New Delhi: Hundreds of bank branches can be found in India’s Capital nestled behind metal grates in concrete buildings and tucked down alleyways off busy thoroughfares. Many of the offices are jockeying for attention with battered signs and offers of high rates for deposits and low-rate loans.
India’s drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts say. Two-thirds of the banking business is conducted through less than 5% of its branches, and its growing corporate sector has headed overseas for advice and loans.
Consultants at McKinsey estimate that $48 billion (Rs2.1 lakh crore) could be added to India’s annual gross domestic product, bringing its growth rate on par with China’s, if its financial system were made more productive.
Powerful bank unions and politics, though, are making that impossible, and the issue will come to a head in the next few weeks—an umbrella group of nine bank unions called for a nationwide strike at the end of this month to protest a litany of complaints, including pressure to merge. They later called off the strike after the government said it would consider their demands.
India’s banking system has its roots in sometimes centuries-old regional banks that spread through acquisitions and as their customers migrated. The major banks were nationalized in 1969 amid promises of lending to rural areas and secure jobs, especially for the underclasses.
The legacy of banks as tools for social reform, though, is colliding with India’s accelerating economic growth. An estimated 70% of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are leaching benefits from faster-growing parts of the economy, say political leaders and economists.
“We need a further deepening and widening through a reform of our banking and financial system,” Prime Minister Manmohan Singh recently told executives at a conference in Delhi, “so that the underlying potential of savings and resources can be mobilized and deployed efficiently.”
Making changes, though, is proving difficult and slow. Despite India’s big and rapidly growing middle class, and the global-crossing ambitions of its corporate sector, its banks remain tiny and their focus local. Only the State Bank of India, numbered among the world’s top 250 banking companies ranked by assets, comes in at No. 83, according to data from American Banker.
An attempt to lower the government’s stake in public banks from 51% to 33%, and allow them to merge with each other has been met with staunch resistance from the 750,000 public bank employees, who have strong unions.
As the fast-growing corporate sector takes off, the banks are being left behind. None of the multibillion-dollar cross-border deals that Indian companies have undertaken in recent months have relied on a state bank. Instead, companies are turning to Wall Street firms and global commercial banks.
Foreign private banks are also knocking on the door, hoping to lure high earners from the country that this year became Asia’s biggest home of billionaires, knocking Japan from the top spot.
Ultimately, state and local banks may not be able to compete, leaving India with a two-tiered system, with the richest firms and people putting their money elsewhere, critics say.
The largely state-dominated banking system funnels 70% of the net savings of the economy into government and state-owned enterprises, and finances a huge budget deficit, about 9% of gross domestic product, McKinsey said. Making changes necessary and reducing the government’s dependence on these funds would require huge changes in the way that India thinks about its banking system, from a solution to social ills to an independent capitalist industry.