Private banks: Does distinction between old and new matter?

Private sector banks account for around 20 per cent of the assets of the banking system. They are broadly categorised as old private banks (OPBs) and new private banks (NPBs).

Both the old and new private banks have almost the same number of branches.

In 2010, old private banks had 5,174 branches and new private banks, 5,213. Except Tamilnad Mercantile Bank, all other major OPBs, like the NPBs, are listed on the stock market. Then why make a distinction between NPBs and OPBs?

NPBs were supposed to be trendsetters in the banking industry. NPB is a terminology used to describe private banks which were given banking licences in the mid-1990s with a precondition that all their operations will be fully automated.

The idea was to create a set of banks which will anchor infusion of technology in the Indian banking system. In the early 1990s, when economic reforms were initiated, liberal entry norms for foreign banks were also mooted. It was thought that domestic banks will not be able to compete with the foreign banks given their technological prowess.

Tech orientation

To encourage technology orientation in the Indian banking system it was conceived to promote a few private banks with technology driving their operations. The intention was to encourage technology adoption in PSBs as well by showcasing the benefits.

After 15 years we find that not only nationalised banks (NBs) but most of the old private banks, too, have adopted technology in a big way to remain competitive in the market place.

The major OPBs have adopted core banking solutions and provide Internet-based banking. In that sense, the distinction between OPBs and NPBs has lost some ground. However, in terms of size of business and place of operation, there is a significant difference. While NPBs account for 15 per cent of the assets of the banking system, the share of OPBs is much lower at around 5 per cent.

The assets of old private banks are just 30 per cent of NPBs. The OPBs account for 32 per cent of the advances and 39 per cent of deposits of NPBs. While the OPBs do not have presence outside India, the new ones have foreign presence. NPBs derive 2.4 per cent of their deposits from branches outside India. Around 3.6 per cent of their investments and 12.5 per cent of advances are outside India. Further, most of the OPBs have a regional outlook, having maximum branches in a few States.

How have the private banks performed vis-à-vis their peers? Of the 14 private banks, eight have declared their audited financial results, which account for around 65 per cent of the branch network and 80 per cent of the assets of all the private banks taken together.

The OPBs' performance lies mid-way between that of NPBs and the NBs when it comes to asset management and operating efficiency. The nationalised banks had the lowest GNPA (gross non-performing assets) in the industry both in 2010 and 2011.

The NPBs fare a tad better than the OPBs both in 2010 and 2011 when it comes to operating efficiency reflected through the cost-to-income ratio. Though this ratio for the OPBs turn out to be the highest, they are not very different from that of NPBs and NBs.

In terms of pricing power, OPBs are next to NPBs, the best in the lot. While the NBs maintained their RoA, both the NPBs and OPBs registered a higher RoA in 2011 as compared to 2010.

The NIM of OPBs is an impressive 3.53 per cent despite having the lowest CASA share across the different bank groups. Thus, the OPBs also enjoy better pricing power than the NBs.

A comparison of financials of different bank groups in 2011 reveals that the performance of OPBs has been respectable. They are not constrained by the legacy issues as their NB peers but their scale of operation has been rather limited compared to their NPB peers.

Barring the small scale and limited geographical spread of their operations, the OPBs seem to be delivering well on the financial front.

Falling numbers over the years

In 1951, there were 566 private commercial banks in India with 4,151 branches. Bank failures in India were rampant before Independence in the absence of comprehensive banking legislation and structured supervision mechanism for the banks.

During 1913 to 1936, 481 banks failed in India. The situation did not improve in the post-Independence period even after the promulgation of the Banking Regulation Act in 1949.

On an average 40 banks failed in India during each year between 1947 and 1955. During the period 1954 to 1959 as many as 106 banks were liquidated. Of these, 73 banks went into voluntary liquidation and 33 into compulsory liquidation. To protect public savings, it was considered better to wind up insolvent banks or amalgamate them with stronger banks.

In 1960, the RBI was given formal powers to amalgamate banks. Between 1960 and 1966, 217 banks were amalgamated. Thus, liquidation and amalgamation of the private banks to protect depositors' interest has brought down their numbers.

Further, some of the bigger private banks were nationalised in two tranches in 1969 and 1980 to promote inclusive banking. Thus, the number of private banks has significantly reduced over time.

As on March 2011, there were 14 old private banks operating in the country.

(The author is Chief Economist, Bank of India. The views expressed here are personal and not of the institution he belongs to.)

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