Banking on the middle ground

This is a well thought out, neutral book by someone who is both knowledgeable and impartial. It comprises 38 short essays on various aspects of India’s banks and banking. No important aspect has been left out.

But the title of the book also describes the author’s approach well. Even though these essays are accurate in their depictions of the problems and solutions, there could be differing views on treatment.

For example, Sabnavis is not a votary of what economists call corner solutions. Some may see this preference for the middle ground as a disadvantage. But realism is useful for sensible analysis. Indeed, in that sense, it is very nearly a textbook for students and others looking to familiarise themselves with the main issues in Indian banking.

Despite its high price, it should be compulsory reading for students of economics and business. The publisher should market it as such, rather than as random purchase on the trade side of bookselling.

Trends and troubles

The book has only two parts. The first is about trends. The second is about controversies.

The trends part has nine essays. The controversies part has 31. This tells us a lot about the way the author has approached the subject.

His main thesis is that banking in India has changed a lot, mostly for the better. However, along the way it has been beset by scores of problems caused by the way the government and the regulators have approached the sector.

Sabnavis doesn’t take sides while discussing the trends and the troubles. That is good.

But it also means he offers no solutions other than “let’s hope for the best” sort of wish. The British call this bumbling through. It works but only about 50 per cent of the time.

Substantive issues

There are many meaty questions that these essays discuss. It is not possible to write about all of them here, so a sample will have to do.

The main problem that I had here is of completeness. Sabnavis sometimes leaves out important underlying issues. He should include these in the next edition.

Thus, he discusses the question of infrastructure funding as a binary between banks and non-banks such as the bond market or the development finance institutions (DFIs).

Actually, global experience shows that none of these work well. The problem with infrastructure is that, because of its public good aspect, it is best funded by taxation. That is, risk capital is not a good option for infrastructure except for the bells and knobs like lighting, hard shoulders, lane separators and so on.

Another issue which is discussed objectively but not completely is that of the government and the Reserve Bank of India (RBI). Everything he says is correct but he doesn’t say everything there is to be said.

Thus, he has left out the most important aspect of the relationship, namely, that of sovereign power and its manifestations. The RBI is a creature of the sovereign and this has a crucial bearing on the relationship. It is not an equal one, and is like that of a car-owner and driver.

Likewise, there is the new question about bank deposits and whether the depositors could lose them. After 50 years of telling people that their money is safe in banks now the government is telling them not to count on it.

Sabnavis says there should be a White paper on government policy on this, not just the occasional broad hints. This is correct but there is an underlying problem here which he should include in the next edition: risk and the political approach to it. Indian politicians have failed spectacularly in this regard.

A related question is long-term borrowing: who should provide it, commercial banks, a DFI or the bond market or a combination of all three? The answer is obvious, but a pre-condition is the need to re-introduce risk into commercial consciousness.

It is quite extraordinary that risk and uncertainty are simply ignored by everyone. The next edition, from which around a third of the chapters that are currently contextual should be excluded, should have small theoretical preambles to each chapter. That will truly enrich the book’s value as a textbook on banking.

The reviewer is a senior journalist and commentator

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