One of the unexpected consequences of the global financial crisis has been the rapid shift in the preferences of depositors from private and foreign banks towards public sector banks. If banks can have a liquidity problem, depositors seem to be saying, it is safer to be with a public sector bank. So far, the numbers don’t suggest that depositors are actually taking out deposits from private and foreign banks and putting them in public sector ones, but in terms of incremental deposits, the shift is unmistakable. Deposit growth in the foreign banks till January 4 last year was 34.1 per cent; this fell to a mere 12.1 per cent till January 2 this year. For the private sector banks, the fall was from 26.9 per cent to 13.4 per cent. For the state-owned banks, the figure for both periods is 24.2 per cent. There has been a big shift in the credit share as well since, at the end of the day, a bank can lend only what depositors keep with it — the public sector banks saw their credit growth rise from 19.8 per cent to 28.6 per cent, while the private sector ones saw it fall from 24.2 per cent to 11.8 per cent, and foreign ones from 30.7 per cent to 16.9 per cent.
That this shift took place despite the RBI saying that the leading private sector banks had no liquidity problems and that their exposure to global sub-prime markets was under control, is eloquent testimony to how risk-averse depositors have become in the wake of successive bank failures overseas. The fact that the foreign banks operating in India have suffered more than private Indian banks tells its own story too. This trend increases the dominance of the public sector banks, while the drum-beat about a more liberal operating framework for the foreign banks has quietly died down.
The state-owned banks seem to be in a mood to drive home their advantage. While their private sector rivals (Indian and foreign) are cutting back, they are hiring rapidly, opening new branches, and now cutting rates aggressively to capture market share—Sate Bank of India in particular seems to be behaving like the ICICI Bank of yore. It is worth noting also that the shift to state-owned banks has come after a period of adjustment by them, leading to a substantial fall in non-performing assets (NPAs), which now are broadly comparable with those of private banks (foreign banks’ are much lower, of course, because they tend to focus on the best clients). Gross NPAs for state-owned banks fell from 3.5 per cent of assets in 2003-04 to 1.34 in 2007-08, while those for private banks fell from 2.82 per cent to 1.38 per cent. Relatively speaking, therefore, the state-owned banks have performed better than private ones when it comes to reducing NPAs.
One question is whether, from the viewpoint of the economy as a whole, even greater dominance of the market by the state-owned banks is a positive development, given the fact that they are neither the most technology-savvy nor the most innovative, nor even the most efficient from the viewpoint of operating costs. The even greater fear is of the government being encouraged to expand the scope of directed credit—in recent weeks, banks have been told to lend more to specific sectors like real estate. Last year’s massive waiver of farm loans gives some idea of what can and does get done. The other danger is that the government and RBI will get lulled by these trends into going even slower on urgently needed banking reform.
