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Suresh Krishnamurthy

ALMOST all PSBs, irrespective of their size or place of operations, seem set to record reasonable profit growth in 2003-04. However, that does not mean that all of them will continue to remain in the pink in the longer term. Indeed, there are too many banks in operation and a culling of some of them is likely at some point of time or the other.

Will size be the determining factor? Globally, smaller banks have survived and are being run profitably. However, smaller banks need to find a niche to operate. There is still some time before size becomes the sole arbiter of fortunes.

Infact, with a fixed savings bank rate and deposit insurance, the cost at which weaker banks raise funds is not much higher than that for stronger banks. This offers opportunity for weaker banks to grow their profits.

When these controls are dismantled, partly at least, competition will intensify and then size will assume more importance

As of now, the battle is being fought on the low-cost deposits front. Technology, too, is an issue as is the rate of growth in advances.

Low-cost deposits

The proportion of low-cost deposits eventually determines a bank's ability to reduce its cost of funds. Banks such as Punjab National Bank, Bank of India and Syndicate Bank have been more successful in reducing their costs.

There are no magic wands to reduce the cost of funds. Increasing the proportion of savings and demand deposits is the way to go about it. With demand deposits virtually drying up because of efficient use of funds by the corporate sector, savings deposits represent the only viable proposition.

Scramble for savings

The PSBs have always had a considerable share of low-cost deposits Now, there is greater realisation on the importance of low-cost deposits and there is a mad scramble for augmenting the savings deposit base.

Here again, money supply will remain a constraining factor. Growth in savings bank deposits can be more than the rate of growth in money supply for a particular bank only if the market share of other banks is captured. Over the past three years, Punjab National Bank, Oriental Bank of Commerce and Corporation Bank have been successful in enhancing their market share.

Role of technology

Technology has played a crucial role in reducing the cost of funds of banks. The installation of ATMs has become a sine qua non for boosting the savings accounts of banks. The installed base of ATMs is set to expand exponentially between 2003 and 2005. As of now, the link between ATMs and deposit growth has been rather tenuous. Banks with large ATM networks, such as Punjab National Bank and Corporation Bank, have been more successful in attracting higher savings deposit inflows.

However, others such as Bank of Baroda and Union Bank of India have not significantly lagged behind either. Still, a large network of ATMs is likely to prove indispensable for attracting fresh inflows. This indirectly favours larger banks.

Technology can also help in branch rationalisation through branch mergers. In certain pockets, some PSBs have more branches than required to service the customer. With ATMs , some of the branches can be merged. Union Bank of India, for instance, has merged a few of its branches in Mumbai, as has Bank of India. Eventually, such branch rationalisation on a larger scale will lead to reduction in costs.

In addition, a network of centrally-linked branches is necessary to provide such services as cash collection to customers. This will boost non-fund income. Higher non-fund income reduces the impact of operational expenses making the bank cost competitive. While technology-savvy banks, such as Corporation Bank and Punjab National Bank, generate relatively larger non-fund income, those with low levels of computerisation, such as Union Bank of India and Oriental Bank of Commerce, lag behind. The proportion of non-fund income to operating expenses is the highest for SBI. As a banker to the government, SBI generates a relatively larger proportion as non-fund income.

Growing advances

Low-cost deposits and offering a bouquet of services provide a base to fight competition. However, how banks manage to register growth in advances without affecting the yield on advances will determine their profitability and financial health.

Andhra Bank, Canara Bank, Punjab National Bank, Union Bank of India and Vijaya Bank, among others, have consistently done well in growing their advances in the past three years. Though Corporation Bank, Bank of India and Oriental Bank of Commerce faltered in 2002-03, they can boast of a decent record in advances growth over the last three years. Those which have lagged behind, such as Bank of Baroda, will have to contend with lower spreads. In fact, Bank of Baroda's spread is one of the lowest in the industry.

Incidentally, here too, size may prove to be a factor. Size may be necessary to exploit opportunities that emerge across the country. Larger banks may grow their advances at a higher rate than their smaller counterparts. However, as of now, size has not proved a disadvantage.

The few that score

Among the PSBs, not all have a convincing record across parameters such as low-cost deposits, higher proportion of non-fund income and growth in advances. In fact, only Punjab National Bank and Canara Bank emerge with a creditable showing on all the fronts. It is not fair to compare SBI with these banks.

Given its large size, its performance too must be rated as creditable. While these three banks will strive to maintain their hold over the industry, other banks need to pull themselves up in order to remain competitive. An era of intense competition is ahead even if it is going to be only a few years down the line.

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