The Hindu Business Line : Banks: Traditional performance measures need change

The Indian banking system is a mish-mash of the ubiquitous public sector, ex-term lending institutions, old Indian private sector, new Indian private sector and foreign banks. And this does not count the numerous cooperative banks, hundreds of which were started at the level of a district (but may have outgrown their origins over the years). That so many in diversity of ownership and numbers have survived is proof of a vibrant and growing market for banking and financial services in the country.

Not that there have not been crises. Public sector banks are just about coming out of their huge problems with non-performing loans. Thanks to treasury profits from falling interest rates and they (and borrowers) getting lucky with appreciating real estate (in many cases), NPLs and NPAs are no longer a drag on balance sheets.

Surplus capacity

Still, there is little doubt that there is surplus capacity, especially in overbanked urban India. Another problem, at least according to Government, is the meagre capital base of the biggest Indian banks compared to their international peers. Consolidate, merge - so goes the prescription. But that is more easily said than done. After the Finance Minister mooted the idea, quite a few bank CEOs were quick to say they were interested in taking over other banks. None (naturally) wanted to be taken over!

And this highlights another issue in the Indian context - banks are a source of patronage for credit and directorships - the more the merrier. No Government - even one overtly committed to privatisation - will find it easy to overcome these practical hurdles to mergers and disinvestments.

Abused indicators

Despite reforms, liberalisation, allowing the entry of private sector into banking and listing public sector banks on the stock exchanges, traditional measures hold sway when it comes to judging performance and ranking. Much abused indicators are growth in deposits and advances on a point-to-point basis: March 31 to March 31, September 30 to March 31. Every year, towards fiscal close, this leads to a mad rush, especially on the part of public sector banks, to boost and window dress balance sheets, lest performance is seen as inadequate.

After Basel I and with Basel II now under way, capital provisioning to support the balance sheet is key. Success is no longer a matter of balance sheet size but doing maximum (profitable) business with minimum risk and available capital. More sophisticated methods of performance evaluation are necessary, going much beyond crude indicators of deposits and loans and a standardised, one size fits all approach. It will help to focus individual bank managements on the right goals and strategies to achieve them, after going through the due planning process of mapping their specific strengths and weaknesses.

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