If you have seen one, you have seen them all! So monochromatic are the commercial banks in India in their activities that there is very little to distinguish one from the other. All of them accept deposits, both retail and bulk, lend for purposes ranging from housing to small business to large industry to big-ticket infrastructure, and deal in areas as diverse as dairy farming and international banking.

The public sector banks particularly are like country-cousins. Despite common ownership by the Government, they vie for the same pie, most often undercutting each other in the rush to boost the top line. The fact that the number of managerial posts at all levels, including that of general manager, is linked to the total volume of business according to Government of India norms and not to the bottom-line, does not help matters either.

The idea of differentiated banks — banks which focus on certain specific areas and try to develop expertise in those segments — is relevant in this context. Can the Indian banking landscape evolve to sprout differentiated banks which have succeeded elsewhere in the developed world like the Sparkasse in Germany, the savings and loan banks in the US or the POS Bank in tiny Singapore?

There is no time like now for a few Indian banks, especially the smaller ones, to think in terms of diversifying into differentiated banks. Most of them are paying the price for unrestricted lending to all spectra of activity without really having the wherewithal to monitor or manage the risks. Most of the credit decisions have been on a herd instinct, when the going was good.

The herd mentality These smaller banks did not have the skill sets to appraise independently the risks associated with, say, a large steel project or a road project based on annuity payments and they depended largely on the expertise of the bigger banks. It is no secret that credit departments in different banks used the appraisal memorandum of the lead bank to “copy and paste” their own proposals.

“Competitive lending” by banks and, possibly, a perverse element of the “animal spirits” among entrepreneurs, led to high leverage in the system itself as equity or own funds were not coming in proportionately. One steel major currently has ₹36,000 crore loans and the company’s sales last year was just ₹10,000 crore. What sort of magical EBIDTA would enable the company even to service the interest on the debt, not to speak of repayment of the principal?

As the tide in the corporate sector has turned, these smaller banks are now at the receiving end. The options are to go with the majority for a restructuring under CDR or sell these assets to the ARCs. Most of these bankers privately concede that there was no sense in taking large exposures in businesses they did not fully understand.

This trend also led to the small businesses and services sector being ignored in the process. The Nachiket Mor committee report has quoted sources to estimate that close to 90 per cent of small businesses in India have no links with formal financial institutions and a large part of the economy is dependent on the informal sector.

More means more As Nobel Prize winner Muhammad Yunus said, it was a case of “the more you have, the more you get and conversely, if you don’t have it, you don’t get it”. Against a contribution of 57 per cent to GDP by the services sector, the deployment of credit to this sector is only 23 per cent whereas industry which contributes 25 per cent to economic output garners 45 per cent of bank credit.

There is a large untapped potential for banking growth in the micro, small and medium segments of industry/services which the relatively smaller banks can tap meaningfully. Anecdotal evidence suggests that most of these entrepreneurs take loans offering good collateral too. Most importantly, these are exposures whose risks can be assessed and managed by the smaller banks.

At last count, there were at least 16 public sector bank “clones” with individual loans outstanding of less than ₹1, 50,000 crore. The way forward for these banks would be a merger/consolidation among peers as is being talked about in government circles now. Alternatively, their survival will depend on their conversion into differentiated banks, lending to enterprises which they understand.

For good fortune, you need not necessarily go to the bottom of the pyramid. Even the middle would yield handsome dividends.

(The writer is with the State Bank of Patiala. The views are personal)

Related Topics
comment COMMENT NOW