If Indian industry has confidently hit the growth trail, that pick-up in activity is best reflected in the banking sector, which after all is as candid a mirror of a country's economy as you could ever find. And as the 10th BT-kpmg annual list of India's Best Banks reveals, most of India's financial intermediaries have been keeping pace with the deepening market economy, riding the opportunities that come along with reforms even as they brace themselves for increased competition-both foreign and private-by strengthening prudential norms and leveraging technology to ensure that the growth engine hums smoothly along.

Of the 56 banks ranked this year (another 30 with five branches or less have been ranked separately), five of the top 10 have it made it the honors list of top 10 banks for the last three years in a row. Yet, the roster of names isn't exactly predictable. True, you'd expect the superior asset quality of the large foreign banks to polevault them into the top half of the list, but the new private banks as well as some of their good old public sector counterparts are standing up to be counted. What also paints a better picture for the banking industry-more so for the public sector-is the robust retail growth notched up in 2002-03, accompanied by structural reforms in the banking sector, right from branch and manpower rationalisation to foreclosure and asset reconstruction legislations, which have started bearing fruit.

The big Story

So what does this year's BT-KPMG Best Banks survey throw up? The biggest story of this year's ranking is the comeback of the PSU banks. For the first time in 12 years, there are all of four PSU banks amongst the top 10. And 12 in the top 20. The corresponding figures last year were three and 10 respectively. Corporation Bank (#2) and Oriental Bank of Commerce (# 8) remain among the top 10, but it's the surge of the relatively smaller PSU banks like Andhra Bank, from #27 last year to #10, and State Bank of Patiala, to #4, that's fascinating. Andhra Bank has shown enormous improvement in its working in the recent past and the bank seems to have taken cognisance of the new market dynamics to renew its strategies. The largest bank, State Bank of India, has slipped to #19 from #10.

The new #1 bank is HDFC Bank, the new private sector bank, climbing up a notch from #2 last year. The bank has made steady progress up the listings, from an inconspicuous #12 in 1996-97 to #1 in 2002-03. The thrust on retail on both sides of the balance sheet continued to gain momentum, thereby allowing the bank to grow as well as to expand margins. Moreover, despite the shift to NPA recognition norms of less than 90 days, the bank's NPAs as a percentage of net advances is 0.4 per cent.

Slips and Slides

Unsurprisingly, four large foreign banks, Standard Chartered (#3), ABN Amro ( #6), Citibank (#7) and HSBC (#9) are hogging the top slots. A little surprisingly, however, last year's top dog ABN Amro has skidded to #6, and Citibank has slipped three notches.

You will find that though these large foreign banks have better productivity ratios relative to most of the Indian banks, the reason for the slide of these banks is the intense competition from new private sector banks and some of the nimble public sector banks in retail lending. These four large foreign banks with a full service presence across all products account for over 70 per cent of the total assets of all the foreign banks in India.

In a separate listing of 30 foreign banks with five branches or less in the country, Deutsche Bank remains at #1, but there are some smaller foreign banks that have been affected by impaired assets on account of credit concentrations, or reported losses on account of low operating revenues and consequently moved down in the ranking.

Among the old private sector banks, The Jammu & Kashmir Bank stays put at #5, aided by the margin expansion and asset growth that have been driving profits. Improved asset quality is also helping the bank reduce its provisioning requirements. Then there is Karur Vysya Bank (#16), which was started in the textile belt of Karur in the South and has since changed its profile completely, again through a retail thrust. Some of these old private sector banks are likely acquisition targets, as is evident from ING Group's increasing its stake in Vysya Bank from 20 to 44 per cent or the amalgamation of Nedungadi Bank with Punjab National Bank.

Life for the bottom-trawlers continues to be tough. These banks have little hope of finding their way up as long as their sticky assets keep growing year after year. You have Global Trust Bank #50, Dena Bank #52, and Dhanalakshmi Bank #54. Almost all of these banks are faced with serious asset quality problems requiring large amount of provisioning. They have no choice but to shape up or be taken over.