By the end of FY 2009, the banking scenario in India appears to be emerging somewhat better than what was perceived, when the international financial sector became a victim of its own creation. Unregulated growth engineered by greed, has proved to be very fatal, shaking the faith in the capitalist system. Bailing out the big banks, which were believed to be invincible, became the order of the day, entailing huge costs to the state exchequers. Indian banks, measured by the international standard as puny little banks, did not suffer from the turbulence, like the little plants surviving the storm, when tall trees fell.

18 Indian banks in Top 500...

One of the public sector banks, State Bank of India, has gained during the year the status of a world class bank, having more than 10,000 branches. It has 11,111 branches as on date. It ranks 60th among the top 500 global financial brands 2009. It is indeed gratifying to note that 18 Indian banks are included in the list of Top 500 Global Financial Brands, while 13 of them have joined this group during 2008, when international financial landscape is littered with debris of fallen financial giants. More interestingly all the 13 new entrants are public sector banks. The ardent followers of market theology may draw lessons from Indian experience.

Coping with international melt-down

Quite a few proactive steps have been taken by the Reserve Bank of India to enable the banking sector to cope with the recessionary trends seeping into the Indian economy. Repeatedly reducing the statutory pre-emptions, it has ensured that the banks have enough liquidity to meet the demand for credit. It has been successful in controlling the inflationary trend, reducing the price rise to an unprecedented low level of 0.44 per cent at present.

The stock market being badly mauled, investments in shares and mutual funds have become less attractive to the investors. The uncertainties in the real estate market are virtually discouraging investment in housing. As a result, bank deposits have become the most preferred investment avenue. Banks, which have gone for bulk deposits at higher costs earlier, are now off-loading them, as other deposits are increasing. Recurring deposits or the monthly saving deposits are gaining ground. Banks have reduced the interest range of deposits without delay.

On the credit front, though the banks are flush with funds, there is hesitancy on their part to expand the credit portfolio. Their reluctance to reduce the rate of interest is induced by the lurking fear of the possibility of the emergence of NPAs, by the end of the fourth quarter. Their financial performance till the third quarter has been very positive and the bottom lines were looking up. A few of them have ventured to declare interim dividends, indicating thereby that the rate of dividend during FY2009 could be higher than that of the previous year. But the possibility of a substantial increase in gross NPA cannot be ruled out, due to the retrenchments specially in IT, automobile and garment export sectors and the consequent depletion of the repaying capacity of the borrowers.

Two of the credit segments which are expected to enlarge the NPAs, are the retail credit and housing segments. Many youngsters working in the IT sector, particularly those have double incomes, have gone in for luxurious housing apartments in the bigger cities. Some of the aggressive private sector banks have been too obliging to extend them housing finance, in many cases, without even minimum margins. With the floating interest rates moving in the upward direction most of the time till recently, banks were making a killing on housing finance. Now, with many sitting on the benches and the pink slips chasing them, repayments are bound to decline, necessitating banks to make larger provisions in their balance sheets. Hotels and transport are the other related segments, which may face a decline in their revenues. This may affect to some extent, their own loan repayment schedules.

Retail credit extended through credit cards is another source of concern for banks. It was a remunerative revenue earner when the going was good. With the proliferation of credit cards, not only delinquencies have increased, even frauds and mis-uses have increased, badly hurting bottom-lines. Even one of the progressive private sector banks has felt the pinch, compelling it to stop further retail credit lending in the north-east. When the final financial results of FY2009 are announced, there is bound to be an increased volume of provisions made for such advances in the balance sheets..

Housing finance - the asset-liability mis-match

Banks are back in the borrowers' market, wooing the prospective customers by offering housing finance at attractive rates. State Bank of India, offers housing loan at 8 per cent on a special drive for housing loans. Another big bank advertises that the housing loans would be sanctioned within six days. The repaying period is extended to as many as 25 years. Loans up to Rs.1 crore are offered for construction or purchase of new or old houses. It is difficult to comprehend as to how the banks would be able to avoid the asset-liability mismatch over such a long period. May be in finer fonts, some stringent conditions would be added in the loan application forms.

Big cities corner bulk of housing loans

In a study of the regional imbalances in the deployment of housing finance in India, I have observed that the bulk of these advances are made in the state capitals. Nearly 55 per cent of the total housing advances made by the banking sector are deployed in 31 districts, where the state capitals are located. Brihan Mumbai district alone accounts for about 14 per cent of the total housing advances in India: it got Rs.32,073 crore out of the total of Rs.228,923 crore as on March 2007. National capital region- Delhi- is the other major beneficiary of housing finance (Rs.17,619 crore). Besides Delhi, Noida located in Gautam Buddha district abutting Delhi, also gets a large volume of housing finance (Rs.2227 crore), which is on par with what Lucknow district got (Rs.2278 crore).

The Silicon City ranks second in getting housing finance - Rs.20,345 crore, nearly 5 per cent of the nation's total. Chennai ranks fourth with Rs.12,584 crore. Hyderabad follows with Rs.10,899 crore.

An analysis of the number of housing accounts in these 31 districts reveals some interesting features. In Mumbai, the urbas prima, where the population is over a crore, the number of housing accounts with banks is 3.86 lakh only. No wonder therefore 50 per cent of the city's population lives in the slums. Not far from Dharavi, Asia's biggest slum, a big hoarding of a nationalised bank on the top of a high rise building, explains in English the availability of housing finance and Slumdog Millionaire wins the Oscar Award. Many high rise buildings may come up in this city, thanks to bank finance and financial inclusion would be deemed to have improved with the symbolic installation of an ATM in the slum!

Out of the total housing loan accounts of 50.10 lakh, nearly 33 per cent are in the 31 districts - 5 per cent of the number of districts. Only a very small number of borrowers are serviced by the banks in rural areas and smaller towns. The preferred groups of borrowers for the banks are the professionals and salary-earners. As a result a large number of self-employed persons remains beyond their reach.

The heavy concentration of housing advances in the state capitals, depriving the needy persons in smaller towns is not a desirable feature. Black money easily finds its way into the luxurious apartments in the posh localities, where bank loans invariably are obtained for records sake. While banks are shy in publishing the data on NPAs, most of the frauds in housing finance are found to be in metropolitan centres. Banks have burnt their fingers, where out-sourced agents were deployed to canvas and process housing loan proposals. Defective documents, dilution of lending norms and lack of follow-up have been the major short-comings in handling housing finances.

Insatiable demand for housing finance

It is desirable that the banks should spread out their housing advances into smaller towns, where land values do not oscillate as violently as in the metropolitan areas. These advances should be linked with other income-generating loans, so as to enhance the repayment capacity of the borrowers. In the Indian context, the demand for housing finance may remain insatiable and it requires more need-based schemes and not greed-induced programmes, as happened in sub-prime lending in the US.