the case given his remarkable candour on how a shining sun had made it possible to shift in a big way to higher value deposit and credit accounts which cost much less to service in a technologically efficient way. But there is more to it than that.

Take, for instance, his statement that "restructuring" brought down rates of interest for corporates from "a high of 17-19 per cent to 10-11 per cent", thereby providing them "tremendous relief"; while, simultaneously, banks were enabled to "clean up their act to avoid the situation that South-East Asia and China now face".

The Chinese banking system has a bad debt of 50-60 per cent of GDP.

After the clean up in India, the corresponding figure is "probably" a mere 3-4 per cent (about half the earlier level), and is still "improving dramatically". How were they able to do it?

The answer is to be found in pursuing a trail which can helpfully resolve the question of how and why this decrease in the rate of interest increased rather than decreased the profits available to our banks.

While the ICICI Bank, according to its CEO, was for some reason not invited to the party, a "large number" of other banks made huge `treasury' gains which they used judiciously to "clean up" the system.

It goes without saying that the private banks, relative newcomers to the field, did not have much spring cleaning to do, and thus managed to get away with huge unearned profits.

This is because the government quite deliberately made little or no effort to reduce spreads even as rates of return on treasury borrowings (and, as a downstream effect, bank deposits) were cut dramatically.

The ostensible fall in the rate of inflation had been used as an excuse to reduce the revenue deficit in the Budget that is largely composed of costs of interest on `borrowings'; thereby handing over a bonanza to the (public sector) banks which they could, if they chose,use to `clean up' their non-performing assets — and kick out non-performing liabilities.

The question that arises, of course, is what both they and the private banks will do for an encore. The ICICI Bank chairman probably has a better grip of the matter than his public sector counterparts.

During this writer's years of association with the State Bank of India, it was on the size of their portfolio that public sector banks were judged by rather than their profitability.

And each Friday, the end of the banking week, would witness larger and larger transfers between loan and deposit accounts; till people simply ran out of the energy and/or imagination to go on with the game.

More Stories on : Private Banks | Insight | Non-Performing Assets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Farm credit needs a lending hand

Quiet flow the funds

Interim relief: A word of caution

Capital Account Convertibility — Right road, but best with speed-breakers

Keeping one's word

Private banks: Profitability easier to invent than reinvent

VC funding: Nothing ventured, nothing gained

Price cut in medicines

Ma Foi clarifies