The Hindu Business Line : Banks on a roll

OVER THE LAST two years, the banking system in India seems to have stacked up a greater amount of critical appreciation for its operations than it ever did since the reforms began. From the way bank stocks are moving, to the new-found enthusiasm of public sector banks for mergers and acquisitions and new business opportunities, the banking system seems to be emerging from the shadows. The Reserve Bank of India's Report on Trend and Progress of Banking in India 2004-05 provides a paternal scrutiny of that journey.

Among other things, the Report dissects banking operations, provides a review of policies that affect the banking system against the backdrop of national and global economic changes and technological developments. One welcome development is the central bank's comparison of the performance of Indian banks vis-a-vis their global counterparts. Domestic banks have been showing up on the global investors' radar screens over the last few years. Policy hints of foreign investment in scheduled commercial banks (SCBs) have been aired. Quite expectedly, a global ratings agency and a management consultancy firm have issued their own reports on Indian banks. It is only appropriate, therefore, that the RBI comes up with its own findings.

According to the Report, Indian banks have done well on various financial health indicators such as the non-performing loans and capital adequacy ratios. Needless to say, private and foreign banks operating in the country fared better, but the SCBs are working at it. Globally, the ratio of non-performing loans to total assets (NPL) ranges from 0.3 per cent to 3 per cent in developed countries to 10 per cent in Latin America. In India, the NPL ratio of the SCBs declined to 5.2 per cent in 2004-05 from 7.2 per cent. The return on total assets (RoA), defined as a ratio of net profit to total assets, measures profitability. Globally, it varied between -1.2 per cent and 6.2 per cent in 2004. In India, it was the highest for foreign and new private banks; it was 0.2 per cent for SCBs which is pretty close to the global benchmark. Similarly, the capital adequacy ratio that measures the ability of a bank to withstand shocks compared favourably in the case of the SCBs with the global and Basel norms.

Clearly, Indian banking is going through changes that are reflected in their liabilities and lending patterns. Traditionally, banks relied on retail deposits to fund lending. Of late, they are looking to borrowings and retained earnings for resources — a testimony to their coming of age as business entities. Market borrowings are, of course, more expensive than deposits but they are typically long-term and, therefore, help banks fund long-term projects, thus widening their business options. On the asset side, non-food credit has grown but in directions and at speeds that has the RBI worried. Banks have found attractive avenues in retail lending, such as for housing and small road transport operators, and the central bank cautions against erosion of credit quality. But the economy is on a roll and so is consumer spending.

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