‘India’s banks inefficient, pass on added costs to borrowers’

Delayed clearances and infrastructure are considered the biggest drain on the overall efficiency of Indian industrial sector. A less known fact though, is that the Indian banking system, a key source of funds for industry, too is guilty of passing on the cost of its operational inefficiencies to customers.

Even as the country?s banking sector has made some progress on the productivity front, benchmarking the Indian banking system against global productivity standards does prove the point that banks here are far less efficient that their peers in other countries.

According to Reserve Bank of India estimates, while there has been a perceptible improvement in the relative productivity levels of India?s banking sector on various parameters such as operating expenses ratio, the country still lags behind peers from Asia and the developed world.

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For instance, in case of ratio of operating cost to assets, China (0.80 per cent), Malaysia (1.27 per cent) and Korea (1.05 per cent) have much lower ratios as compared to the Indian position of 1.65 per cent.

Considering the fact that India is pursuing the mission of extending access to affordable banking services to the unbanked poor in the coming years, the RBI points to the need for the Indian banking sector to target a level that is at par, if not better than many of these countries.

The Indian banking sector?s net interest margin (NIM) at 2.70 per cent is also higher than that the comparable ratio in many other countries.

While a higher NIM has certainly helped in improved profitability of Indian banks, the higher margins indicate an extent of inefficiency, which is being passed on to the borrower.

With respect to the ratio of net profit to assets, Indian banks are better than many other countries.

Taking into account the fact that the operating expenses ratio of the Indian banking sector is higher than many countries, this implies our banks have been passing on the cost of their operational inefficiencies to their customers and are, thus, able to record greater profits at the cost of their customers.