Bankers in India fall into three clear categories — public sector, private sector and foreign. The top brass at these banks are very different in their backgrounds and style of operations. A public sector banker normally makes the rounds of several state-owned banks before rising to the top. The chairman of a private sector bank is more likely to have been with his or her organization for several years. In a foreign bank, the country head (or whatever the designation) may come from the private banking pool. But it sometimes also happens that the top man or woman (banking is one sector in India with a large number of women in senior positions) is imported from headquarters. Then there are the regulators from the Reserve Bank of India (RBI) and other stakeholders in the financial system such as the non-banking finance companies (NBFCs). Some of the latter aspire to become banks if the RBI gives them a license.
Many of these sectors were represented at a panel discussion in Mumbai recently. The meeting was organized by weekly business magazine Businessworld to launch “Contemporary Banking,” a book compiled and edited by Naina Lal Kidwai, country head of HSBC India and director of HSBC Asia-Pacific. Among the contributors to the book are RBI governor Duvvuri Subbarao, ICICI Bank CEO Chanda Kochhar, Bharti Airtel chairman Sunil Mittal and economist Subir Gokarn. Public sector bankers are well represented in the book. But the only senior representative at the panel discussion was M.V. Nair, until recently chairman of Union Bank. The finance minister had called a sudden meeting of the chairmen of the state-sector banks and they all had to leave immediately for Delhi.
Financial Inclusion a Priority
Aditya Puri, chairman of HDFC Bank, started the discussion by bringing up a hot-button subject in India — financial inclusion, which he called a political, economic and social necessity. The focus is not new, but it was being expressed differently. Priority sector lending, which means that every bank must allocate 40% of its loans to what is defined as the priority sector, has long been one of the guiding principles of Indian banking. “The original rationale was to ensure that people who would normally not get credit from bankers should be able to get access to organized finance,” Puri noted. “I do believe that that rationale holds true even today. However, we need to fine-tune it to recognize the fact that there has been a change in the composition of the GDP, as well as the needs of the people and the needs of our future.”
Puri cited the case of agriculture. It used to be a dominant portion of India’s GDP, but is now down to 20%, half of which is accounted for by agricultural services. The number of people employed in agriculture has also decreased, from about 70% of the population to 45%, a proportion that is expected to fall further as productivity improves. With the share of the farm sector coming down, it will be necessary to start treating agricultural ancillaries also as priority sector, Puri said.
But the priority sector cannot be a bottomless pit where loans go in and repayments never emerge. “If you say 40% of the bank’s lending must be to the priority sector and if you don’t want bankrupt banks, then you have to ensure that the priority sector is viable,” Puri noted.
“Money can do a lot of things, but it can’t do magic,” he continued. “So financial inclusion has to be the responsibility of the government. It has to be the responsibility of companies and banks. There is no point telling me to lend to a fellow who doesn’t have roads and power. How is he ever going to pay me back? He was a poor man when he started; he will be a dead man when I am finished.”
Puri concluded that there is indeed money to be made at the bottom of the pyramid. “We at the bank have gone in there,” he said. “We can make money and we can make a difference.” But doing so requires careful thought and changes in strategy, Puri added.
Kochhar of ICICI Bank took up the issue of change. Her contribution to the book focused on the transformation of the Indian banking sector in the past 10 years and in the decade ahead.
“I think from the 1990s onwards, the Indian economy has really evolved,” she said. “The banking sector has evolved as well. We saw consumption driving the growth of the economy. We saw a lot of investments taking place. We saw new sectors emerging — the services sector, the IT sector and so on. We even saw some of the older sectors like the manufacturing sector trying to become competitive, even by global standards. As that happened, the banking sector evolved not just to participate in the growth of the economy but in a way to catalyze the growth of the economy. The banking sector widened its horizons. It didn’t just stay in banking but got into insurance [and] asset management …. A lot of those developments took place in the last decade. And, of course, the banking sector innovated [and] really used technology to offer technology at the front end.
Looking forward, Kochhar sees great potential for further growth. “If the economy grows 8%, 9% or 6.5%, the banking sector will grow at at least two-and-a-half times the rate of India’s GDP growth. The sector could grow 16%-to-24% per annum year-on-year for the next decade. That means by 2020, we as a sector can be five times what we are today. So the growth opportunity is huge.”
According to, Kochhar the real issue is how banks conduct their business because the regulatory environment is becoming tighter, the global environment is becoming even more volatile and resources are getting scarce. There will be huge demand for both capital and human resources, she predicted. “We have to focus more on using capital better, using money better and using our human resources better. We have to calibrate our approach to risk in line with the way the environment changes. And we have to continuously innovate and continuously move as the economic structure changes.”
The Promise of Young India
Nair of Union Bank also spoke on the emerging paradigms, but with a sharper focus — banking for the next generation. “The total number of new-generation customers who are in the working age group and who are going to join the banking sector as customers is 400 million,” he said. “The number of new customers — who are actually next-generation customers — getting added to the banking sector is equal to the total number of customers whom we are now catering to. That’s huge.” The challenges, added Nair, lie in providing the service levels desired, getting the human resources in place and having a complete bouquet of offerings.
The public sector banks will be on the frontlines with the others. “At the beginning of the last decade, there were projections that public sector banks would lose about 20% market share by 2010. But it didn’t happen,” Nair noted. One reason is that the confidence in government-owned banks actually went up post-2008.
Neeraj Aggarwal from the Boston Consulting Group revisited Puri’s topic of financial inclusion. He agreed that the bottom of the pyramid is not barren. But it won’t be so easy to make money there. “It’s a hard nut to crack,” he said. “There is little room for error because the economics are tight. Also, the gain-to-pain ratio is not as suitable as many other opportunities out there.” There have been a lot of initiatives over the past four decades. But the problem is that there is compliance, but not commitment, he noted.
NBFCs Need a Better Deal
Panelist Y.M. Deosthalee is not a banker — though, according to Kidwai, he aspires to being one. Deosthalee is chairman of L&T Finance, a spin-off from engineering giant Larsen & Toubro. Kidwai said that when the RBI starts doling out licenses, L&T Finance — a NBFC — will be among those in the front of the queue.
Deosthalee used the opportunity to talk about NBFCs. NBFCs were once the darlings of the finance world. A couple of decades ago, however, they fell out of favor as the RBI changed the rules of the game. Many closed shop, though many still remain.
NBFCs have played a significant role in terms of distribution of credit, noted Deosthalee. “However, regulators have several issues with NBFCs. The first point is there are several types of NBFCs and they don’t know how to regulate all of them. There are, I believe, some 12,000 NBFCs in the country. Some are loan companies, some investment companies; there are asset-backed companies, and there are infrastructure finance companies. More importantly, the sizes are different. Some are very small, some very large.” Today, the regulations are more or less equal for all types of NBFCs. Second, NBFCs are not banks but they are governed like banks. “This is wrong,” said Deosthalee. Thirdly, NBFCs have created many innovative products — such as gold loans or second-hand truck loans. “They have played an extremely important role,” he added. “But the regulator perhaps considers the NBFC as a stepchild. I think there are some very serious issues with reference to regulation…. There is no level playing field.”
Kidwai took the panel back to the big picture. The government’s borrowing program is managed through the statutory liquidity ratio (SLR) and the cash reserve ratio (CRR), which all banks have to maintain in liquid assets and cash. This is about 27% to 30% of the balance sheet of a bank. Then there is the priority sector lending, which is 40% of all lending. “Do we have a banking sector today that is positioned to adequately support the needs of Indian industry?” she asked. “If not, what is it that needs to be done? Are banks adequately sized for growth? Is this directed lending and government borrowing crowding out the mid- and large-sized companies? (Lending to small companies is considered as priority sector loans.)
The panel was, however, fairly optimistic. There was agreement that large projects were not being denied credit because of a shortage of money. But banks should not be expected to do everything, they said — providing venture capital, for instance, was outside their ambit. The CRR and SLR were a concern, but they have been coming down.
Are the banks and the banking sector big enough? Kochhar pointed out that banks have acted as catalysts for growth. “But the Indian banking sector is very small compared to the requirements of the economy,” she said. “Our economy has to grow. I also think the credit intensity of our economy is going to be very large because we are going to enter — and we should enter — an investment phase. We see parallels across China. Until 10 years ago, until 2005, there was not even one Chinese bank amongst the top 10 banks in the world. Today, there are four.”