RBI to Indian banks: work harder - James Lamont

Duvvuri Subbarao, India’s central bank governor (pictured), is never short of recommendations of how India can reach double digit economic growth.  A few months ago he was touting more foreign direct investment to make what he called the “quantum leap” from India’s current 8.5 per cent growth rate to something nearer neighbouring China’s. But a recent fall in FDI has persuaded Subbarao to turn to domestic savings as the key.  His latest recommendation won’t make him friends among the country’s more somnolent bankers, who are already under pressure to deliver a massive expansion of services to reach tens of millions of unbanked Indians in the years ahead.  “For the double-digit growth that we aspire for we will need to have savings…and for that to happen we need to encourage savings,” the governor of the Reserve Bank of India told a meeting of international bankers in New Delhi this month. “Banks will have to raise the interest rates they offer to depositors and reduce the interest rate they charge from borrowers.”  The catch is that banks would have to cut their very healthy profits – unless they make their own “quantum leap” in efficiency and target more fee income.  India’s banks have for long enjoyed cosy margins and benefited from regulated interest rates on savings accounts. They have reaped rewards from an under-banked market with few alternative capital market instruments for depositors and lenders. It has been an almost effortless way to make money.  Surprisingly, that and uncomfortably high inflation hasn’t deterred Indian savers. India’s savings rate has risen from about 20 per cent of GDP to more than 30 per cent during market liberalisation over the past 15 years.  Nonetheless, Mr Subbarao wants to strike a blow for consumers. In gentle tones, he is calling time on fat interest rate margins of about 3 percentage points. He is also making an appeal for more efficiency among banks that employ a lot of people and are badly in need of technological advance. The underlying message is that India’s banks, among them 26 publicly owned institutions, need to work harder for their profits, and benchmark themselves against international peers.  To enable them to cut lending rates, banks will have to reduce wage bills and transaction costs, weed out non-performing assets and seek efficiencies through technology.  Banks have traditionally defended their high operating expenditure. After all, India is a big, unconnected country with a lot of people on low incomes. They claim not to be out of whack with counterparts in Latin America and elsewhere in Asia, like Indonesia.  They have, however, responded to a more dynamic environment by bettering their return on assets and lowering staff costs.  The run-away success of the Indian IT outsourcing and business processing industries has shown how India can radically cut operating costs for financial institutions overseas, among them Citigroup, Bank of America and JP Morgan.  Mr Subbarao has a point asking why the same efficiencies should not be brought to bear at home.

http://blogs.ft.com/beyond-brics/2011/03/23/rbi-to-indian-banks-work-harder/