The ideal way of demonstrating a bank’s growth is growth in assets and not “total business”—a metric no bank uses in any part of the globe except India. Photo: Hemant Mishra/Mint
Live Mint :Tamal Bandyopadhyay : Tue, Apr 02 2013. 02 08 PM IST
It will be nice to see banks claiming zero NPAs,
or highest margins,
instead of talking on meaningless total business
Some Indian banks—both state-run as well as private—have started screaming from the rooftops about how well they have been doing.
Canara Bank’s total business has crossed Rs.6 trillion and that of Indian Overseas Bank has crossed Rs.3.5 trillion.
The total business figure for Oriental Bank of Commerce is Rs.3 trillion; Dena Bank Rs.1.5 trillion; Federal Bank Ltd Rs.1 trillion and South Indian Bank Ltd Rs.75,000 crore.
They have all been splashing their ads across national dailies for the past few weeks. And, there are too many zeros in their ads to make them look impressive and cover the breadth of a paper, across columns. So, instead of saying Canara Bank’s total business has crossed Rs.6 trillion, or Rs.6 lakh crore, the ad copy prefers to use the figure—Rs.6,00,000,00,00,000. This possibly demonstrates better the scale of the bank’s achievement.
In a slowing economy, growth of business is indeed credible and these banks’ obsession for zeroes could perhaps be traced back to the fact that the concept of zero is India’s contribution to the world of mathematics. (Well, who has not heard of Indian mathematician and astronomer Aryabhata?) But what is more intriguing is the banks’ obsession for so-called “total business”.
What is total business? It is deposits mobilized from the public plus loans given to borrowers. Banks raise money from the public in the form of deposits and this, along with capital, reserves and money borrowed from the market, support their loan and investment growth. While money thus raised—both from depositors as well as borrowings from other sources, including other banks—is a bank’s liability, loans and investments are assets. The ideal way of demonstrating a bank’s growth is growth in assets and not “total business”—a metric no bank uses in any part of the globe except India.
Why don’t banks add investments, too, to show the bulge of their total business? It could be because of the fact that historically, investments in government bonds are statutory (as part of the statutory liquidity ratio, or SLR) and, hence, banks do not take pride in this business.
The concept of total business is baseless. Whom do the banks want to impress by their total business—the consumers, owners or investors? The consumers do not care about the scale of business; they are concerned about the quality and reach of service. The owner and the investors are probably more interested in knowing the financial ratios such as return on assets, return on equity, price-to-book value or, say, bad assets as a percentage of loans and net interest margin (NIM)—the spread between a bank’s cost of deposits and earnings from loans. These metrics demonstrate the efficiency of a bank.
It will be nice to see a bank claiming to be a zero-NPA (non-performing assets) bank, or the bank with the highest NIM, instead of playing with so many zeroes and talking about meaningless total business. If they want to focus on scale, total assets are a better parameter. Incidentally, the total assets of the entire Indian banking system are less than those held by each of the four largest Chinese banks.
Banker’s Trust Realtime is a frequent blog by Tamal Bandyopadhyay, who writes a popular weekly column Banker’s Trust.
