domain-B: How do you assess the prevailing environment in the Indian banking industry?

Indian financial markets are increasingly converging with global markets, as a result of which the standards in the Indian financial sector are undergoing a process of refashioning to conform with global best practices. Banks are in the process of absorbing new technologies and it is here that the new generation banks are in the vanguard.

These new banks are setting the pattern of change in the banking sector. Financial products available internationally like net banking products, e-commerce products, e-broking, etc. are now increasingly available in India.

Public sector banks which control almost 80 per cent of the market are coming under increasing pressure from these new generation banks and unless they pull up their socks, they will lose market share drastically. The public sector banks must concentrate on upgrading their technology and becoming more customer-friendly.

domain-B: Are spreads in the banking sector coming under pressure?

Yes, indeed. Spreads are coming down in corporate banking. The strong relationships which the banks enjoyed with corporates is now a thing of the past; relationships now are more volatile and transaction-based. Because of the advance in technology, corporates can now access the same financial markets available to banks directly. In the present day environment, banks will have to depend less on loan products and more on fee-income based services.

domain-B: How serious is the problem of non-performing assets (NPAs)?

It is a very serious problem and, in my opinion, is a result of exposure to old economy segments such as textiles, steel, etc. Banks are presently powerless to tackle defaulters. The legal system needs to promptly revamped and banks given powers to seize assets pledged, hypothecated or mortgaged and sell them to realise dues without the intervention of courts.

The pre-eminence of the Sick Industries Companies Act (SICA) over other Acts should also be eliminated so that defaulters who take their companies to the BIFR cannot delay recoveries.

domain-B: But why is the Indian banking industry saddled with high NPAs in the first place?

The entire banking system has, for long, been held hostage to the public policy of social banking. There is no doubt that this policy has indeed helped in the even spread of industrialisation in the country and also in bringing about the agricultural revolution. But as the economy moves towards global integration, corporate and business restructuring, scaling up of technology and exposure to foreign competition became issues which Indian business could not be handle properly.

This resulted in many firms in the small-scale sector and large companies in both the private and public sector being unable to service loans taken from banks. The banks too could not easily shed these assets because of the tortuous legal processes. All these factors led to high NPAs in the Indian banking system.

domain-B: What about Indian credit assessment techniques?

Our systems of assessment are in no way inferior to those prevailing elsewhere in the world. Problems may have arisen due to lapses in the implementation of these systems and also to due to governmental pressure in respect of social lending. This has made it appear as though our systems are inferior, but I strongly oppose this view.

One must also remember that our economy is in transition from one of "command" to a "market-friendly" one. Many corporates have not been able to cope up with this change and have consequently become sick. Our appraisal systems, again, cannot be blamed for this. Another point I would like to highlight is that some borrowers were able to play one bank or institution against another by submitting different cash flows to them. The complete lack of co-ordination between banks prevented a proper exchange of information among banks and institutions, which could have helped avoid much of the prevailing bad debts.

In this connection, I welcome the initiative of the Reserve Bank of India to set up a credit information bureau. This will go a long way in helping banks tackle the bad debt problem.

domain-B: How do you see Indian banking evolve over the next three-to-five year period?

The alignment of the Indian financial sector with global markets will lead to more mergers and acquisitions between banks. The merger of HDFC Bank and TimesBank is a pointer in this direction. A restructuring amongst public sector banks, too, cannot be ruled out. Financial institutions are likely to become universal banks and competition will become intense. This is a positive sign as the customers will be ultimate beneficiaries.

domain-B: What will be the role of public sector banks in the future?

Public sector banks have a huge network and are present in every nook and corner of the country. In my opinion, their pre-eminence will continue for some more years, simply because private banks cannot hope to match their network. The public also has a strong and unshakeable faith in these government-owned banks and as long as this faith and loyalty remains intact, public sector banks will continue to remain leaders. However, I feel public sector banks could lose out to competition in the metros and urban centres.

If the public sector banks are to be made more nimble footed and customer friendly, a drastic change in mind-set is called for. They will have to increasingly concentrate on fee income which means they will have to enlarge their range of products and depend less on interest income and branch expansion. Their vertically integrated value chain which offers multiple products – originated, packaged, sold or cross-sold through their high-cost proprietary channels – should change.

They must also attempt to build bridges between their banking software and the web; this should be strengthened by reliability, security and enforcement of electronic contracts. This will enable the public sector banks to create financial web-sites for offering the whole range of banking products. They should move in this direction swiftly.

domain-B: Do you feel that the 40 per cent stipulation on priority sector lending should be reduced under the prevailing circumstances?

It is high time the ceiling is brought down to ten per cent as recommended by the Narasimham committee. It should be directed in a focused manner on the weaker sections of society. However, this is a socio-political issue and one must move carefully on the matter. What can perhaps be done is to ask banks to subscribe to bonds of agencies specialising in micro-lending but not necessarily in the public sector. This will free the banks of their operational responsibility in handling small loans.