Sucheta Dalal :The great banking slice up
Sucheta Dalal

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The great banking slice up  

Jan 22, 2007

At this time last year, we saw a raging controversy over the proposed headcount of minorities in the armed forces. The move was dropped after senior ex-army personnel took to the streets protesting against the politicisation of India’s defence services.

A year later, the government reportedly wants the Indian Banks Association (IBA) “to consider ear marking a slice of the total loan disbursement for members of minority communities”. The banking division apparently wants 15% of priority sector lending across all categories reserved for minority communities. Surely this is a loan mela in disguise? In today’s aggressively competitive banking scenario nobody discriminates against borrowers who qualify for finance—they woo them. By creating a minority quota in lending the government is clearly playing politics and wants to fatten its vote banks, whether or not it makes commercial sense. Coming from an ostensibly progressive ministry, the move is even more bizarre because the ‘priority sector’ concept itself is fast becoming redundant. Where banks had to be threatened with punishment to make them lend to agriculture or rural markets, even foreign banks are now jostling to grab these “new growth opportunities”.   Banks across the spectrum are drawing up plans for rural lending in the expectation of sharing in their economic growth. They are also working overtime to mitigate business risk through insurance and tie-ups with self-help groups and teaching farmers to extract better value out of their effort by financing inputs costs.

For instance, Citibank’s hottest business is Citi Financial Services with 460 branches in 165 cities and growing. It clears loan applications for upto Rs 40,000 in 12 hours, with adequate checks and balances to ensure a healthy spread of 7-8% after containing bad loans at 4.5%. ICICI, HDFC and PSU banks are also competing in this segment. Can they do this by discriminating against minorities?

Ironically, a government basking in India’s economic growth and booming capital market, cannot seem to grasp the dynamics of a changed economic reality. The same goes for the banking regulator. The Reserve Bank of India (RBI) barred India’s most dynamic and fastest growing banks, implicated in the Demat scam from opening new branches for a year as punishment for lapses in implementing Know Your Customer (KYC) rules. Certainly the banks needed to be penalised, but RBI clamped down on their growth because it has no power to impose fat monetary penalties. In the process, it inflicted far more crippling damage on the banks than was warranted by their mistake. What adds to the absurdity is that the Securities and Exchange Board of India’s (Sebi) impressive disgorgement order asking ten market entities involved in the demat scam to cough up Rs 116 crore is unlikely to realise very much. SEBI has strangely chosen to collect from several entities that weren’t enriched at all. And even its order seeking a change in management of depositories seems to have been ignored by their shareholders. Consequently, only banks have paid a significant price for the IPO scam.

Coming from an ostensibly progressive ministry, the move is bizarre because the ‘priority sector’ is becoming redundant

The RBI’s regressive order asking all banks to compulsorily issue passbooks to account holders exhibits a similar failure to understand market segmentation. The regulator’s job is to ensure that customers get the service they pay for and have a fair choice of services. Both are reasonably available and could grow if RBI clears bank expansion. Why then mandate a “passbook” when Net banking is growing rapidly and banks are spending money to put in place appropriate technology to delivery service and information? Indeed, several customers want passbooks and insist on having them personally updated, but they are a minority. Instead of a general fatwa, the RBI must encourage smaller banks to woo this segment by offering passbook services. At the least, banks must be asked to issue them only to those who want passbooks. No bank has complied; they want a rollback.

On the flip side, certain liberalisation moves are equally irrational or motivated. Such as the effort to permit foreign institutional investment and direct entry of hedge funds. In the absence of capital account convertibility, it discriminates against resident Indians, but does one need to explain why politicians want a freer flow of funds, especially via foreign tax havens?

-- Sucheta Dalal