Bank of India chief bullish on public sector banks

Mr. K. V. Krishnamurthy, Chairman and Managing Director of Bank of India, spoke to our Business Editor,

S. Swaminathan, recently in Mumbai on a range of challenges confronting the public sector banks. With his long experience in banking spanning three decades and close association with four public sector banks at the higher echelons, Mr. Krishnamurthy exudes strong conviction on the robust potential of public sector banks with all the turbulence of globalisation. Excerpts:

An institutional perspective

The financial sector reforms as far as linking our system to international norms by way of capital adequacy, the income recognition aspects, then provisioning norms are all being enforced. This is all important and I would say sometimes more than the international norms a higher dosage is prescribed by the Reserve Bank of India. So all of a sudden there is a change, particularly when we had based all our lending on security. The insistence on following international norms has affected all the public sector banks barring one or two, leading to an operational loss or a net loss. Some made operating profits but the majority made net loss. Now realising the position the Government also pumped in the required funds to keep the banks not only floating but also to come out of all the problems, so that in future they can become stronger. In that process what has happened with the induction of further capital to meet the (book) losses on provisioning, has resulted in blocking the capital of almost all the banks.

Credibility v efficiency

Unlike in Indonesia, the Southeast Asian crisis has not affected our system that much. But globalisation in the financial sector has proved an all-too-sudden change. There cannot be anything gradual in this on our part, because all of a sudden this has been forced on us and the country. Now, globalisation has affected Indian industry particularly the small scale sector. At different points of time, I think like a cyclical change, the ups and downs over a period, you can see in the economy. It has happened in industry and it has affected Indian banking. Now all the strong banks of the country, where the entire portfolio of their advances was put to the core industries, are affected because none of the core sector industries is doing well.

In the past, the banks were instrumental in developing the core and infrastructure industries, the core industries like iron and steel, cement and also textiles on which the entire economy was booming; at least in Maharashtra. The banks were all advancing heavily on securities. At one point of time we were all sitting on security worth almost five to six times of our lending. Now all of a sudden, change in the government policy pro- globalisation has put the banks in distress. Partly the blame belongs to lack of legislation in labour matters, labour rules and laws and the legal system which are more defaulter-friendly and labour courts or high courts which are more pro-labour oriented.

The Government policy in the past - of nationalisation, in addition to the nationalisation of banks, the nationalisation of so many textile mills, industries, these also created a problem. They took over only assets but not liabilities, with the result that the lending banks were left high and dry. The banks which were sitting pretty with a security of almost four times their loans lost over 90 per cent of their securities and again this became a heavy burden. This was reflected in their financial position. But one amazing factor is even today the public sector banks have the strength and capability to withstand all this.

There are two factors which I see; one is that at the back of the public's mind there is always a feeling this (the bank) is backed by the Government - the sovereign guarantee though the guarantee amount is limited.

The fact is that the Indian public today respect the association of the sovereign guarantee in all this. Majority of the public sector banks are still 100 per cent owned by the Government. Otherwise what reason can you attribute to the fact that even the few public sector banks which are much maligned both in the media and by sections of the public continue to enjoy public reputation? It is a fact that the deposit growth of these banks is almost comparable to the system's growth. If people have no confidence, how are these things happening?

What is happening today in private sector banking? If you look at the American banks' history - in a year almost about 100 mergers are taking place, 100 liquidations are taking place. This is part of the private sector where the motive is primarily profit. If private sector is synonymous with efficiency why are these companies going into loss and ultimately get merged or closed or liquidated? Here in India also some of the private sector banks which were started with much fanfare, also started merging which we saw in the Times Bank merger with HDFC Bank. I don't know in future how many banks are going to merge.

Today the entire strength lies in how big one is going to be. In the past there was a concept of ``small is beautiful''. Now ``big is going to be bountiful.'' At different points of time changes are taking place. I think with the strength in the economy, with the confidence of the people and the democratic set-up of the country, I think all these will keep the economy growing and also the public sector banks will definitely thrive.

When we talk of efficiency, when the entire industry and the financial institutions have to face the competition one will have to be ready for it. If I have to survive in this market, naturally I will have to offer the same products which have been offered by my competitors whether it is technology- related or different products and whatever it is. In this respect the large network of public sector banks like ours is helping us to mobilise large resources at low cost.

The public sector banks have immense potential to tap the savings resources so long as the savings interest rate is not deregulated. No body will be able to beat the public sector banks in mobilising resources at a low cost and only these type of banks will be able to meet the credit needs of both large borrowers as well as get involved in so many schemes of national development.

Structural issues and the social context

Basically I strongly believe in the public sector concept. What I look at is social responsibility. It is the duty of every Government, perhaps it can be in the Constitution also, to provide employment opportunity to individuals. How much do public sector banks provide in terms of employment opportunities to people? Second, any thing is related to the structural changes, leaner organisation again, it is all directed towards maximising profits.

Ultimately the objective is maximising profits. In a country like ours where there is no social security system, what is the other alternative for the population of the country? How are we going to give employment to the educated people? I don't think the banking sector today is to a great extent over-staffed. The problem is low productivity.

What has happened in the industry is that anticipating a situation, a certain work load, people have been recruited in the past. Immediately after nationalisation, there were many areas where there was no banking at all. Today even a village with say a population of 3,000 or 4,000, has a bank branch. Look at the village economy today. Do you think without the banks' support the rural economy would have developed to this extent? And without the compulsion, which people may criticise, of priority sector advances or dictated lending? Only dictated lending in my view brought about a lot of economic activity in rural areas. Today purchasing power in rural areas is amazing. Otherwise why should multinationals such as Coca-Cola or Pepsi look to the rural market?

Today what is not there in the rural area? In fact the entire economy can boom if only the Government is in a position to stop the influx of rural population into the urban areas. But it can be done only by the development of rural infrastructure and rural agro-based industries.

This is one aspect. Secondly, when we consider the cost of giving services, how many are aware what is the cost of the main branch of a private sector bank? In my view they spend three to four crores to set up a branch even with high information technology. In this industry changes are very fast. Even the machines which have been installed two years ago become redundant today. This being the case, cost-wise many public sector banks own their own premises. We have no extra cost. Most of the fixed costs are already there. What we have to do is to increase in the volume of business which will increase productivity and thereby profitability.

So there is already a ban and an awareness not to go in for more people. We have also come out with a scheme of voluntary retirement, we are also encouraging people to go on sabbatical leave. All these things will result in reduction of manpower costs and consequently increase in productivity. There is no need immediately to go lean. Automatically over a period the public sector banks will become lean and technologically savvy and in course of time will be in a better position to offer better services.

In this country people are interested in personal banking. They are not interested in virtual banking or dealing with the machine. If you look at senior citizens, it is a pastime for them to visit the banks and interact with people there. Everyone wants to have advice or everyone would like to have an interface with human beings and then do banking. So there should be a blend of technology with people around which will definitely boost the business. The public sector banks can definitely do well. The only thing is increasing the efficiency. That awareness has already come.

As a result of liberalisation and with changes in labour laws and legal reforms, the mindset change has also come in the banking industry. The trade unions have now understand that they have to speak a different language. Now there is a transition going on and trade unions have realised that their role is how to make their members accept this transformation and how to make it less painful. That process is on. I see a wonderful future for the banking industry as well as the economy.

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