It has been a long-pending 'dream' in Kerala, especially of the Left Democratic Front, to have a bank for the State. With Kerala High Court dismissing a batch of petitions against the merger of 13 District Cooperative Banks, it is mirth in the CPM camp. But sound economics can rightly make one doubt how long this mirth will last.
Kerala's history of cooperative banking has been all about finding a space for the CPM to let its members and mainly leaders jostle. On taking it to a higher level, questions about the relevance of such a bank in an already over-banked State assume relevance.
Coming to financing of major projects, one must understand the nature of loans being given in Kerala. There aren't big corporates here and lending is mainly to the small and medium enterprise and trading sectors. This is minuscule and will not take the bank ahead. Some of the leading Kerala banks are now in the race across the country to compete with acclaimed financial institutions to squeeze into that space.
The need would call for quality of human resources and maintenance and updation of technology. The amount to be spent for annual maintenance and updation of the software would be substantial. How far this can happen in the Kerala bank is anyone's guess.
Running a bank is not like running the party or a small service cooperative bank. Experience shows that a team of elected members representing political parties get elected to govern such a local society. Loans are sanctioned on the basis of the whims of this team. Defaults happen regularly and notices are sent. Finally the borrower fearing action, pays a small amount and the loan amount is raised to keep it alive only to become an NPA later. The refinance is done by the district cooperative bank. It has been nothing but 'ever greening' happening in the cooperative sector.
It was the NPA created by three State-run ventures, Rubco, Marketfed and Rubbermark, that had been a major hurdle in the way to create Kerala Bank. The three had availed of loans worth Rs 306.75 crore from the State as well as district cooperative banks which turned out to be bad debts. The State Government has cleared that, making the creation of the bank easy.
In the case of Kerala Bank, there will have to be a team of experts and experienced bankers. The director board will comprise experts nominated by the RBI. Even the selection of the managing director and CEO will be done by the RBI. It will have a qualified and quality decision-making body right under the control of the RBI. All and sundry party men cannot be nominated.
The top management will have to be highly paid officials and it remains to be seen how this will be implemented.
If using the funds to meet the projects of the Government, then it has to be realised that there are different layers for clearance and there is little likelihood of the Government getting this money to propel its so-called development agenda.
What can follow is an agitation later against the RBI for 'unwanted interference' and 'not supporting Kerala's development agenda'.
Evolving products and innovating them are crucial. In these changing times, it is not just interest income that keeps banks going. Non-interest income and fee-based ones are things that make the banks go ahead. That explains why banks are in the insurance market too.
If banks in Kerala have been struggling over the years for survival and some ready for takeovers when new generation ones have been surging ahead, the future of Kerala Bank becomes clearer or bleaker. Kerala's Cooperation Minister Kadakampally Surendran was heard saying Kerala Bank would have ATMs put up at several places. Leaving aside the cost involved, it has also to be noticed that banking is going to higher levels like e-wallets and payment platforms that will soon make even ATMs obsolete. He also said that interest rates would be brought down which is no decision to be taken by the party politburo or state secretariat as RBI runs the banks.
There are the globally set Basel norms for capital adequacy and loans need to be backed by sufficient capital. How the Government is to find this would remain a major stumbling block as the bank starts functioning as pointed by investment banking experts.
The technical and quality aspects set aside, the big question arises of whether Kerala, already over-banked needs another bank. According to the State Level Bankers Committee, Kerala already has over 7,400 bank branches of which 62 per cent are in semi-urban areas, 31 per cent in urban areas, leaving just the remaining 7 per cent in rural areas.
With State Bank of Travancore merging with its parent bank SBI, Kerala has Federal Bank, South Indian Bank, Dhanlaxmi Bank and CSB, which recently tasted oversubscription through its IPO. It had Lord Krishna Bank and Nedungadi Bank which were merged with banks outside some years ago.
It is the policy of the Central Government to bring down the number of banks and that explains its decision to merge a number of PSU banks recently. In all likelihood there might not be more than a dozen banks in a few years.
Incidentally, what the Kerala Government eyes is the huge potential of NRI deposits which in Kerala now stands Rs 1.7 lakh crore. They are already in banks in Kerala and it is no rocket science to know that moving them from one bank to another can make little difference in the amount available within the State.
There is the basic question that comes up before Keralite - What will be the fate of the bank in two-three years? Given Kerala's history of Government-run institutions, even optimists will say three years is too long a period. When the Government fails even in the basics of administration, why should it get involved in matters which are outside its capabilities is for the Government to answer.
There is little beyond sheer political interests in the Opposition claim that it will not allow the bank to function. Unfortunately, the agitation is not based on sound economics, but just temporary political gains.