These are testing times. All that we thought was most solid, such as the big US investment banks, has melted. All that was most holy, such as the private ownership of banks, is being profaned.
Blasphemy is in the air. Staunch free-market supporters are begging the state to come to their rescue. The dreaded n-word—nationalization—is being bandied about with impunity.
Even so, Alan Greenspan’s recent support for bank nationalization has caused a flutter in economic dovecotes. That’s hardly surprising, considering that Greenspan had for long been viewed as the high priest of capitalism. It’s a bit like the Pope renouncing Christianity, or Stalin saying he was all for free markets. Ayn Rand, Greenspan’s and neo-liberal capitalism’s guru, must be rotating dizzily in her grave.
But the Indian response to all the hoo-ha over bank nationalization in the West could well be: what’s the big deal? We’ve lived with nationalized banks for decades, and while it’s true that once upon a time they used to be slothful bureaucratic departments intent on making the customers’ life hell, things appear to have changed since then.
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In fact, horror of horrors, the argument could even be made that public sector banks have acquitted themselves rather well, compared with several of their private sector peers. Could our assumption of private sector good, public sector bad be too facile?
I have before me the Reserve Bank of India’s latest on Trend and Progress of Banking in India, which has all the numbers on banks up to 31 March 2008.
Let’s start with State Bank of India (SBI), whose bad debts were at 1.78% of net advances at the end of March last year. Axis Bank Ltd had non-performing assets (NPAs) —a fancy name for bad debts —of 0.42% of net advances.
So far so good: private sector good, public sector bad. But hold on a bit. State Bank of Hyderabad, part of the State Bank group, had net NPAs to net advances of just 0.16%, much better than Axis Bank.
Here are the numbers for a few other public sector banks: Andhra Bank 0.15%; Corporation Bank 0.32%; Indian Bank 0.24%; Punjab and Sind Bank 0.37%; Union Bank of India 0.17%. To top it, there are several private sector banks with bad loan ratios at around the same level as SBI, or higher.
Let’s take another ratio, one taken by many analysts as the touchstone of profitability—the return on assets. The range for this metric among public sector banks is from 0.28% to 1.64%. Among the new private sector banks, the range is between 0.34% and 1.54%.
What is true for the return on assets and bad loans is true for all the other financial ratios used to judge banks. The simple conclusion is that there’s not really much to choose between public sector and private sector banks as generic categories. Good and bad banks exist in both sectors. All you have to do is remember Global Trust Bank Ltd, or Centurion Bank of Punjab Ltd, or Times Bank Ltd.
But surely, private sector banks get the most out of their employees, because they are completely computerized and don’t have the huge rural branch networks that the public sector banks are saddled with? Unfortunately, even here, the numbers are far from what we would expect. Profit per employee for Corporation Bank, Oriental Bank of Commerce and Union Bank are very high, while it was very low in Development Credit Bank Ltd, IndusInd Bank Ltd and Centurion Bank of Punjab.
Moreover, public sector banks are delivering these returns in spite of all the social objectives they have to fulfil, in spite of a unionized workforce and despite their employees being paid a pittance compared with the salaries of private sector bankers. Even the market, that final arbiter in capitalism, now puts a higher valuation to SBI rather than to ICICI Bank Ltd or indeed to Citibank.
It’s true, of course, that there’s plenty of scope for improvement among public sector banks. They continue to be bound by red tape and have not been quick to master the arcane arts of packaging and selling new derivative products. Trouble is, in the recent context, these skills now seem akin to the black arts, best avoided.
But perhaps the key takeaway, as they say, is that the public sector banks have responded well to competition. They even have incentive schemes nowadays that reward branch managers financially for meeting targets, apart from fast-track promotions.
So does it mean that the mixed economy is not such a bad thing after all? One way of denying that is to say that the capitalism in the West is not free-market capitalism at all and we should root for a more immaculate, laissez-faire variety. That’s a lot like the communists saying you shouldn’t judge communism by the Soviet Union, but by the pure communism of the far-off future. Actually existing capitalism is a very different animal.
Surely what is being questioned is not capitalism per se, but merely the unregulated, neo-liberal variety that developed over the last 30 years? Maybe all that we need to do is return to capitalism with checks and balances. But we are on dangerous ground here. Someone may well turn around tomorrow and say that if we can have a social democratic variety of capitalism, what’s wrong with having socialism with market characteristics?
Manas Chakravarty looks at trends and issues in the financial markets. Your comments are welcome at email@example.com