Home truths

Orthodox banking specialists would frown at the finance minister asking public sector banks not to raise home loan rates 8212; P. Chidambaram was reacting to the RBI hiking the rate at which it lends to banks to 7.5 per cent, the highest in four years. But orthodoxy would be missing the point here. The FM8217;s suggestion is not so much evidence of ministerial intervention as reflective of an Indian banking reality. By extension, the relevant issue about home loan rates here is not so much about bank policy freedom as cosy arrangements in the banking business.

When bankers routinely justify various rate hikes as a fall-out of monetary belt-tightening, they forget to mention that their power to pass on cost-plus pricing to consumers 8212; home loan takers, for example 8212; is guaranteed by a sector that operates on a safe assumption: there isn8217;t enough competition for any bank to really fear that someone would break the ranks. The best indicator of this kind of lazy banking is the high margins enjoyed by Indian banks. A 2006 McKinsey study showed that Indian banks8217; margin is 6.3 per cent, roughly twice that in the US and Singapore. Bankers here have got used to this kind of easy picking, and the sub-text of what the FM is saying is that they have to get de-addicted, learn to operate with finer spreads and stop being lazy bankers. That the intermediation cost 8212; the ratio of operating costs to total assets 8212; in Indian banks is, at 2-3 per cent, considerably higher than global norms is another indication of inefficiency.

However, that there isn8217;t enough competitive spirit in Indian banking is the fault of the government the FM belongs to 8212; and of previous governments. Foreign investment ceilings are laughably low. Foreign banks still face a host of restrictions. The control raj still holds for a shockingly long list of managerial minutiae. Assorted priority lending rates are still in force. And the overall asset base is still heavily dominated by the public sector. In an ideal world, it is the market and not the FM who should be dissuading bankers from passing on any and every cost to the consumer. But since we are far from an ideal world, occasional ministerial reminders can be useful.