Building on a strong base

Karnataka has been the cradle of many a bank that has acquired national repute. Despite the competition that liberalisation has ushered in, these banks have fared exceptionally well.

THE State of Karnataka, especially its coastal region consisting of the districts of Udupi and Dakshina Kannada, is unarguably the cradle of banking in the country. Seven of the country's leading banks - Canara Bank, Syndicate Bank, Corporation Bank, Vijaya Bank, Karnataka Bank, Vysya Bank and the State Bank of Mysore - originated from the State. Of these, the first five were started in the coastal districts. Between 1880 and 1935, as many as 22 banks were established in coastal Karnataka, nine of which were in the region's commercial hub of Mangalore.

The reason for the growth of banking in the coastal region is not far to seek. Sandwiched between the imposing Western Ghats and the Arabian Sea, the region remained inaccessible for long and was not conducive for the setting up of industries. Early entrepreneurs, therefore, took successfully to selling financial services. Even to this day these coastal districts maintain a strong banking culture with almost every other household having at least one member employed in the banking sector.

Modern banking was introduced to the region in 1868 when the Presidency Bank of Madras (founded in 1843) opened a branch to cater to the needs of British firms involved in exporting plantation produce. In 1921, this bank became part of the Imperial Bank of India, the precursor to the State Bank of India. Another boost to the financial sector in the region came in the form of the Indian Co-operative Societies Act in 1912. The Act paved the way for the growth of a number of cooperative societies. Several private banks also sprang up during the freedom movement. For example, Karnataka Bank, which was promoted by a group of agriculturists, lawyers and businessmen as the common man's bank, was an offshoot of the swadeshi movement of 1905.

Today, while State Bank of Mysore, Canara Bank, Vijaya Bank and Vysya Bank have their headquarters in Bangalore, Corporation Bank, and Karnataka Bank are headquartered in Mangalore, and Syndicate Bank in neighbouring Manipal.

Although many of these banks, if not all, started with the intention of serving the needs of a particular community or profession - primarily agriculture - over the years they have become catalysts of growth for all communities and the entire region. As a result, the region's infrastructure and industrial development have been intertwined with the rise of these banks.

Most were nationalised during the first or second rounds of nationalisation in 1969 and 1980. Nationalisation also meant that the focus of banking underwent a change in many of these banks. And `social banking' was the key word.

IF nationalisation led to a major re-think of policy, the changes in the financial sector in the post-liberalisation phase have led them to rework their strategies and adapt to the new challenges - moving into and competing in areas such as non-interest banking. Given the competition from the mushrooming Indian and foreign private sector banks, they have been forced to reorient themselves and venture into fields that were hitherto considered untouchable, such as the derivative and equity trading markets.

While the new climate in the banking industry has had its advantages, such as increased autonomy, it has also meant pressure to turn out higher profits. It has also meant intense competition from Indian as well as foreign private banks.

With the need to make the credit delivery system cheaper, given the cut-throat competition between banks (thanks to the constant interest rate wars) and the considerably falling net interest margins, the banks have been compelled to get rid of the inefficiencies in the system and reduce manpower, even while increasing volumes and their non-interest incomes, putting up with reduced credit deposit rates and the larger-than-life demands of their customers.

Bankers aver that irrespective of the fact that officers and staff already feel overburdened, there is no alternative but to increase volumes and working hours.

They are confident that the climate of intense competition and the compulsion to focus on non-traditional banking avenues such as insurance, equity and mutual funds, will not affect the concept of `social banking'. The focus of most of the public sector and scheduled banks, they say, still continues to be in tune with the government's emphasis on the priority sectors (agriculture and small and medium enterprises). But most public sector banks are hard-pressed to maintain the 40 per cent funding of net bank credit that is mandatory for public sector banks in the priority sectors and 18 per cent that is mandatory in agriculture lending.

Bankers also aver that despite credit-deposit ratios going up, the government has not pushed them to do anything outside the norms of prudent financial banking, a la loan melas, which caused the non-performing assets of many of the Karnataka-based banks to skyrocket recently. As a banker said, today the message right down from Union Finance Minister P. Chidambaram is that loans are meant to be paid back. This, bankers agree, has spread to all walks of life making banking a better proposition.

Bankers are also aware of Chidambaram's call for a consolidation of India's leading public sector banks through acquisition of smaller government banks or other private banks. The proposal, which adopts the acquisition route as a major growth strategy, will shake up all the public/scheduled banks that are headquartered in Karnataka.

According to Y. Vijayanand, managing director, State Bank of India, the State Bank group - State Bank of India and its seven associate banks - offers a ready opportunity for consolidation: "Since we have compatible accounting systems and a common technology platform there is already a virtual merger in the group."

N. Kantha Kumar, chairman and managing director, Syndicate Bank, said: "Consolidation will help since size matters. But the Finance Minister has indicated that there can be a merger even among the top public sector banks. Currently, we have (in India) 19 nationalised banks and eight in the State Bank group. In a period of three to five years, this figure of 27 banks will come down to around eight or nine. But the Minister has also mentioned that post-consolidation, there will continue to be space for mid- and smaller-sized banks."

As far as interest rates go, especially in retail lending, bankers in the region feel that given the ample liquidity there is no immediate scope to raise them. The view is that if a bank is looking for good, quality borrowers and wants to stay competitive, it will have to put a cap on interest rates, at least for short-end loans.