The Hindu Business Line : `Retail banking has lot of hidden costs'

What lies ahead
Growth in the immediate future will be more balanced between retail and wholesale banking.
When the ability to grow on your own is there, why invite trouble by going for mergers?
If foreign banks want to come in a big way, they may have to come in through acquisition of PSBs.

Chennai , June 25

Professor T.T. Ram Mohan, of IIM-Ahmedabad, in a chat with Business Line pointed out that retail banking has a lot of hidden costs, which the public sector banks (PSBs) are not taking into account. These such as costs of follow-up in the event of delay or defaults, legal costs show up later. He said that they must build the capacity to monitor costs customer wise, before offering interest rates.

Expressing concern about the indiscriminate expansion in retail banking, Prof Mohan said, "It cannot be on the premise that non performing assets (NPAs) in this sector will always be less than one per cent. Once the cream of the market is addressed, the ratio of NPAs will increase." He added that some kind of corrective mechanisms were coming into play now and this would ensure that the growth in the immediate future would be more balanced between retail and wholesale banking.

Benign rates

He said that interest rates were benign despite the recent hike. He pointed out, "The interest rate increase we are seeing is from an all-time low. The decline we have seen earlier has been so steep. Any increase, which takes place, will not bite either the retail or industrial borrower. So in that sense, it is benign."

He spoke about the to the IMF world economic outlook, which said that the interest rate cycle might go on for another year or two. This may indicates that peak rates may be reached with another one to one and half per cent increase over the next year. Prof Mohan debunked the idea of mergers among public sector banks as a necessity. He said that in general, mergers happen when the opportunities for organic growth are exhausted. He added, "Now what we are seeing in India is top line and bottom line growth of an unprecedented quality in last several years, especially in PSBs. When the ability to grow on your own is there, why invite trouble by going for mergers?"

No threat

On competition from foreign banks entering the country, Prof Mohan said any foreign bank would need Rs 75,000 crore assets by 2009 to have a credible size. That would require an investment of about $1.5 billion .

He said, "That is not small investment even for leading international banks. When the total FDI is $3 billion , half of that for a single bank is not a joke. The question that a foreign bank will have to ask is what this will fetch in terms of branch network or brands."

He pointed put that it will not fetch anything comparable to what PSBs have. "So, if they want to come in a big way, they may have to come in through acquisition of PSBs," Prof Mohan said.

That doesn't mean they want to take over some co-operative bank. Citibank or Bank of America is not interested in that. They are interested in the PSBs. We have the scale to be competitive in Indian environment now. That is what we should be focusing on."

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