• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

AS INTEREST RATES go down, the inefficiencies in banks are beginning to show up starkly. Non-interest working expenses of banks constitute almost three per cent of total assets, according to the Reserve Bank of India. With their cost of funds dropping to as low as 6.25 per cent, these administrative costs are looming relatively large, to almost a third of total costs. They are sticking out like a sore thumb, and causing the spread between the deposit and lending rates to be unreasonably wide. There are two ways for banks to narrow this down: either cut down costs by trimming staff (which they are doing with voluntary retirement schemes) or by cutting transaction costs and increasing the volume of business. The former causes much pain to the workforce and is a slow-acting remedy for anaemic bottomlines. The latter causes little pain but requires more effort. It can happen more easily when the effort is launched across the banking system.

It is a pity that the RBI has not picked up lessons from what the Securities and Exchange Board of India (SEBI) did to the stock market over the past eight years by doggedly dematerialising scrips owned by millions of investors and ushering in electronic trading. The positive spin-off has been the ease of transacting at the stock markets. Mountains of share certificates moving from sellers to buyers have disappeared. So have the risks and costs associated with physical movement. Settlement costs have dropped from 1.5 per cent of the transacted value to 0.1 per cent. Brokerage charges have dropped from 2.5 per cent to 0.25 per cent.

Replicate the same ideas of dematerialisation into the banking system, and one should see fewer cheques and less currency, whose physical movement today causes the greatest drag on transactions and piles on the costs. Outdated and inefficient it might be, but cash is still king in the economy; more transactions are done with cash than through the banking system with cheques or similar instruments. A testimony to this is the fact that the cash component of M3 is larger than demand deposits, the reservoir from which payments are made through the banking system. If banks are to increase their volumes of business, they ought to get their customers off cash and into bank instruments. Cheques are only a whit more efficient than cash as their physical movement, which is still required for a payment to be completed, is as demanding of effort and cost. Electronic transfers are the most efficient, and the RBI has recognised their worth. It has set working groups to study them, and even has a thinly patronised service, but has been far too tardy in getting them implemented full-scale. The transformation into a world of electronic fund transfers cannot be done by the attempts of one forward-looking bank, or even a few of them, just as a few shareholders dematerialising their scrips would not have effected the transformation on the stock market.

The RBI needs to hustle at least the organised sector into the electronic era. To start with, the RBI must mandate that salaries, at least in the Government and corporate sector, must be transferred electronically into individual bank accounts. That would save the banking system a few million manhours each month and a few crores in cheque leaves each year, not to mention their customers cumulatively being saved the millions of manhours filling out challans and commuting to the bank. The stock markets gained from a methodical and persistent push from SEBI. The RBI has to do its bit for the banks if their non-interest costs too must shrink to less than one per cent of their assets. At the moment these are thrice as obese as those of banks overseas.

Send this article to Friends by E-Mail

Stories in this Section
Thinning the spreads

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line