The Centre for Analytical Finance (CAF) at the Indian School of Business (ISB) hosted the Indian Banking Conference on June 13, 2008. The Conference brought together financial experts, researchers focussing on the banking industry, top officials and business heads from major public sector banks, private banks and foreign banks operating in India, and senior academicians.

The banking fraternity was represented by the RBI, State Bank of India, Axis Bank, Citigroup India, NABARD, Canara Bank, etc. The theme of the Conference was ‘Economic and Social Responsibilities of Indian Commercial Banks: Is There a Healthy Compromise?’

The Conference promised to address India’s changing role in the new exciting banking landscape, and explore the myriad of opportunities that are evolving in this sector. Are there ways for the Indian commercial banks to achieve both objectives: performance and social responsibility? This was the question the Conference aimed to find answers to. It was a sort of public platform for the leaders in the banking domain to share experiences and innovations. It consisted of two panel discussions and a special address.

Welcoming the gathering, Professor Sankar De, Executive Director, CAF, outlined the moot objective of the Conference. “To find convincing answers about the Indian banking industry,” he said. Professor De mentioned that the Conference had meshed representatives from the public sector banks, the private banks and the MNC banks to get a first hand view about challenges faced by each of them, to address the issue of competitiveness of these banks in a global market place, and finally to discuss the social responsibility of the banking sector as a whole.

The first panel discussion on ‘Competitiveness of Indian Commercial Banks’, boasted of an eminent panel comprising OP Bhatt, Chairman, State Bank of India, PJ Nayak, Chairman & CEO, Axis Bank, Sanjay Nayar, CEO, Citigroup India and Joydeep Sengupta, Director, McKinsey & Co. The panel moderator was Professor De himself.

The panel addressed several concerns such as how the performance of Indian banks compare to their global counterparts, what is the role of the Indian banking sector in the Indian economy at large, what are the concerns of the public sector banks, why do private sectors have an edge, how do new bank compete with incumbent banks, should banking be ownership neutral, etc.

“Banks do not exist in vacuum. They make a large contribution to the country’s GDP growth, meet the demands of the growing middle class, contribute to infrastructure spending, and reach out to the semi-urban and rural areas,” said Bhatt. He pointed out that public sector banks also serve a number of social and macro-economic objectives like financial inclusion, agri-lending, government debt, stock market support, etc. National banking institutions, he confirmed, have served the economy well between the years 1990- 2000. “However in spite of higher profitability, the valuation of public sector banks is low,” Bhatt observed. The reasons were, according to him, lower asset quality, slower growth, lower productivity, etc. “Public sector banks are inferior to their private counterparts in terms of customer service, proactive sales, world-class operations, etc. This is due to issues like inability to attract and retain best talent, union issues, and finally ownership and operational issues,” he said. Representing the private sector bank, Nayak shared a picture of how the new private banks have gained significant market share. Some of the possible reasons, he said, were “use of technology for operational efficiency, adopting superior sales and distribution channels, taking forward customer segmentation, and creating mass outreach through ATM services.” In conclusion he remarked that different ownership types have lead to different operation models, and it remains to be seen which business and operation model is most conducive to the Indian banking clime.

“Where does India want to take the banking sector as a whole,” that was the question posited by the third panellist, Nayar. His presentation emphasised on the ‘scalability’ issue and its importance for foreign banks in India. “The greatest shortage in India, after food and fuel is finance,” he said, adding that the sector was highly inadequate in terms of shape and size. He innumerated the constraints of a MNC bank playing in the Indian landscape – restricted market access, limited capital raising options, high tax rates, talent retention, no access to public sector and government wallet, dual regulatory frame work for home and host countries, etc.

Sengupta shared with the audience some of his research findings about how the sector has performed, how competitive it really is and finally the role of regulators and policy makers. “Indian banks have provided high returns to shareholders over the last few years. It is also serving the economy in terms of value creation and employment generation. The sector has improved on capital allocation, resulting in lower NPAs. However it still performs poorly in areas like access to finance. The loan concentration is limited to the four metros,” he pointed out. According to him it is a very concentrated market and the fragmentation and polarisation of the sector is an issue of grave concern.

Some other pointers shared by him were – private and foreign banks have shown higher growth and profitability compared to public sector banks, foreign banks focus on high profitable segments and the private banks are now making a foray in this area., talent and people development remains the biggest challenge for the public sector banks, Indian banks are yet to demonstrate various channel innovations, and finally on the technology front, banks in India are among the most efficient in the world.

During the second panel discussion on ‘Social Responsibilities of the Indian Banking Sector,’ panellist Rajesh Chakrabarti, Assistant Professor of Finance at the ISB explained that social responsibility in the banking sector implies “stability, planned growth and equitable distribution of credit, and last growth of small industries and farming.” Arriving at a definition of financial inclusion as “absence of price and non- price barriers in the use of financial services’, Professor Chakrabarti explained that some of the barriers to this wholesome inclusion are physical access, eligibility (documentation), and affordability. “The old dichotomy between growth and equity doesn’t exist any more and the shift of the focus is to ‘accesses’,” he noted.

Vijay Mahajan, Chairman, BASIX added that social responsibility includes ‘ extent of banking services, extent of net bank credit to priority sector, agri- sector and weaker sections, and to make services cost-efficient and have satisfactory quality of services. He emphasised that banks should be socially responsible, beyond the normal CSR, because banks are “special and high leverage businesses”, and the deposits come from large number of small people. The failure of one bank can lead to system wide reverberations, he explained. The need of the hour, according to Mahajan, was “private small finance banks and local area banks.” The other factors to assure inclusion , he said, were private ownership, good governance, professional management, no caps on interest rates, and most important, commitment to local areas and local community. K G Karmakar, MD, NABARD asked a basic question “Is growth with equity possible? Is it poverty alleviation or financial inclusion?” Karmakar emphasised on the need for policy changes for priority sectors, a need to redefine the role of rural money lenders, a need to fund the emerging rural service sector, a need for an information campaign, and to support village level initiative for example setting up rural credit bureaus, etc.

The conference culminated with a special address by Professor Raghuram Rajan, Chair, Committee on Financial Sector Reform, Planning Commission; University of Chicago, and Eric J Gleacher Distinguished Service Professor of Finance, University of Chicago. Professor Rajan focussed on the Committee’s recommendations on the banking sector.