Banks, industry and the chicken and egg syndrome

Banks, industry and the chicken and egg syndrome
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First Published: Sun, Jun 21 2009. 10 55 PM IST

Updated: Sun, Jun 21 2009. 10 55 PM IST
The Communist Party of India (Marxist)-led government in West Bengal came to power in 1977. It is the world’s longest running democratically elected Left government. Its finance minister, 64-year-old Asim Dasgupta, has the enviable record of being the longest serving finance minister in any state.
Dasgupta, a Massachusetts Institute of Technology-educated economist, blames local banks for not doing their bit to help industry and the state’s economy. Had the banks been active in disbursing loans to entrepreneurs, the state’s industrial scene would have been different, he says.
The bankers, meanwhile, say there are not too many takers for loans and they run the risk of piling up stressed assets if they become aggressive in lending.
Who is telling the truth? Are the banks to be blamed for not supporting industry? Or, should one blame industry for the fact that the three local banks are laggards among India’s state-run banks, which account for about 80% of the banking sector’s assets?
A 2009 report by the Associated Chambers of Commerce and Industry of India, or Assocham, an industry lobby, says that among 21 Indian states, West Bengal ranked fourth among favourable investment destinations in 2007, but dropped to 13th in 2009, and there has been a 63% drop in investment plans by corporations in the eastern state.
Dasgupta, however, does not bother much about these figures. In absolute term, the state has seen an investment of Rs4,430 crore in 217 projects in 2009, against an investment of Rs5,072 crore in 2008. This means the state government’s failure in acquiring land for a proposed special economic zone of the Indonesia-based Salim Group at Nandigram, a rural area of East Midnapore district, and the trouble surrounding another plot at Singur in Hooghly district for Tata Motors Ltd’s small car project, the Nano, does not signify the end of the road for industrialization.
While land acquisition has been a relatively recent problem for West Bengal, India’s third largest state economy after Maharashtra and Uttar Pradesh, which occupies only 2.7% of India’s land area but supports 7.8% of the country’s population, the three banks located in the state have all along been laggards. United Bank of India, or UBI, one of the two unlisted banks in the public sector (outside the State Bank of India family), recorded the lowest profit among all state-run banks in fiscal 2009. Its earlier avatar, United Bank of India Ltd, was formed in 1950 merging four banks—Comilla Banking Corp. Ltd, Bengal Central Bank Ltd, Comilla Union Bank Ltd and Hooghly Bank Ltd. It ranks 20th in terms of assets among 27 state-run banks.
Allahabad Bank is 144 years old, the second oldest bank in the country after the largest lender, State Bank of India. But its assets have not yet crossed Rs1 trillion. In terms of net profit, it ranked 13th among public sector banks in fiscal 2009, and in market capitalization, 14th. Uco Bank, founded in 1943, is the biggest of the three with an asset base of Rs1.11 trillion, but both in terms of net profit and market capitalization it ranks far lower than Allahabad Bank.
Dasgupta seems to be unhappy with them as they raise money from West Bengal in the form of deposits, but when it comes to distribution of this money in the form of loans, they are reticent. They take a long time to process loan proposals and it seems, given a choice, they would not like to lend much to local industries.
The lack of bank financing is one of the reasons behind the not-so-bright industrial scenario in West Bengal. For every Rs100 worth of deposits raised in this state, banks in West Bengal lend only Rs64.
In other states, such as Andhra Pradesh, they lend much more even though the growth in Andhra Pradesh’s gross state domestic product, is lower than that of West Bengal.
The chief executives of these banks are, however, not impressed with Dasgupta’s argument. They don’t deny the fact that West Bengal offers more money to the banking sector in the form of deposits and the Left-ruled state’s savings rate is higher than many other Indian states, but the avenues to deploy the money locally are limited as not too many entrepreneurs want to invest here. The main reason behind the healthy savings rate is the risk averseness of the local population. They do not get excited about investing in the market. So, the flow of money towards equities and mutual funds is very limited and the bulk of household savings flows into bank deposits.
The all-India average of credit to deposit ratio is now 70. This means that for every Rs100 worth of deposits, the banking system lends Rs70—Rs6 higher than what banks in West Bengal do. These numbers per se do not say much.
Theoretically, banks should not lend more than Rs71 out of every Rs100 deposit as they need to invest Rs24 in government bonds and keep another Rs5 with the Reserve Bank of India in the form of cash reserves. But when the economy grows at a high pace and the demand for credit is high, banks use their capital too for giving loans, pushing up the credit-to-deposit ratio.
Another point to note is that this ratio can be “managed”. For instance, a Mumbai-based bank may lend big money to, say, Tata Steel Ltd, and prop up its credit-to-deposit ratio in Jharkhand. How is this done? Through a simple accounting entry—showing the actual disbursement of money by its branch located in Jamshedpur, where the company is headquartered.
The job of banks is to lend money and if the West Bengal government can create an environment for industry to grow, they will indeed open the tap. At the same time, all three Kolkata banks must try to shed their local character and become all-India institutions. This can be done by not closing down local branches, but by expanding outside West Bengal. Even if they choose to remain regional players, they can be efficient. The Mangalore-based Corporation Bank and Hyderabad-based Andhra Bank are regional lenders but more profitable than Kolkata banks and have a larger market capitalization even though they have a smaller asset base.
West Bengal can also experiment with local area banks— a concept that former finance minister P. Chidambaram introduced in 1996. The idea was to set up new private local banks with jurisdiction over two or three contiguous districts for mobilizing rural savings and making them available for investments in the local areas. These banks were expected to bridge the gap in credit availability in rural and semi-urban areas, but there has not been a single success story in this space so far. Dasgupta can try this experiment in his state. After all, banks do not need huge chunks of land.
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as a deputy managing editor of Mint. Please email your comments to
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First Published: Sun, Jun 21 2009. 10 55 PM IST