Financial hub

Print edition : September 09, 2011

Chennai as seen from the light house on the Marina beach. - R. RAGU

Chennai is on its way to realising its dream of becoming the country's second financial hub'.

FINANCIAL institutions in Tamil Nadu have carved out a niche for themselves, as the State, particularly Chennai and its suburbs, has emerged as the most favoured investment destination with a strong potential for manufacturing.

The State has been acclaimed as a hub for the production of automobiles and auto components, engineering, textiles, leather, information technology and information technology-enabled services.

According to official sources, by the early part of the 20th century, the economic base of Chennai had shifted from trade and commerce to administration and services. However, in the post-Independence period, the manufacturing sector grew in importance, and the Chennai Metropolitan Area (CMA) continues to be the most important industrial belt in the State. Recent developments show that the economic structure of the city has been tertiarised with growing contribution by IT, ITeS and business process outsourcing industries.

Chennai city accounts for 10.94 per cent of the State's income. The income in the areas of Kancheepuram and Tiruvallur districts, which fall within the CMA, calculated on the basis of the proportion of population, has been estimated at 2.8 per cent and 2.5 per cent respectively. Thus, the CMA accounts for 16.21 per cent of the State's income from all sectors, an informed source pointed out.

The government has decided to formulate a proactive and investor-friendly policy, ensure assured power supply, address infrastructural gaps and improve skilled manpower availability. This is expected to improve the performance of banks and other financial institutions.

In the liberalised scenario, successive governments have come to the conclusion that the State's economy can be resilient only if manufacturing becomes the engine of growth, as it has been pointed out in the Tamil Nadu Budget for 2011-12. The government has promised to come out with a New Industrial Policy 2011, besides formulating sector-specific policies for automobiles and autocomponents, biotechnology and pharmaceuticals.

All this has opened up new opportunities. The government has also announced that critical bottlenecks in infrastructure development will be addressed to sustain higher growth in the service sector in order to achieve an overall growth of above 10 per cent in the coming years. These and a host of other factors have contributed to Chennai's dream of becoming the country's second financial hub.

But some experts believe that the issue should be seen in its totality and not in isolation as the banking sector plays a vital role in the development of the country's economy, be it during a boom or a recession.

Some experts have predicted the emergence of India as the third largest banking hub in the world by 2040, as the Indian banking sector stands on the threshold of exponential growth. But it passes through a difficult phase now because of the adverse impact of the downgrading of the United States credit rating by Standard & Poor's, and the eurozone debt crisis.

The Indian Overseas Bank building on Anna Salai in Chennai.-M. MOORTHY

Drawing inspiration from the success of steering the country's economy through the 2008 global meltdown to a reasonably high growth trajectory, the Central government and the Reserve Bank of India have resorted to measures to allay investors' fears now.

M. Narendra, Chairman and Managing Director of Indian Overseas Bank, feels that there is no need to panic. Our banking system is a robust one, thanks to the various regulations in place. However, some minimal impact of this development cannot be ruled out. Export finance may show some delayed payments or rescheduled shipments. Some spillover effects of U.S. difficulties may affect India marginally. Close monitoring of key indicators both by the Reserve Bank of India and the Ministry of Finance has helped moderate the effects.

Though initially the market reacted strongly to the rating downgrade, the statements of the Finance Minister and the RBI have boosted confidence. The RBI has made it clear that both the rupee and forex liquidity have been maintained at comfortable levels to prevent excessive volatility in interest rates and exchange rates, says Narendra. Admitting that the debt crisis in the U.S. and the liquidity position of banks in Europe have had a mild impact on the Indian system, he said, The impact of these crises on our banking system is also expected to be minimal. I do not see any strong reasons how these will trigger a merger of banks. As the impact can be analysed better after a month or two, the effect of the crises on the profitability in operations cannot be assessed immediately.

Another important aspect that cannot be ignored is the growing potential of the rural market. With the markets in urban areas reaching saturation point, even corporates have started tapping rural markets.

Indian Overseas Bank has more than 50 per cent of its branches in rural and semi-urban areas. The bank's performance in rural areas has been encouraging. Rural branches are planned as profit centres. Rural lending and financial inclusion are not seen as corporate social responsibility initiatives. They are viable in the long run, as purchasing power and economy grows in rural areas. As per the recent RBI policy, at least 25 per cent of the total number of branches proposed to be opened during a year should be in unbanked rural (tier 5 and tier 6) centres, Narendra said.

According to him, IOB's lending to the priority sector has always been above the norm. For the year ended March 2011, priority sector credit to Adjusted Net Bank Credit was at 44.47 per cent, well above the 40 per cent norm. Under agriculture also, as of March 2011, the ratio was at 21.87 per cent, much above the norm of 18 per cent.

M. Narendra, CMD, IOB. He says the Indian banking system is robust.-PAUL NORONHA

But there are challenges in expanding banking services to the hitherto unreached sections of society. In IOB, we have taken up these challenges and expanded financial inclusion reach into the remote villages of the country. In fact, we promoted the concept of last-mile banking when we took banking services to the Kaani tribal hamlets in Papanasam in Tamil Nadu, for which the bank was given the Skoch Award for Financial Inclusion.

Through the IOB Sampoorna, the bank adopts villages for Total Rural Development. Recently in the Nilgiris, we adopted villages where Todas, the local hill tribe, reside. Efforts have been made to make the inclusion economically successful without disturbing their cultural norms. The development programme covers both traditional activities and modern-day livelihood pursuits, he adds.

On promoting the habit of saving among the public, Narendra says the IOB deposit interest rates have been competitive, attracting new customers and retaining existing customers. Savings Bank account mobilisation fortnights are held across centres and campaigns are held for canvassing SB student accounts to inculcate the savings habit among teenagers. A special Walk-in Bank campaign to mobilise SB accounts and IOB Smile campaign for opening of No Frills SB accounts for financial inclusion are carried on across the country. The bank also has minor-operated SB accounts, which inculcate the savings habit at a very young age, he pointed out.

There are already indications that administrators, with the help of the financial institutions want to ensure that the State's growth story is intact. These institutions also seem to have decided that they will leave no stone unturned in converting the challenges before them into opportunities.

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