A nifty recap of banking

Book review of 'From Lehman to Demonetization'

From Lehman to Demonetization 

Tamal Bandyopadhyay

Penguin 2017,

Pages 348; Rs 471

The focus of the book authored by Tamal Bandyopadhyay is the unique story of the Indian banking industry, mainly spanning a period from the collapse of Lehman Brothers, September 15, 2008 to the demonetisation of November 8, 2016. The period between above two major episodes covered three governors — Duvvuri Subbarao, Raghuram Rajan, and Urjit Patel, and four finance ministers, Palaniappan Chidambaram, Pranab Mukherjee, Arun Jaitley, with short-term stints by Manmohan Singh. Overall, an interesting period with different professionals heading the Reserve Bank of India (RBI) and a change in political ideology at the Centre.
 

The book has a brief foreword from famous banker, K V Kamath, followed by an introduction and epilogue. The book is divided in two parts — Part I is thematic, while Part II is interview-based discussions. Part I, consisting of 59 essays, traces India’s journey in the last decade, covered under various chapters like microfinance, public sector banks, banking reforms, stressed assets, corruption, relationship between the RBI and the Ministry of Finance, and the demonetisation. The selection of articles in the book from nearly 600 columns is very carefully done. Illustratively, under ‘Demonetization’, the article based on the diary of a bank’s branch manager, or under ‘Corruption’, ‘suitcase banking’ is a compelling read of a case-based study. Similarly, in the Autonomy debate (Chapter 7), the article of January 16, 2017 makes it an interesting read. In fact, every column included in the book is an extra-ordinary description of respective subject.

The challenges of the banking sector in the last decade have been many and interesting. First, the Indian economy was passing through its glorious phase, recording a growth rate of more than 9 per cent, while the world was suffering from worst performances since the Great Depression. Y V Reddy, the then RBI governor who had retired just 10 days before the Lehman collapse, had successfully ring-fenced the banking system but his successor, Mr Subbarao, had to face an unparalleled challenge on assuming office. The growth rate started declining and interest rate had to be adjusted downward repeatedly. The position of non-performing assets (NPAs) became grim after the asset quality review of banks. The government has been recapitalising public sector banks to maintain capital adequacy. Second, the financial inclusion initiative, mainly spearheaded by Dr Reddy, faced an unprecedented challenge in Andhra Pradesh. Since then, the sector has stabilised and eight micro finance institutions (MFIs) were later approved by the RBI to become small finance banks. Third, the RBI, for transparency and better transmission of monetary policy, has been attempting to evolve an effective and monitorable benchmark rate, moving from prime lending rate to marginal cost of funds-based lending rate. Fourth, for better accountability and transparency, the RBI has an inflation target to pursue. Finally, there has been a regulatory shift and the RBI has begun to offer banking licences on tap.

Part II has interviews with 12 commercial bankers, two academicians-cum-central bankers, and one foreign investment banker working in India. The 15 interviews, spread across 80 pages, make an interesting reading of prominent bankers in recent decades. The interviews of K V Kamath (June 2001) and Viral Acharya (June 2017) provide an insight into thought process of prominent bankers. Similarly, interviews with UK Sinha (September 2014, chairman, Securities and Exchange Board of India), and Brooks Entwistle (September 2010, Goldman Sachs) are also very revealing. India was privileged, during the last decade, to have Arundhati Bhattacharya, Chanda Kochhar and Shikha Sharma, three females controlling nearly half of Indian banking. This truly was the golden period of female-empowered banking, with women playing an important role across the spectrum — financial inclusion thrives on responsible behaviour of women while female bankers chaired large, vibrant and dynamic commercial banks of India. Each one of these chairwomen are trailblazers of banking and would have made Gandhi ji proud. Their interviews are a must read for aspiring citizens, including competing male bankers.

In the epilogue, the author provides a peep in 2025 by discussing two key questions. First, whether banking industry will be dominated by the public or the private sector? The banking sector may face challenges from automation and artificial intelligence, and therefore a significant change in strategy may be necessary to retain customers. The housing sector in India, in its infancy relative to other countries, could provide enormous opportunities to banking industry. Second, is there a possibility that non-banking finance companies (NBFCs) will challenge the banking sector in the next decade? MFIs, in view of competition from banks, may find it difficult to survive and probably will be replaced by NBFCs. The author correctly observes that there is a distinction between Bharat and India, and given diversity between the two, technology will take time to bridge the gap. 

An impassionate analysis of banking in the last decade shows that policymaking is more of an accident rather than a well-planned trajectory of events. Illustratively, consider desperate search for a benchmark interest rate for transmission of monetary policy, and role of asset quality review of banks that clearly establish lack of fundamental and perspective research on banking in India. Similarly, for future banking policy, in a young demographic country like India, and where the unorganised sector accounts for 90 per cent of the economy, no road map has yet been conceived. And in this context, this collection of well-researched, and analytical articles, is a blessing for policymakers, banking analysts and economic historians. 
 

The reviewer is visiting faculty, IIM Bangalore