The Indian economy is poised to achieve a growth rate of 8.5-9 per cent in the current fiscal. This level of growth cannot be sustained unless the Indian banking sector transforms itself to support the economy. It is with this view in mind that the Indian Banks' Association (IBA) has chosen the theme “Transform to outperform: ideate, innovate and inspire” for this year's annual bankers conference. Mr O.P.Bhatt, Chairman at both State Bank of India and the IBA, explains the significance of the theme to Business Line.
What does the theme “Transform to outperform” mean?
The Indian economy has achieved 8.9 per cent growth in the second quarter. We believe the economy is now poised to perform even better. We are talking about building infrastructure and opportunities in retail (banking). The way the Indian banking system is today, we think there are many areas in which it needs to be strengthened. To be able to be supportive of the economy, we need to build various capacities within the system.
On the retail side, when hundreds of millions of people are moving into the bracket of middle class, as they will with the economy growing at 9-10 per cent, (even today I think it is growing at more than 10 per cent if you add the unaccounted portion of the economy) it is a very huge growth for a country with 1.2 billion people. These people come with the aspirations that the moment you get a job you want a home, car, and investment in mutual funds. You need bankers to help you with that. Retail is more people-intensive.
In the next 5-10 years you need millions of people in the banking system. From where are these people going to come? That is the question.
Indian banks —largely the PSU banks — came out from a very regulated and administrated system to a market economy. So far they have done well. But the product range and market dynamics are now changing very rapidly. We are now getting into retail and more complex products.
India Inc is globalising, so we will need more risk products in terms of aggregation risk. Do we have the right risk products to manage those risks?
So when we say ‘transform to outperform' it means building capacity, building risk products through technology. But do we have a culture where we are constantly looking at these things and looking at the future to build it today? How many bank managements are even comfortable with technology? How many bank managements' technology department is not vendor-dependent?
Unless we build up all these things, we will not be able to outperform. We will not be able to help our economy outperform. These are important questions for the banking industry today.
Do we need more banks or bigger banks?
We need a little bit of all. We cannot have one size fits all, if India wants to become the third largest economy in the world like China has become the second largest economy. A decade ago it did not have any bank in the top 20 (in the world). Today it has four and some of them in the top three.
The Chinese are growing fast, they could not have done it without their banks. So, if the Indian economy has to become No 3, our banks have to grow. Today, the topmost bank, SBI, is not among the top 50 in the world. So we do require some large banks that have got international stature. Because increasingly our business is going to be cross-border. Indians looking outside, outsiders looking to India. We need to have Indian banks that can facilitate this. But we also need middle-sized banks, niche banks, small banks, geography-specific banks. They have to co-exist. They have different strengths, different capabilities, they are all looking at different parts of the economy.
Should size be achieved through consolidation or organic growth?
It has to be a bit of both. To become large there cannot be a formula that can be prescribed. Some banks will grow organically, will take time. Some banks will grow by having capital. We have about 9.5 per cent Tier I capital. We may need 12-15 per cent capital and use that to grow faster. Maybe we can also acquire a small bank. Each bank has to think for itself where the best synergy is. Crisis comes to a bank not because it does not have enough capital but because it does not have enough liquidity.
We now have a situation of high inflation and high growth. What monetary policy response you expect?
Inflation is coming down due to various policies, both on supply side and demand side. It will continue to fall and by March to 5-.5-6 per cent. Going forward, inflation will be less of an issue. But it should be under watch.
RBI's comfort is 5 per cent. If we can manage inflation by keeping supply and demand balanced we should be all right.
What about interest rates?
At the moment, interest rates are not going to come down. There is still some upward bias in the interest rates. For some time rates are not going to come down.
Will the RBI's liquidity support measures help ease the situation?
These measures are very helpful and the RBI has said it will not allow liquidity to be a constraint. Last few months there is uncertainty about liquidity, how much of it will be available. From time to time there has been some volatility and this kind of volatility we have not seen in the past. It is making it difficult to take a long-term view. It is like the patient on a drip.
I think the RBI is seized of this issue and will come out with some measure to address it.
Will the credit growth target of 20 per cent be met?
Liquidity will not be a constraint in meeting this target. Whether the demand would come in the economy we are yet to see. Because while the economy is growing fast, the banking credit is not growing in the same ratio it was growing earlier.
Earlier it was about 2.5 times. But now it is not happening. They are able to grow maybe because of their internal efficiencies, internal surplus, or money coming from other sources. So, economy will grow. There is no problem with liquidity.
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