Tamal Bandyopadhyay: Old but still not mature

While a number of public sector banks are over a hundred years old, their performance has been poor and market shares remain low. It's high time they consolidate.

What do Bank of India, Canara Bank, Corporation Bank and Indian Bank have in common? They are all 100-year-old public sector banks. While first three have already completed their 100th year, the fourth one "" the Chennai-based Indian Bank "" will turn 100 next March. Two more public sector banks, Bank of Baroda and Punjab & Sind Bank, are inching towards the milestone. They will turn 100 in 2008.

There are even older public sector banks in the system. For instance, Allabahad Bank is 141 years old and Punjab National Bank is 116. State Bank of India (SBI), the country's largest commercial bank, is now celebrating its 200th year. SBI's predecessor, Bank of Bengal, the oldest presidency bank, was set up in 1806. This and two other presidency banks of Bombay and Madras were amalgamated in 1921 to give birth to Imperial Bank, which was transformed into State Bank of India in 1955 through an Act of Parliament. The SBI Associate Bank Act was passed in 1959 for its seven associates.

But unlike wine, commercial banks do not necessarily mature with age. SBI, being the oldest player on the banking turf, continues to have the highest market share, but this has been shrinking with competition getting more and more aggressive. It now enjoys a 17.74 per cent market share in the country's total banking assets, 17.27 per cent in total advances and 17.90 per cent in net profit. In the early 1990s, before the new private sector banks made their appearance, SBI was enjoying a market share of over 20 per cent.

Allahabad Bank, which is 141 years old, does not figure among the top banks in the country in terms of its loan book or its total assets, and the 116-year-old Punjab National Bank is third in terms of market share in assets and net profit and fourth in terms of advances. At the second position is ICICI Bank, which is, for all practical purposes, a four-year-old entity. Its earlier avatar, Industrial Credit and Investment Corporation of India, though, was born in 1955, and ICICI Bank, promoted by the project financial institution, received its banking licence in 1994 as a new private bank. The institution was merged with the bank in 2002 and since then it has been growing its assets by about 24 per cent each year.

The oldest project finance institution in the country, IFCI, born in 1948, has been on its death bed for quite some time now. The youngest one, Industrial Development Bank of India, born in 1964, has converted itself into a bank and merged IDBI Bank, promoted by the institution, with itself. The merged entity now is the eighth largest bank in India, in terms of assets, occupying a little over 3 per cent market share.

Two other new private banks, born in the mid-1990s, have found space for themselves in the Indian banking industry, ahead of their older counterparts among the state-run banks. The 12-year-old HDFC Bank is now the 10th largest commercial bank in assets, 12th largest in terms of its loan book and sixth largest in net profits. Similarly, UTI Bank, its peer, is ahead of at least eight much older public sector banks and three foreign banks in total assets.

Incidentally, Citibank, Standard Chartered and HSBC are all more than a century old in India. Standard Chartered, which has the largest network of branches in India among the foreign banks, was incorporated in 1853, but opened its first branch in 1858 in Kolkata. HSBC, too, came in 1853 in the form of the Mercantile Bank of India, London and China. Its first branch was opened in January 1954 in Mumbai. HSBC of the UK, however, had set foot in India in 1865, and opened its first branch in Kolkata in 1867. It bought the Mercantile Bank in 1959. Now, HSBC is present in 26 cities through 47 branches. Citibank, which has its presence in 27 cities through 39 branches, came to India in 1898 and opened its first branch in 1902, in Kolkata.

Despite being around for over 100 years, none of the three foreign banks has been able to capture even 2 per cent of the market share. Standard Chartered's share in banking assets is 1.73 per cent and 1.59 per cent in the case of advances. Citi's share in banking assets is 1.63 per cent and in case of advances it is 1.61 per cent. HSBC is even smaller. Its share in assets is 1.35 per cent and in advances it is 1.11 per cent.

However, when it comes to profitability, the foreign players have done much better. Standard Chartered accounts for 3.68 per cent of the total net profits of all banks; Citi 2.87 per cent and

HSBC 2.9 per cent. So even though they are small, thanks to the banking regulator's restrictive branch licensing policy for foreign players, they have found ways to make profits.

This has not been the case with some of the old public sector banks. They have the history and tradition behind them, but when it comes to building balance sheets, they lack aggression and vision. Which is why, Corporation Bank, born in March 1906, has only 1.45 per cent of the market share in banking assets. In other words, most of them have remained local players and refused to join the national league.

This is why India is the most fragmented banking market in the world. There are 87 scheduled commercial banks (excluding the cooperative banks and regional rural banks) and only one of them "" State Bank of India"" has a double-digit market share. While ICICI Bank's share is close to 10 per cent, there is only one more bank, Punjab National Bank, that has a market share (of assets) of more than 5 per cent. Can anybody say no to consolidation after this?

Postscript: After six years, this Thursday Oped on the banking and financial sector has run its course. This column will appear in some other form in the media space in future. Au revoir, dear readers.