Global ‘Indian’ banks, mere flight of fantasy--Business Line 22nd May 2013
May 21, 2013:
Talk is cheap. And if it reflects a ‘grand’ vision, it’s likely that even a lot of knowledgeable people will fall for it.
In this class falls the idea of consolidating Indian banks to enable them to compete globally. Sounds great, in tune with the zeitgeist. And if anyone argues, it can be dismissed as emanating from the small-minded.
Of course, bank mergers thoughts have sprung up from time to time before and forgotten when mundane matters or a crisis took over.
Michael Porter in his book The Competitive Advantage of Nations makes the point that global companies first succeeded in their home markets before venturing abroad. By this test, where do our banks stand?
At the bottom of the heap.
Perpetual recapitalisation is the story of Government banks —so many times in the last decade and a half that one has lost count. The beauty is that it’s all book entries. Government acquires shares in its banks (an ‘asset’ for Government) and the banks invest the proceeds back in Government bonds (liability for Government). Not even cash exchanges take place. And behold, the capital ratios magically increase to Basel norms.
The sad part is much of the recapitalisation is not to support more lending but to shore up balance sheets after loan losses. One such ‘repair’ job is now on after close to a couple of hundred thousand crores of credit threatening to go bad, having been lent to overextended business groups suffering from poor governance against the dodgiest of collateral — ‘values’ of Government licences, franchises and corporate ‘brands’.
Mostly, it’s not the fault of the banks but the times and environ we live in.
First, we need to define catchall phrases like building ‘globally competitive’ banks.
Compete for what?
Business in America, Europe and Japan?
Global lending?
Asset management?
Lending to global companies?
Any of these goals, to say the least, is a flight of fantasy. We simply lack the human resources, infrastructure and technology for just a minimal presence in one of these markets. Not to speak of the billions of capital.
Moreover, if our overseas branches lose money, they will need constant recapitalisation. With hard dollars, not book entries, as we do in India.
In fact, one of our high profile private sector banks has been repatriating capital from its foreign branches after burning its fingers there. The world of international finance is not for minnows. So let’s get real in terms of ambitions and priorities. Are we aware and sensitive, for example, to the looming water crisis in India staring us in the face?
The billions are needed not for ego puffs in international banking but to find solutions to providing basic necessities for the growing population. As far as global finance is concerned, let’s first get our banks’ letters of credit accepted without paying confirmation fees to foreign counterparties.
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