Indian Banking:A perspective

In this phase of uncertainty where the banking sector is witnessing a world of chaos and big names are found to be tumbling like a pack of cards, the Indian Banking sector has shown a remarkable resilience. This throws certain lessons that the world may well catch up. An attempt has been made to trace the evolution of banking sector in India and analyze the reasons for this resilience as also to pinpoint the challenges that lie ahead.

Historical Perspective:
The history of banking in India is probably as old as the civilization itself. The practice of money lending can be traced to the Vedic period i.e. 2000 to 1400 BC. While references to professional banking can be traced to as early as 500 B.C. Kautilya in his famous work “Arthashastra” has given thought provoking ideas in relation to creditors, lenders and lending rates. Interestingly, the work also documents the norms for banks going into liquidation. In that early age where information and communication was a scarce commodity, an extensive network of Indian Banking Houses existed connecting all commercial cities/towns. They had their own inland Bills of exchange (commonly called Hundis) which were significant forms of transactions. The system was founded purely on mutual trust without any securitization whatsoever. The dishonoring of Hundis was almost unheard of and was a crime second to none.

With such a rich cultural heritage, it does not seem strange that a certain semblance of that heritage continues right from executive decisions to grass root banking.

However, the credit for introducing a formal banking architecture, as the world knows it today, goes to the British. The beginning was made with the establishment of The Bank of Bengal, The Bank of Bombay and The Bank of Madras (collectively referred to as the Presidency Banks). The pre independence era was entirely dominated by the private players. The central Bank of the country was established in 1935 which was subsequently nationalized in 1948. Another step forward was the enactment of The Banking Regulation Act in 1949.

With the dawn of Independence, the focus of the policymakers shifted from “Class Banking” to “Mass Banking”. This is evident from the nationalization of 14 banks in 1969 while another 6 banks were further nationalized in 1980. Till the late 90s, the sector witnessed a reasonable growth but the expansion was invariably dictated by a socialistic bent of mind with little or no concern for profitability or quality services.

The decade of 90s witnessed the ushering in of pro liberalization policies in an attempt to integrate the economy with the so-called global village and unlock the depressed purchasing power of a large populace. In the last part of the decade the government allowed the private players to set up shop in this sector at a fast pace which was meager in the pre-liberalization era. The sector today spans 82 commercial banks, 92 Regional Rural Banks, 4 Local Area Banks, 1813 Urban Cooperative Banks and 107497 rural cooperative credit institutions. In spite of the tremendous growth clocked in by the private sector and the foreign banks, 75% of the total banking assets continues to be in the domain of public sector banks.
Financial Crisis:
At a time, when two words, namely “Sub prime” and “Bailout” have become the buzzwords of the economic world, the Indian Banking sector has stood its ground with minimum Governmental intervention, except for elevating the public sentiment. Barring one private sector Bank, the exposure to US crisis has been minimal, with majority of the Banks reporting strong balance sheets growth. The reasons are not far to seek and are a combination of our psychological mind set and strong economic realities. As has oft been repeated to the point of boredom, the US crisis has been a result of indiscretion on the part of the bankers who presumed that home prices can only increase. This upbeat sentiment got transferred right from Banks to Securities firms and there from to the Investment Banks, who sold their complex collaterized Debt Obligations to Hedge funds and Private equity players. However, while more and more sophisticated instruments were brought in vogue, the original lenders had conveniently transferred their risk to others so that they had no stake in performance or otherwise of the borrowers. In this context, the words of former Fed Chairman, Alan Greenspan in his memoir “The Age of Turbulence: Adventures in a New World” are worth mentioning. He writes, “I was aware that the loosening of mortgage credit terms for sub prime borrowers increases financial risk…..but I believed that the benefits of broadened home ownership are worth the risk”. In short, the crisis was primarily due to misplaced conceptions and overly optimistic notions. While the governments the world over were busy doling out gargantuan bail out packages and desperately trying to put the financial system in shape, there is one economy where the policy makers have only one job to do and that is to hold press conferences to lift public sentiment while not worrying about the crash of the Banking sector. That economy is India: often touted as a Tortoise, but as the old story goes, the rabbits usually lose out.

The Story of the Tortoise
As with the tortoise, Indians by nature, dispel things sophisticated and are comfortable with chaos and disorder, two things that are a part of every Indian’s ordinary life. When tongue twisters like collateralized Debt Obligations were being lapped up by the savvy Bankers and Fund Managers the world over, we continued to revel in our immature securities market. The net result is that the lenders maintain the risks on their books and so remain prudent and continue to be the stakeholders in the performance of their assets. In India the relationship between the lender and the borrower is like a marriage made in heaven-till death do us apart, while the US relationship remained to be under silos. The first moral of the story – complexity does not always breed efficiency and liquidity rather adds up to the confusion and then results in profound suspicion.

The existence of black money in the system has often been derided for the ills of the economy but it has proved to be a blessing in disguise for the Banking system. Any one who has transacted a real estate deal would reveal that a majority of such transactions involve an element of black money. This has an interesting repercussion. When any such real estate transaction is proposed to be financed, the Banker would usually have to bolster the claim of the borrower because the income evidenced by the documents would usually be far less than the actual. Further the margin money in such a transaction would be far ahead of what would be insisted upon by the Bank. Consequentially, the borrower has a significantly higher stake in the performance of his part of the contractual obligation. The risk of defaulting on the loan and finding one’s name in the morning newspaper on initiation of legal proceedings carries a moral hazard, which a large proportion of the Indians would be loath to invite upon them.

It would not be misplaced to point out the contribution of the legislature in this regard. The very nature of Indian polity, where a wide range of political forces exist, has ensured that the process of liberalization has been slow with a lot of heated debates interspersed in between. The economic reforms have been undertaken in a gradual and sequential manner. To give credit where it’s due, the successive governments have adopted international best practices with India specific conditions, while stepping up prudential regulations. Instead of plunging head on into the turbulent racecourse, the tortoise has firstly watched the bloodshed caused to the rabbit and then calibrated its response. What it means is that a lot of contentious issues have been resolved after considerable debates and while the economy has opened up, the integration with the world economy has been done with a cautious approach. The moral- Regulations ought not to be enacted in response to a crisis but in anticipation thereof.

At the risk of sounding repetitive, Indians as a class have often resorted to the maternal wisdom of living within their means so that the debt exposure of an average Indian is miniscule when compared to that of an average US citizen. When stock markets the world over were the darling of the masses, the Indians continued to stock up astronomical piles of gold, which today proves to be the best investment that anybody could have ever made. The Moral: It pays to stick to conventional wisdom.

Notwithstanding the immunity to global crisis, the Indian Banking sector faces considerable challenges in the long run and must gear up in seeking out wisdom from this financial bloodshed.

The Road Ahead:
The Indian economy is believed to be poised to become the fourth largest economy by 2025, but as the old saying goes “Finance follows Economics”. A vibrant banking sector has to be ensured to support the growing economy. More than ever, the sector requires new and upgraded skills in relation to sales, marketing, credit and operation. Therein the competition from the foreign banks is going to intensify in the times to come. It is estimated that the sector would require capital infusion to the tune of Rs 600 Billion to fund the growth in advances, non- performing loan write offs and investment in IT and human capital upgradation. The sector ought not to expect windfall treasury gains that decade long secular decline in interest rates provided, which in turn would expose weaker banks.
The biggest challenge probably lies in increasing the penetration of the banking services. It is estimated that only 27% of the rural farming population has access to banking services. There lies a potential to generate huge volumes of deposits simply by geographical expansion.
Although the Reserve Bank of India has taken creditable steps in popularizing no frills accounts yet a lot needs to be done in this regard.

Taking cue from the American fiasco, urgent steps need to be taken in regard to sharing of credit information of potential borrowers. Though such a mechanism does exist, the public sector Banks have been reluctant in sharing such information.
The Management success would largely depend on capability upgradation, adoption of value-creating Mergers & Acquisitions as a growth avenue and development of innovative business models to access the tremendous opportunities that lie ahead.

In Hindsight:

The global recession has thrown up serious challenges for the financial as well as real sector. The fact remains—although financial sector remained buoyant in the course of uncertainty but the world financial crisis has percolated its aftermath into the real sector. Further hindrance in the growth of real sector can have devastating effect again on financial sector. It is still believed that the Indian economy is going to be one of the main drivers of the growth engine. In such an expected scenario, bank boardrooms must gear up to meet the challenges while retaining the competitive edge.

Procter & Gamble:Company Profile

The Procter & Gamble Company (P&G) is a brand behemoth. The Company is focused on providing consumer goods products to improve the lives of the world's consumers. The company operates through three global business units (GBU): Beauty, Health and Well-Being, and Household Care. Some 25 of P&G's brands are billion-dollar sellers, including Gillette Fusion, Always/Whisper, Braun, Bounty, Charmin, Crest, Downy/Lenor, Iams, Olay, Pampers, Pantene, Pringles, Tide, and Wella, among others. P&G is credited with many business innovations including brand management, the soap opera, and "Connect & Develop" innovation. In 2007, P&G spent more than any other company on U.S. advertising; the $2.62 billion it spent is almost twice as much as General Motors. P&G was named 2008 Advertiser of the Year by Cannes International Advertising Festival.

Procter & Gamble is a fortune 500 company based in Cincinnati Ohio. It is the 23rd largest US Company by revenue and 14th largest by profit. Today, the Company markets over 300 branded products in more than 160 countries. The Company has operations in over 80 countries through its Market Development Organization "MDO" having dedicated retail customer, trade channel and country-specific teams for building the Company's brands in local markets. It is organized along seven geographic areas: North America, Western Europe, Northeast Asia, Latin America, Central and Eastern Europe/Middle East/Africa, Greater China and ASEAN/Australasia/India.

A Chance Meeting of Minds

William Procter, a candle maker from England and James Gamble, a soap maker from Ireland might never have met had they not married sisters, Olivia and Elizabeth Norris, whose father convinced his new sons-in-law to become business partners. In 1837, as a result of Alexander Norris' suggestion, a bold new enterprise was born: Procter & Gamble. On April 12, 1837, William Procter and James Gamble start making and selling their soap and candles. On August 22, they formalized their business relationship by pledging $3,596.47 apiece. The formal partnership agreement is signed on October 31, 1837.

The Moon and Stars

Procter & Gamble (P&C) has one of the most well-known trademarks in the world—a man in the moon surrounded by stars. The trademark originated in the early 1850s as a symbol for P&G Star brand candles. This was during a time when most products did not carry a recognizable brand name. The original trademark included a star, which eventually became thirteen stars symbolizing the thirteen original American colonies. The man-in-the-moon was added because it was a popular decoration during the 1800s. In 1882, the trademark was officially registered with the U.S. Patent Office.

Soap Operas

Procter & Gamble produced and sponsored the first radio opera in the 1930s, which is now popularly called as soap operas. Procter and Gamble's being known for detergents (soaps) was probably the genesis of the term "soap opera". When the medium switched to television in the 1950s and 1960s, most of the new serials were sponsored and produced by the company.

Ivory Soap

James Norris Gamble, son of James Gamble, who was a chemist began working on for a new white soap. It was in 1875, through the carelessness of a fellow worker, one of the machines used in soap making process left running too long. As a result, too much air entered the soap, which caused it to "float". It was known simply as "P&G White Soap". In 1879, white soap was marketed as “Ivory soap” with unique size, shape and purity.

The Tide Changes

In 1946, Procter & Gamble scored big with two new products, Prell shampoo and Tide laundry detergent. Tide worked better than other detergents becoming America’s favorite laundry soap. Several more products were released: Crest, the first fluoride toothpaste to fight cavities (1955); Downy, a liquid fabric softener for use in washing machines (1960); and Pampers, the first disposable diaper (1961). The company also bought two well-known businesses, Charmin Paper Mills, which produced toilet tissue, paper towels, and napkins, and Folgers Coffee, a premier coffee producer.

The 1970s and 1980s were decades of expansion. Procter & Gamble purchased more companies and opened new factories. In 1984, Procter & Gamble added a new dimension to its most visible and popular product, Tide laundry detergent, by introducing Liquid Tide. In 1986, came the first shampoo and conditioner combined into one bottle, called Pert Plus. Next in the line was the company’s push into makeup and perfumes, with the purchase of Noxell, which owned the Cover Girl, Noxzema, and Clarion brands. Procter & Gamble had now entered the all-important teen market. Targeting the younger generation, P&G bought Sunny Delight brand of juice drinks in 1989, which was very successful in US and UK.

The Twenty-First Century and Beyond

Some of the company's major purchases include Old Spice bath and body products for men (1990), Max Factor makeup (1991), Giorgio Beverly Hills perfumes (1994), Iams Company pet foods (1999), and Clairol hair care products (2001). The company sold its Duncan Hines cake and cookie business in 1998 and its once-famous Crisco shortening in 2001. New household products like Febreze odor-fighting sprays and Swiffer cleaning wipes were launched, as well as more shampoo varieties such as Pantene Pro-V.

By 2002, Procter & Gamble had reorganized its entire business to focus on the global growth of its famous brands and to add new products ahead of its competitors. Its biggest buy in company history is Gillette in 2005, forming the largest consumer goods company and placing the Anglo-Dutch Unilever into second place. This added brands such as Gillette razors, Duracell, Braun, and Oral-B to their basket.

Procter & Gamble, a company with record revenues of $76 billion and which spends more than $2 billion on research and development, continues to offer products that appeal to every age group: from infants (diapers and baby wipes) to teenagers (Cover Girl makeup, Hawaiian Punch, Pringles potato chips) to parents and grandparents (prescriptions, bath and body care products) to even cats and dogs (lams pet food and treats). That's a remarkable feat for a small soap and candle company.