On 16 December, Punjab and Sind Bank (PSB), the smallest and last unlisted government-owned bank in India, completed its public issue of 40 million shares. It was subscribed 50.75 times, and following the share sale, the government’s stake in the bank dropped to 82%.
The listing of 115-year-old PSB completes a cycle that began in the mid-1990s, when Oriental Bank of Commerce (OBC) sold shares to the public. This was also the key takeaway for Indian banking in the past decade—demonstrating the success of the nation’s public sector banks, the key driver for the banking industry, and accounting for 70% of banking assets.
Miles to go: Farmers transport watermelons to a village market nearAllahabad. The fruits of the banking industry’s development in the past decade are yet to reach large sections of the rural market. Diptendu Dutta/AFP
Delhi-based OBC was the first public sector bank to be listed in 1994, following an amendment to a law that made it possible for the government to lower its stake in state-owned banks to 51%. The last state-owned lender to sell shares in an initial public offering before PSB was United Bank of India (UBI). It listed on the stock exchanges in February 2010 after raising around Rs330 crore from the public. Before UBI, Indian Bank, which has the dubious distinction of wiping out its reserves and equity by posting massive losses in the 1990s, listed on the bourses in 2007. In the mid-1990s, when Indian Bank posted the highest-ever net loss by any bank in the country, it was crumbling under piles of bad assets and not too many bankers and analysts thought it would survive. PSB, too, has not been in the best of health in the past, and there were efforts to merge it with another state-run bank.
Interestingly, the government has not sold its stake in these banks. Instead, banks have raised money from the public by issuing fresh shares and, in the process, the government’s stake has been diluted. This has made the banks more competitive and efficient as they need to meet the expectations of their investors. And, to do that, they need to keep the consumers happy as otherwise business will not grow. Overall, the focus has shifted from growth in balance sheet to key financial parameters such as return on assets and return on equity even as public sector banks compete fiercely among themselves and with foreign and private banks.
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Listing of state-run banks— spread over the last one-and-a-half decades—and the arrivalof two sets of new private banks (once in the mid-1990s and then early in the past decade) have made the industry competitive and consumer oriented. Mortgages, auto loans and personal loans are the products of this decade.
ICICI Bank Ltd was the first to sense the opportunity in retail loans in a growing economy, but others caught on quickly and now this is a big business. While corporations can tap the capital market for money or raise funds overseas, India’s growing middle class with rising disposable income wants to buy houses and cars, invest in the stock market, holiday abroad and send children overseas for higher education. For all these, it relies on its friendly banker who sits in an open office, entertains customers with coffee, and discusses Sachin Tendulkar’s 50th century and terror threats in Mumbai with equal ease. Till ICICI Bank, HDFC Bank Ltd and Axis Bank Ltd—the so-called new-generation private banks—came into being, it was difficult for most consumers to enter a banker’s cabin.
In all key parameters, the industry has done well in this decade. For instance, the collective net profit of the industry was Rs7,100 crore in 2001. By 2010, it had risen eight times to Rs57,109 crore. Bad assets, as a percentage of loans, were 6.83% in 2001. This has come down to 1%. The net worth of the industry—capital plus reserves—during this period has risen from Rs57,146 crore to Rs3.56 trillion. The Indian banking system could remain insulated from the global credit crunch and its impact in the wake of the fall of US investment bank Lehman Brothers Holdings Inc. on the strength of its high capital-to-assets ratio and low bad assets. The ratio of operating cost to total assets has come down from 2.68% to 1.87% and return on assets rose from 0.57% to 1.05% between 2001 and 2010, highlighting the industry’s efficiency.
In 1991, the year India moved ahead with a process that it had begun in the mid-1980s and embraced economic liberalization, the loan outstanding in the industry was Rs1.24 trillion, about 24% of the nation’s gross domestic product (GDP). By 2000, it rose to Rs4.6 trillion, but as a percentage of GDP still remained about 25.75%. In the last decade, the loan book grew to Rs32.4 trillion, a little over 55% of India’s GDP.
Along with the growth in the loan book, the reach of banks is also increasing. The overall number of branches has gone up from 61,724 in 1991 to 67,061 in 2000 and 81,802 in 2009 (the latest data available), but the average population serviced by one bank branch has dropped only marginally, from 15,000 in 1991 to 14,000 currently. And this is the national average—the coverage in rural India is much less than in urban India. Despite being innovative, robust, resilient and well capitalized, banking largely remains an urban phenomenon in India, and bankers are reluctant to tap the big business opportunities in rural India. That’s the biggest failure of the Indian banking industry.
Indeed, some of the figures are glaring. For instance, in 1991, there were 35,134 rural branches, accounting for close to 57% of the total national branch network. In 2000, this number dropped to 32,673 and 48.7% of the branch network. By 2009, it dropped further to 31,549 and 38.6%. During this time, branches in metros rose from 6,191 to 8,957, and finally, to 14,761 (from 10% to 13.4% to 18%).
The share of rural India in bank deposits and credit, too, has been slipping continuously, reflecting the industry’s priorities. For instance, in 1991, there were a little over 100 million deposit accounts in rural India— 31% of the total. By 2000, their number rose to about 126 million, but the market share slipped marginally to 30%. In 2009, the number rose to about 199 million, but as a percentage of total number of accounts, it remained the same—30%—as the overall number of deposit accounts rose from 355 million in 1991 to 662 million in 2009. The share of metros (in terms of accounts), however, rose from 19% in 1991 to 20% in 2000 and 23% in 2009. In terms of money kept in these accounts, rural India’s share remained unchanged at 15% in the previous decade, but dropped to 9% this decade, while the share of metros rose from 39% in 1991 to 43% in 2000 and 56% in 2009.
The contrast is sharper when it comes to accessing bank loans. In 1991, there were about 32 million loan accounts in rural India—52% of total accounts. By 2000, this dropped to 25 million and 46%. In 2009, the number rose to 34 million, but as a percentage of total number of accounts it slipped further to 31%. In these two decades, the share of metros rose from 6% to 33%. In terms of money raised through these accounts, rural India’s share slipped from 21% in 1991 to 13% in 2000 and 11% in 2009, while share of metros rose from 40% to 56% and 60%, respectively.
Competition has raised the standard of banking and efficiency while vigilance has kept the system healthy, but the industry has disappointed rural India in a big way. Bankers know this and will probably make amends in the next decade.
Graphics by Paras Jain/Mint