Economic health of India depends on factors that define how much wealth a nation-state can create for its people
At the end of the day, there is something to be said for the proverb: “God made man. Man made money. And money made everything”. This statement may not find a place in theBook of Genesis but it is almost a gospel truth. The role of money in creation, if not creativity, is undoubted. Hence, financial institutions become almost central to civilised life. Among the financial institutions, perhaps, banks form a key intermediary institution.
In their pristine form, banks were meant to protect public money and deploy funds. In India, they are regulated by the Reserve Bank of India which when necessary also helps channelise Government funds. A back-of-the-envelope analysis will show that these are all dependent functions and a bank’s health is a factor of well-being elsewhere.
One of the variables which affect the state of banks is the state of industry. Investment in industry is one of the major functions banks. The interest which banks get on loans is partially paid to investors as returns. For the robustness of banking operations and the welfare of the investment of the customers, it is necessary that those who receive loans should also be healthy.
The current condition of several industrial sectors is dubious. Not withstanding the dramatic reduction in excise rates, the automobile sector continues to have excess capacity and is consistently being augmented. However, the health of this sector is also dependent on the health of many others. Illustratively, if the automobile sector is to grow, transport infrastructure like roads, traffic signals, emergency care should also be in place. The highways have come but the communication systems on the highway remains poor.
The number of banks operating under ‘private’, ‘public’, ‘foreign’ and ‘other’ categories is modest. The total number is estimated at 89 of which private banks are at 20, public at 26 and foreign at 40. The profitability per employee is Rs 10.70 lakh, Rs 6.30 lakh, and Rs 45.63 lakh respectively.
The figures speak for themselves. Compare this to the cost of funds which, in the layman’s language means, the cost at which each bank is lending. It is 6.12 per cent for private banks, 6.2 per cent for public sector banks and 4.05 per cent for foreign banks. The figures speak for themselves again. Nevertheless, public-sector banks, in spite of their indifferent performance, are still a huge source of patronisation.
It is alleged that functioning of funds is manipulated by public figures through public-sector banks while foreign banks survive on external networks. It is one’s case that if nothing is being done about it, it is almost a consensus of connivance amongst the stakeholders.
General election cannot be permitted to become an occasion for taking turns on the public exchequer. The merits and de-merits of the election rhetoric apart, the crowds at BJP’s prime ministerial candidate Narendra Modi’s rallies do signify the hope of those who attend that the present dispensation faces a certain rout. Figures of finances have a habit of talking. It is difficult to silence them like slogans of secularism or socialism or whatever else.
To continue with the narration of the banking story, the return on advances, adjusted to the cost of funds, also shows some pattern. It is 5.14 per cent for private sector banks, 3.8 per cent for public sector banks and 5.50 per cent for foreign banks. This, itself, is an eloquent trend but something more is here. Private sector banks have only 16.6 per cent of the business while public sector banks have 83 per cent and foreign banks only 0.4 per cent.
There is no need to say anything more. Cliques and factions are nurtured by permutation and combination of groups flourishing on power-divide. This brings us to the inevitable task of challenges and assets of the financial sector and the banking sector. Among the more prominently used arguments, currently, is of harvesting demographic dividends. Yet there will be no dividend if the level of skill-formation remains as low as it is. Un-employability is endemic.
The problems are many, and to each problem there are multiple solutions. For moving things, to begin with, the institutions and delivery channels have to be positive and uncluttered.