A Bottleneck For Growth

<div>Like many others, I too was taken in by the swanky exteriors and glib talk of many a foreign, private bank. In 1992, soon after the historic economic reforms kicked in, many made a beeline for opening accounts in Standard Chartered, HSBC Bank and so on. I remember, to keep the ‘chaff’ out, these banks first demanded a minimum balance of Rs 25,000 for savings accounts. After a hue and cry was raised, they brought it down to Rs 10,000. For small professionals, even that was too much, and some of us, tail between our legs, went back to the old state-run banks where the requirement was just Rs 500.</div><div>&nbsp;</div><div>The intent was obvious. The foreign banks were not here to serve the poor. They wanted to keep those accounts out and target the high net worth and the big borrowers. Rural India was even further away. That task of cranking up the villages fell on the state-run banks. The ‘socialistic’ history of banking in India will always be an overhang to be reckoned with. The Nehru government nationalised the Imperial Bank of India in 1955, and the behemoth, SBI, was founded. There were three waves of nationalisation thereafter, and by 1980 we had 27 state-run banks covering around 90 per cent of the bank branches in the country. Today, despite liberalisation and foreign banks coming in, state-owned banks are still big. They account for 76 per cent of the advances, 77 per cent of the deposits and 82 per cent of the branches. More important, the professed goals of nationalisation — to break the monopoly of a few, to include the masses in the banking system and to fund priority sectors — is still the governing philosophy.&nbsp;</div><div>&nbsp;</div><div>The big problem they now face though is they don’t have enough money to lend. Even finance minister Arun Jaitley in his 2014 Budget speech admitted these banks needed a float of Rs 2.4 lakh crore. The impact of slow credit growth is both direct and crippling. Failure to recapitalise banks slows growth and is detrimental to everything the Prime Minister and his government are trying to put in place. Meanwhile, the government is facing the ignominy of breaching the Basel III accord, a global, voluntary regulatory framework that has prescribed bank capital adequacy norms.&nbsp;</div><div>&nbsp;</div><div>The government is aware of the problem. Finance secretary Rajiv Mehrishi said a few weeks ago the government will inject Rs 18,000 crore this fiscal, and around Rs 36,000 crore next year. A recent report by global investment and research outfit Jefferies estimates that these banks can raise around Rs 50,000 crore if they sell their non-core assets. This is chicken feed in relation to what is required.&nbsp;</div><div>&nbsp;</div><div>So what are the options? A report by a panel headed by former Axis Bank CEO P. J. Nayak, submitted last year in May, suggested that New Delhi privatise national banks by lowering its stake to less than 50 per cent. In the alternative, the government should stop meddling and allow banks to function autonomously. They now take orders, often contradictory, from two masters — the RBI and the finance ministry.</div><div>&nbsp;</div><div>While privatising or lowering the government equity in banks will raise the funds to recapitalise banks, it is a political pill that is difficult to swallow. How will the government be able to launch its ‘social inclusion’ programmes like the Pradhan Mantri Jan Dhan Yojana? The lakhs of unionised employees of state-run banks too are all set for rebellion! An option is to lower government equity to 33 per cent and allow it to hold a ‘golden’ veto. Understand the full picture of this mega banking snarl penned by deputy editor Raghu Mohan.&nbsp;</div><div>&nbsp;</div><div>That is not all. Our offering this fortnight also includes a hard-hitting story by associate editor Joe C. Mathew revealing that despite all the talk about ‘Make In India’, 70 per cent of the medical devices market has been grabbed by foreign players, leaving the ‘locals’ with low-end products. Also, don’t miss the story about the government getting tough on the menace of mobile call drops by special correspondent Neeraj Thakur and all you wanted to know about Uber but were afraid to ask by senior editor Mala Bhargava.</div><div>&nbsp;</div><div><div>(This story was published in BW | Businessworld Issue Dated 10-08-2015)</div></div>