India’s Banks Are Seen As Antiquated And Unproductive

NEW DELHI, March 21 — Hundreds of bank branches can be found in Indias capital nestled behind metal grates in concrete buildings and tucked down alleyways off busy thoroughfares. Many of the offices are jockeying for attention with battered signs and offers of high rates for deposits and low-rate loans.

Indias drive to become a global economic powerhouse faces a huge roadblock in its inefficient, largely state-controlled financial system, analysts say. Two-thirds of Indias banking business is conducted through less than 5 percent of its branches, and its growing corporate sector has headed overseas for financial advice and loans.

Consultants at McKinsey estimated that some $48 billion could be added to Indias annual gross domestic product, bringing its growth rate on par with Chinas, if Indias financial system was made more productive.

Powerful bank unions and politics, though, are making that impossible, and the issue is coming to a head in the next few weeks: An umbrella group of nine bank unions is calling for a nationwide strike at the end of this month to voice a litany of complaints, including pressure to merge.

Indias banking system has its roots in sometimes centuries-old regional banks that spread through acquisitions and as their customers migrated. The major banks were nationalized in 1969 amid promises of loans to rural areas and secure jobs, especially for the lower classes.

The legacy of banks as tools for social reform, though, is colliding with Indias accelerating economic growth. An estimated 70 percent of Indian citizens are still not part of the banking system, while bureaucracy and inefficiencies are countering the benefits from faster growing parts of the economy, say political leaders and economists.

We need a further deepening and widening through a reform of our banking and financial system, Prime Minister Manmohan Singh recently told executives at a conference in Delhi, so that the underlying potential of savings and resources can be mobilized and deployed efficiently.

Making changes, though, is proving difficult and slow. Despite Indias big and rapidly growing middle class, and the global ambitions of its corporate sector, its banks remain tiny and their focus local.

Only one, the State Bank of India, is among the worlds top 250 banking companies ranked by assets; it comes in at No. 83, according to data from American Banker. In contrast, there are four Chinese banks in the top 35.

An attempt to lower the governments stake in public banks to 33 percent, from 51 percent, and allow them to merge with one another has been met with staunch resistance from the 750,000 public bank employees, who have strong unions.

As the countrys fast-growing corporate sector takes off, the banks are being left behind. None of the multibillion cross-border deals Indian companies have undertaken in recent months have relied on a state bank. Instead, they are turning to Wall Street firms and global commercial banks.

Foreign private banks are also knocking on the door, hoping to lure high earners from the country, which just this year became Asias biggest home of billionaires, knocking Japan from the top spot.

Ultimately, state and local banks may not be able to compete, leaving the country with a two-tiered system, with the largest companies and richest individuals putting their money elsewhere, the gloomiest critics say.

Suggestions for fixing the system include lifting lending requirements so that assets flow from small businesses to the more profitable corporate sector, allowing more foreign ownership of Indian banks, and reducing state ownership in the banking system.

Right now, the largely state-dominated banking system funnels about 70 percent of the net savings of the economy into government and state-owned enterprises, and finances a huge budget deficit, about 9 percent of gross domestic product, McKinsey said. Reducing the governments dependence on these funds would require huge changes in the way that India thinks about its banking system, away from a solution to social ills and toward an independent capitalist industry.

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