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India’s big small banks

India’s big small banks
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First Published: Sun, Aug 21 2011. 11 07 PM IST
Updated: Sun, Aug 21 2011. 11 07 PM IST
The Reserve Bank of India (RBI) is expected to release its proposal on licensing norms for a new set of private banks this week. It’s fairly well known that RBI was not too keen to have more banks in the system when finance minister Pranab Mukherjee announced the entry of private firms into banking in his February 2010 budget speech. Mukherjee wants more banks as half of India’s population does not have access to banking services.
The Indian central bank had released a discussion paper last year covering critical issues such as capital requirement and profile of promoters of new banks, and subsequently sent its proposal to the finance ministry ahead of the February 2011 budget for approval. It took seven months for the ministry and the banking regulator to thrash out the differences. It’s fairly certain that industrial houses that have not been allowed to float banks since 1969, when India nationalized 14 major banks, will now be given freedom to do so. RBI will, however, insist on strict “fit and proper” criterion to keep all firms that have been under the glare of investigative agencies out of the process.
The draft proposal merely kicks off the process of selecting the third set of new private banks in the world’s 10th biggest economy, a process that was initiated 18 months ago, and it will take a while before the new banks actually see the light of day. After receiving feedback from different quarters, RBI could release the licensing norms by the end of this year. An internal RBI committee will first go thorough the applications seeking licence to set up banks, but before giving its stamp of approval the banking regulator will get them vetted by an external panel. Another critical factor that will have a bearing on new bank licences is the amendment to the existing banking law. RBI wants to amend it and empower itself to supersede a bank’s board in case it is found violating norms. It needs this power to make sure that big industrial houses running banks are not able to misuse funds for their benefit or deny money to competition.
India offered nine licences to private banks in mid-1990s, but four of them did not survive. Subsequently, in 2003, two more banks were allowed to begin operations and are doing fine. I don’t know how many new entities will enter the banking space this time around, but it may not be a bad idea to see how Indian banks have been doing on the global scale, particularly after the 2008 meltdown that hardly affected this country.
The latest issue of The Banker magazine, a Financial Times publication, is on the top 1,000 banks of the world. The editor’s letter says there can be no more dramatic illustration of the transfer of economic power from the West to the East than the rankings of this year’s (2010, for Indian banks fiscal year 2011) top 1,000 banks. There are three Chinese banks among the top 10, up from one last year, while the number of UK banks has come down to two from three. The editorial also compares the latest rankings with that of 2008 (based on 2007 financials), the last year before the global meltdown hit the financial system, and says the transformation is even more radical. At that time, UK banks were most profitable, accounting for 11% of the top 1,000 banks. While total profits have almost recovered to the pre-crisis level, the share of UK banks has fallen to 5%. Meanwhile, the share of Chinese banks has more than doubled to 21% from under 10% in 2007.
The magazine’s August issue also talks about the “underperformance” of India’s “fragmented” banking sector. Indian economy is seven times greater than Malaysia’s, but in the top 25 banks in the Asia-Pacific region excluding China and Japan, in terms of tier-I capital (equity and reserves), it has only four entries and Malaysia has three. Five banks each from Australia and South Korea feature in the list. Punjab National Bank (PNB) is the new entrant into this list (25th) and Bank of Baroda (BoB) has missed out by a single place.
Overall, 32 Indian banks have featured in the list of the world’s top 1,000 banks, but only one—State Bank of India (SBI)—is among the top 100. Its position is 61st, up from 68th in the previous year. SBI apart, five Indian banks have made to the list of top 200 banks. They are ICICI Bank Ltd, HDFC Bank Ltd, PNB, BoB and Canara Bank. Three others—Axis Bank Ltd, Bank of India and IDBI Bank Ltd—are among world’s top 250 banks in terms of tier-I capital.
In terms of assets too, SBI is the lone bank among the top 100, and ICICI Bank, PNB, BoB and Canara Bank are among the top 200. When it comes to return on assets, not a single Indian bank features in the list of top 100. SBI’s position is 355 and that of ICICI Bank is 228. Three banks that have made it to the top 150 in this category are Indian Bank, HDFC Bank and Axis Bank.
Finally, let’s look at the market capitalization of Indian banks. At Friday’s closing price, SBI is the 42nd most valued bank in the world and its market cap is about 13% of the world’s most valued bank, Industrial and Commercial Bank of China Ltd. Two other Indian banks—ICICI Bank and HDFC Bank—are among the top 100 banks in terms of market cap, with four more banks featuring among the top 200. Here, too, the Chinese banks are dominating, occupying three of the first five slots.
Clearly, Indian banks have not been able to cash in on the benefit of the world’s second fastest growing major economy, both in terms of scale and market cap.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at bankerstrust@livemint.com
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First Published: Sun, Aug 21 2011. 11 07 PM IST