State Bank of India — Is Liquid and Wishes to Lend

Elsewhere in this issue we quote from a German source on the earliest origins of banking that informs us that banking preceded the notion of money by several millennia. And that our original merchants’ form of credit rather was coined gold or silver or any other specially designated commodity by several thousand years. Indeed the very term bank (or the corresponding Greek trapezit)refers to the small foldable tables that small operators quite late in the game set outside the temples and palaces where the heavy business of exchanging credit took place. The original bankers dealt in the exchange of diverse debts and securities supporting debts, and of course the money coins of the innumerable principalities when they came into existence. From there they used their wits to prosper and grow.

In that article we have dealt with the many implications of all this. For this article I wish only to draw a further specific lesson from this excellently documented but generally unrecognized fact: if credit could have been developed in such an abundance of forms before coined money or even metallic money came into existence, it by no means follows that we are restricted to any particular pattern of handling the organization of our monetary credit system. We must consider ourselves perfectly free to observe what has disorganized the world economy to the point of world bankruptcy, and pick up whatever changes our dreadful experiences would counsel.

And that is why we should consider carefully possible lessons that contradict what has been taken for the right relationship between central banks – even state-owned ones – and private banks that have forfeited more respect in the past two or three decades than probably ever. Its success in India is, of course, less than a perfect argument for adopting them in the US or Canada. But given the official cures proposed for our ailing credit systems even by President Obama and his advisers, there appears no serious alternative – not even serious accountancy for governments which would include accrual accountancy that would not write off government investments in human capital as a current expenditure. That contradicts the conclusions that emerged from Washington’s own investigation based on the wrong forecasts of hundreds of economists that the US government sent to Japan and Germany at the close of WWII to forecast how long it would take before Japan and Germany could become formidable competitors on world markets again. Sixteen years later one of these economists reached the conclusion – that no one of his colleagues question that I am aware of – that they were so wrong in their predictions of the time needed for such recovery because they had concentrated on physical destruction in the war, and overlooked the importance of their highly educated, skilled and disciplined work forces had come out of the struggle essentially intact. From this he concluded that the rapid recovery of Germany and Japan from wartime destruction proves that investment in human capital is the most productive investment a government can make.

India’s Versatile Central Bank

We must then recognize that what has been taught in our university economic courses has been a caricature of economic theory created to serve very special interests.

The news in fact deals with a government central bank of a major country that from many indications had a major future before it. A this point we will begin our quotation from The Wall Street Journal (30/3, “State Bank of India – Has Cash, will Lend” by Eric Bellman): “Mumbai – State-owned State Bank of India is lending like the global credit crisis never happened, as it looks for places to park billions of dollars in new deposits.

“Consumers have shifted tens of billions of dollars to India’s state-run banks amid the bailouts of the world’s most sophisticated financial institutions and concerns that global problems could infect India’s private-sector banks.

“State Bank of India has been the biggest beneficiary of that trend. It is India’s largest bank by assets, including private sector lenders, and is 60% owned by the government, but has remained a traditional lender rather than expanding into other financial instruments that sank many international banks. That conservatism saw its deposit base swell by close to 40% in the three months ended December 31.

“Now it is on a spending spree, cutting interest rates on loans, snatching customers from competitors and doing its part to prevent India from getting stuck in the global slowdown.

“Subhra Chatterjee, 39 years old and a cell phone company employee in Kolkata, used to have his home loan with ICICI Bank Ltd., India’s largest private-sector bank. He appreciated ICICI’s telephone-banking and online banking services as well as their bright branches.

“But in the last six months, his view of private-sector banks has soured as he watched banks elsewhere implode. This month, he flipped his savings and his $40,000 home loan to State Bank of India.

“‘People are disillusioned with the private-sector banks and all the charisma that was originally coming out of the private sector,’ he said. ‘State Bank is extremely cash rich. That is why I changed to them.’

“V. Vaidyanathan, executive director of ICICI Bank said in an interview that the rise in deposits at state-run banks has more to do with the higher deposit rates and lower lending rates they are offering than with a flight to quality. He also noted that while liquidity late last year was ‘tight’ for many banks, deposits are increasing again.

“While banks in the US and elsewhere are cutting back, State Bank of India is expanding. It hired 35,000 workers last year, plans to hire 10,000 in the coming year, and is adding 4,000 ATMs and 2,000 branches to its network of almost 10,000.

“The health of State Bank of India and India’s other state-controlled banks, plus their willingness to ratchet up lending in tough times are reasons why India’s growth is relatively healthy compared with other economies. In the coming year, India’s economy is expected to expand at 6%, down from 9% a couple of years ago.

“Over the weekend Indian Prime Minister Manmohan Singh said the country needs its banks to lower interest rates further following repeated monetary-easing measures by the central bank.

“‘With ample liquidity and low inflation, there is scope, perhaps, for a further moderation in interest rates,’ he told a meeting of Indian business leaders Saturday.

“State Bank’s history goes back more than 200 years to India’s days as a British colony. After independence, the government took it over, and the bank has been expected since then to act in the interest of uplifting the People of India.

“That used to mean it had to give loans that it didn’t expect to get back or set up branches to sparsely populated rural areas that couldn’t support them.”

Undoubtedly that is not unrelated to the Gandhi-Nehru tradition that lives on. The good Lord bless it.

“During the last 15 years though, as India reformed its economy State Bank has received more independence from the government to boost its profits and modernize its economy to compete with private-sector banks.

“The bank’s cash glut is behind its latest move to cut interest rates and promote home loans, car loans and small business loans. Its mortgage loans are 8%, more than 2% below some of its competitors. It has matched that a nationwide advertising campaign, ‘Economy Booming or Slowing, SBI Keeps Your Business Moving,’ says one of the Bank’s posters. State Bank says about 60% of its loans are taken over from competitors.

“Lending at State Bank and other public-sector banks rose 29% last year, up from 20% in 2007. State Bank plans to use some consumers’ yearning for safety to claw back some of the market share it had lost in the last decade. The company is sitting on close to $20 billion in cash above what it needs to operate. And if it can take advantage of its strong competitive position now, it could emerge from the downturn far stronger.

“The bank is also using the surge in business to upgrade some of its branches. At a branch in the heart of old Mumbai, half way between the Bombay Stock Exchange and India’s central bank, some clerks still sit under electric fans. Long lines of customers wait their turn, and banking hours run from 10.30 am to 4.30 pm. Just across the street, a brightly lit, air-conditioned ICICI Bank branch is open from 8 am to 8 pm. On a nearby corner, ABN Amro Bank and HSBC also provide cheerier alternatives.

“State Bank is repainting its branches with a uniform color scheme, adding air conditioning, televisions and an electronic token system to more customers faster. ‘We are asking people to smile more often,’ said a general manager at State Bank’s headquarters in Mumbai. ‘We want out people to be more customer-friendly.’

“It is the stability, not the smiles, that is luring customers. Foreign banks said they often can’t compete with State Bank of India’s rates. Growth in lending by foreign banks slowed down to 17% last year from 31% in 2007. State Bank of India shares have shed about 35% value in the last 12 months.”


- from Economic Reform, April 2009