Forgotten fountains of flows

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September 28, 2006 13:02 IST

The Indian banking industry, in particular its public sector segment, is feeling intense pressure on margins, which have been thinning out steadily. Interest rates on deposits are rising but lending rates are unable to keep pace.

Increases in prime lending rates are being resisted by borrowers as also the government, perhaps with some justification.

The dependence on the single revenue stream, the core business of borrowing and lending, is now taking its toll on the financial health of the industry. In fact, it has been good going for Indian banks for too long; the fat spread between borrowing and lending rates has led to the luxury of large fixed-cost superstructures.

This has happened primarily because, unlike in the developed economies, borrowers are not the depositors in India and the stepped-up demand has been chasing scarce supply.

Globally, the banking industry has two broad frames for raising revenue, each of equal importance -- the core business, and fee-based customer relationships. Whereas the banking industry has still to bloom fully in even the core business segment, the spotlight is now on fee-based income, which has been conspicuous by its absence among the public sector and old-generation private sector banks.

The depth of the industry in the core business can be gauged from the fact that India's savings per bankable person are just $240, woefully low in purchasing power parity (PPP) terms compared to $86,708 of Japan, $66,075 of Australia, and $1,084 of Indonesia.

India's consumer credit as a proportion of GDP is 9 per cent, in comparison with 92 per cent for Australia, 58 per cent for Malaysia, 17 per cent for Thailand, and 11 per cent for Indonesia.

Similarly, consumer loans as a proportion of total loans in India are just 23 per cent (despite the sudden spurt in the last three years) in comparison with 62 per cent in Australia, 52 per cent in Malaysia, 49 per cent in Korea, and 46 per cent in Indonesia. Higher GDP growth, a declining dependency ratio and a growing savings rate lend tremendous potential for growth and expansion.

As regards fee-based income, well, vast treasure (revenue) fields have not been properly tapped even though the potential for raising revenue from fee-based income is visible and can be described as 'Forgotten Fountains of Flows.'

Fee-based income has four broad verticals: (a) bancassurance, (b) mutual funds distribution, (c) plastic money and (d) other opportunity zones like wealth management, financial & commodities market operations like cash and derivatives, remittances (NRI), etc.

Co-ordinated initiatives can help in boosting the bottom line of the banks and provide a hedge against the vagaries of cyclical changes in the economy, inflation rates and interest rates. Increased profitability can also help in building the financial strength for a greater risk-bearing capacity and increasing the width and depth of the businesses.

Singapore is assiduously working to replace Switzerland in getting a larger share of the wealth management business stemming out of the rising prosperity in Asia. Singapore University has started a tailor-made post-graduate degree course in wealth management to meet skill deficiencies, and the government has enacted laws (which provide for a jail sentence of three years) to inter alia prevent leakage of customer information.

There must be enough money to propel a modern nation state to be aggressive in exploiting the opportunity. Incidentally, high-net-worth individuals (HNIs), the target customers of this service, are increasing in India three times quicker than in China.

The fee-based income (FBI) business is different from the core business. In the core business, the customers approach the bankers. In the case of the FBI business, the bankers have to walk the extra mile to tell the customers what difference they can make to the customers' lives.

Cashing in on the potential, however, necessitates sagacious strategy, building capacities, capabilities and competencies, and offering incentives to people expected to take the initiatives. A holistic approach has to be pursued.

It is difficult to imagine that the managements of banks would not be interested in raising revenue. Probably, they are not able to put their act together. Some of them have the dream of becoming a financial power house -- producer and distributor of all kinds of financial services -- while others are deficient in skill, holding up the harnessing of potential.

It is worthwhile remembering that producing and managing service requires capital, and seizing opportunities and this rakes in revenue in greater proportion than the inputs employed. There is no gainsaying the fact with the muscle to invest, and waiting and holding the risk, it might be a fruitful long-term strategy to build an umbrella organisation.

The propensity of architecting such strength does exist, but only in a few organisations. The alternatives could be: (a) build the muscle or (b) try out aggressive marketing/distribution, or (c) do both simultaneously.

The real problem is day-dreaming: "Why not, I am capable of competing with the leaders of the financial world, even in the production of service", in particular insurance, notwithstanding the obvious lack of financial strength and skill, and structural inadequacies in building those in the short to medium term.

Even though many of their predecessors' dreams could not be realised, and the experience in setting up asset management companies by many public sector banks has not been encouraging, banks are still optimistic. While dreaming is desirable, pragmatism should prevent frittering away of resources and opportunities.

The futility of such exercises has choked the channels of revenue at the cost of stakeholders.

The author is former chairman, Sebi and LIC.

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