Tamal Bandyopadhyay: India's big little small problem

Banking appears to be the flavour of the season with as many as three reports released on the state of affairs in the Indian banking industry in the last fortnight.

The Federation of Indian Chambers of Commerce and Industry (Ficci) annual survey on the "Status of the Indian Banking Industry" has predictably dealt with contemporary issues like consolidation, capital requirements, technology, customer service, risk management and implementation of Basel II norms. An overwhelming majority of the respondents in the Ficci survey voted in favour of consolidation.

The other two reports "" by Standard & Poor's and McKinsey & Company "" have harped on a common theme, that Indian banking industry is fundamentally far stronger than that of China despite that fact that the Chinese banks enjoy higher rating by international rating agencies.

In 2003, the net non-performing loans (NPL) of Indian banking system was 3.1 per cent of the country's Gross Domestic Product (GDP) compared to 25.9 per cent for China. Since then, the scenario has not changed much. Similarly, the NPL-to-loan ratio for Indian banks was 4.5 per cent against 18 per cent in China. When it comes to profitability parameters, the pre-tax return on assets for Indian banks was 1.73 per cent against 0.6 per cent for their Chinese counterparts, and the pre-tax return on equity was 27.2 per cent versus 2.7 per cent respectively.

The problem, however, as brought out by the McKinsey report, is that India's banking system is very thinly spread "" indeed, this is also a big factor in India's NPL-to-GDP ratio being so much lower than China's.

In 2004, India's loan assets were 31 per cent of GDP. In case of China, it was 130 per cent. Taiwan has even a higher ratio of 151 per cent of GDP. For Singapore, it is 118 per cent, 114 per cent in the case of Malaysia, 100 per cent for Thailand, 82 per cent for Japan, 73 per cent for Korea and 43 per cent for the Philippines. The deposit portfolio of the Indian banking system was 49 per cent of the country's GDP in 2004 against 176 per cent in the case of China. Here again, Taiwan is at the top (188 per cent), followed by China, Malaysia (139 per cent), Singapore (132 per cent), Thailand (109 per cent), Japan (107 per cent), Korea (69 per cent) and the Philippines (58 per cent).

Despite the remarkable growth in credit and deposits over the last one decade, access to banking in India continues to be restricted to privileged sections of the economy.

A McKinsey Personal Financial Services Survey last year revealed that in urban households with an annual income between Rs 25,000 and Rs 2 lakh "" which account for about 32 per cent of the total urban households "" the credit card penetration was only 4 per cent and this was negligible in the case of auto loans.

At the mass affluent households (annual income between Rs 2 lakh and Rs 5 lakh), the credit card penetration was over 22 per cent and auto loan were about 5 per cent. The affluent households (annual income between Rs 5 lakh and Rs 10 lakh) have a 34 per cent credit card penetration and 14 per cent auto loan penetration.

Technology banking is available only to a small segment of retail customers in urban India (ATMs are present in 250 out of 435 Indian cities). In 2004, there were only 10 ATMs in India for every one million people.

The comparable figure in Brazil is 790, 501 in Korea, 211 in Poland and 53 in China. Similarly, only 3 per cent of Indian population have a piece of plastic in their purses (both credit and debit card), against 174 per cent in Korea, 71 per cent in Brazil and 61 per cent in China.

The urban-rural divide on the Indian banking landscape becomes glaring if one takes a look at the presence of bank branches and deposit mobilisation and loan disbursals by these branches. The metro centres account for a miniscule 7.32 per cent of the 67,742 strong branch network spread across the country. But these centres account for over 36 per cent of deposits and 48 per cent of credit in the banking system.

Small and medium enterprises have limited solutions for their banking needs. India's 20 largest companies enjoy over 30 per cent market share of total bank borrowings, 59 per cent of debentures, 74 per cent of commercial paper and 72 per cent of foreign borrowings.

The next 80 companies' share of bank borrowings is 25 per cent, it is 30 per cent in the case of debentures, 26 per cent for commercial paper and 27 per cent of foreign borrowings. All these statistics point to the "financial exclusion" of a large segment of banking customers despite expansion, greater competition and diversification of ownership in Indian banks. The industry must address the "exclusion" issue before taking the plunge for consolidation.