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Net profit of 11 old pvt banks up 74% -- Economic upturn, cost cuts lift bottomlines

N.S.Vageesh

BL Research Bureau

OLD private banks -- the underdogs of the banking world -- registered a 74 per cent growth in net profits in fiscal 1999-2000. Eleven leading private banks (the old private bank group consists of 25 members) reported post-tax earnings of Rs. 52 3 crores in 1999-2000.

Improved credit offtake following the economic upturn and a conscious strategy to cut costs (by retiring high-cost NRI deposits and better NPA recoveries) have helped these banks improve their performance this year.

The Kerala-based banks such as Dhanalakshmi Bank and South Indian Bank managed to triple and quadruple their earnings this year. Though the performance may seem stunning, it must be remembered that these banks had a lower base to start off.

The year 1998-99 saw profits dip dramatically for most old private banks. Their profitability has come under pressure in the last couple of years following the rise of new private banks that use technology as a differentiator and the introduction of tigh ter prudential norms.

Their limited reach and regional bias (owing to promoter affiliations, community linkages and a restrictive branch licensing policy before the nineties) have also tended to limit growth opportunities. More recently, severe competition and a comparatively liberal licensing policy have encouraged these banks to look outside their traditional areas for business.

A few of these banks have in the past been vulnerable to takeover threats and often sparked off debates on whether a couple of old banks need to merge for survival. Some banks brought in ``white knights'' to stave off these threats -- viz. Bank of Mad ura taking Kotak Mahindra on board and South Indian and Federal Bank bringing ICICI on board.

Some old banks are now on the lookout for strategic alliances with a foreign partner to handle competition.

The RBI itself was believed to be nudging some of the old banks to come together. But the banks themselves do not seem interested. At least not yet.

For them, mergers mean a loss of identity. They continue to argue that there is space for the small. Their aversion for mergers and the desire to retain their identity may have also been boosted by their improved profit performance last year. But that ma y only delay the inevitable.

As Mr. S. Venkitaramanan, former RBI Governor, has said: ``Many of these old banks lack adequate capital. To handle expanding business opportunities, some of these banks will have to merge.''