Banks driven by commercial considerations, financial inclusion long way off: Economic Times 6th April 2011

RBI's latest release of 'Statistical Tables relating to Banks in India' is quite revealing when we juxtapose FY00 and FY10 data. We've had several measures that have been invoked under financial liberalisation while a lot has also been spoken of on inclusion to add a social dimension. How has this model worked?

The study of data over these 10 years has some interesting stories to tell. Three aspects of banking development could be looked at: banking structures, business profile and financial performance. Under banking structures, the growth in network increased from 67,532 branches to 87,768. However, the share of rural branches came down from 48% to 37% while that of urban and metro increased from 30% to 40%. Quite clearly, banks have been going to places where there is business.

Simultaneously, the staff strength came down by around 14% to less than a million i.e. 869,412 (FY09). Banks have effectively used technology to replace surplus manpower. The business profile reveals that deposits remain the main source of funds, accounting for 79% of total liabilities as against 80% in FY00. Second, term deposits continue to be around 65% of deposits and there has been virtually no change here.

Third, surprisingly, households have become less important for banks in terms of garnering deposits with their share going down from 67.6% in FY00 to 58.3% in FY09. Banks evidently prefer to raise bulk deposits from corporates which have lower transaction costs and are easier from the point of view of ALM considerations. This also reflects household's preference for stock markets and insurance products and corporate proclivity for parking funds with banks through the CD markets, which is a sign of a mature banking system.

On the lending side, some discernible patterns have emerged. To begin with, the share of term loans has gone up from 36.5% in FY00 to 57.4% in FY10, which may be attributed to the demise of development banking with banks taking on the role of long-term lending. Second, the share of priority sector lending remains at around 31% and banks have just about met their targets and have not really followed the inclusive model. Maybe, there is a very critical role for MFIs here. The fact that NPAs in this sector tend to be higher could be a reason for not converting enthusiasm into action.

Third, the level of concentration in loans is unchanged and Maharashtra and Delhi still account for around 42% of credit, which is reflective of the demand coming from the more industrialised states where business is higher. Fourth, the sectoral distribution of credit has also changed. In terms of share in total credit, professionals (3.2% to 9.8%), personal (11.2% to 12.7%), finance (4.8% to 8.5%) have been gainers while trade has come down from 15.6% to 10.7%.

The success of banks in terms of financial performance has been quite amazing. Profits, which were never really very important for public sector banks , have seen a turnaround. The return on assets has increased for the entire sector from 0.73% to 1.05% in FY10, after peaking at 1.12% in FY08. This is remarkable at a time when the base of total assets has quadrupled from 15.16 lakh crore to 60.25 lakh crore. Return on equity, however, has been more volatile. The increase in base of net worth explains most of this phenomenon.

Third, despite interest rates coming down on account of RBI policy on both deposits and advances, the spread has remained rather stagnant. Such high spreads are atypical of mature banking systems and may be attributed to a combination of higher risk in the system as well as operating expenses.



Intermediation costs have been coming down from 2.68% of total assets to 1.80% in FY10.Last, gross NPAs have come down from 12.8% to 2.5%.

So, how does one evaluate the performance over this decade? Banks have been driven by commercial considerations as witnessed in improved financial performance and proliferation of banking structures towards centres and sectors of growth. Intermediation costs have to be improved upon and one vital missing link in banking ideology which has to get excluded is the 'inclusive nature of banking'. Quite evidently, new innovative models have to be built aggressively if we are really serious.