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Sudhanshu Ranade

Chennai , Feb. 22

IF you thought the main business of Indian banks was banking, that is accepting deposits and lending them at a profit, you are hopelessly out of date.

The first change was with the advent of social banking in 1969. It was the volume of business and the number of accounts and branches that became `targets,' not profits. Many loans and branches were highly unremunerative; most services, including remittances and collections, were under-priced. The soundness of balance sheets was nobody's business. Profit and loss accounts never disturbed anyone's slumbers. There was no reason why they should have bothered, as the owners themselves did not care.

With the forced launch of the 1991 reforms, there arose a concern about non-performing assets and realisable profits. As Basle replaced New Delhi on centre stage, huge and continuing fiscal deficits paradoxically made investments in Government securities both safe and hugely profitable. Unlike the most secure loans, these had a zero-risk weightage, which was an added attraction.

In 2002-2003 and again in 2003-2004, the interest earned on investments by the State Bank Group and by public sector banks as a whole was larger than that earned by them on advances. Almost on the heels of the shift of bank assets from advances to investments, came the era of trading in securities, when large portions of investment portfolios were earmarked, formally or informally, for use as tradable assets, rather than for holding till maturity.

In both the years, a large chunk of operating profits was from trading income (net profits on sale of investments). Leaving aside the safe and attractive returns on Government securities, other trend factors driving Indian banks, private, public and foreign alike, out of the banking sector are disintermediation ( the trend of corporates to directly approach the general public for investible resources) and the option for banks and corporates to reach out overseas for bulk funds that are cheaper than retail banking in India.

Like banks, their erstwhile depositors too have been getting increasingly pushed out of the banking system; except as far as their unmet needs for housing and other personal loans are concerned. These trends are sure to gather momentum as banks diversify into mutual funds and insurance.

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