Journey of Banking in India

Vijay Prakash Srivastava

Today  having a bank branch around is an obvious thing for most of us. Whether we live in a city or a village, we can find a bank branch nearby .Now banking services are available at an affordable cost to everyone. But this was not the case till a few decades ago. In our country lot many changes have taken place since we got independence on 15 August 1947.Some changes have been big and some small. Banking is one area which had undergone maximum changes both in terms of reach and the services offered.

19th July this year marked the completion of 50 years of bank nationalization. This day in 1969,  14 big banks of the country having  deposits over Rs 50 crore were nationalised by the government to serve better the needs of  development of the economy in conformity with the national policy objectives. On 15th April 1980 , six more private banks were nationalized.

Banking has an interesting history in India. The Bank of Hindostan  was the first bank in the country, established in the year 1770. After that the General Bank of India was set up in the year 1786 but it failed after 5 years. The East India Company  established Bank of Bengal, Bank of Bombay and Bank of Madras between 1806 and 1843 which used to be called Presidency banks. In 1920 all these three banks were  consolidated into Imperial Bank of India. Allahabad Bank was the first bank to be established by Indian nationals followed by Punjab National Bank. Both these banks were established respectively in 1865 and 1894. Five more banks viz. Bank of India, Bank of Baroda, Canara Bank, Indian Bank and Bank of Mysore  were established between 1906 and 1913. In order to organize banking function and activities government introduced  Banking Companies Act in 1949 which was later converted to Banking Regulation Act. In 1955 government took the ownership of Imperial Bank of India asking it to offer extensive banking services all over the country.

Bank Nationalization: The first 14 banks to be nationalised included Central Bank of India, Punjab National Bank, Bank of India, Indian Bank, Dena Bank, United Commercial Bank, United Bank of India, Canara Bank, Allahabad Bank, Bank of Maharashtra, Corporation Bank, Indian Overseas Bank and Union Bank of India.

In the second phase Andhra Bank, Punjab & Sind Bank, Corporation Bank, New Bank of India, Oriental Bank of Commerce and Vijaya Bank were nationalised.

In 1993 New Bank of India merged with Punjab National Bank.

All the big private banks were held by one industrial house or the other. As a result wealth and economic power of these banks were exercised by a few and the larger population was be reft from the advantages of banking system. It  was also observed that growth of Indian commercial banking was extremely slow and restrictive. A common man hardly had anything to do with these banks. The lending policy of the banks was discriminatory. Mostly loans given by them were to large and medium sized industries and already established business firms. There was not enough control  to ensure end use of loans and it was not unusual to find banks' money being used for anti-social purposes like hoarding, black marketing and speculation etc. All in all the banking system in the country was not in good shape and needed radical changes. In 1967 the idea of social control of banks was floated. Social control of banks was proposed to be the middle path between complete ownership of government and status quo. it meant  greater participant of banks  in the economy through state intervention. It was felt that banking can play a crucial role in social and economic development of the country, all it needs  suitable policies and their effective implementation.

It was expected that with nationalization it would be able to increase revenue as the profit earned by banks will come to the government. Government ownership also intended to provide security to depositor's money in banks. Adequate credit flow to farming and small scale industries to ensure development at grassroot level was expected.

Prior to bank nationalization commercial banks used to make indiscriminate lending. After nationalization in 1980, the banks were asked that a significant portion of bank loan is allocated to priority sector which includes agriculture, small scale industries, low cost housing etc. With passage of time the scope of priority sector was enlarged to include more activities.

Post nationalization maximum number of bank branches were opened at rural and semi urban centres which hitherto were devoid of formal banking set up. Such massive branch expansion has no parallels  anywhere in the world.

Scheduled commercial banks in India developed banking habits in Common Indian citizens, encouraged them to put their savings in banks and offered them need based finance at reasonable rates. Poor and excluded population of the country found out that they can also approach banks.

Various government schemes were launched through these banks. Prominent among these schemes were Integrated Rural Development Programme (IRDP), Self -employment Scheme for Urban Poor(SEPUP), Self -employment Scheme for Educated Unemployed Youth (SEEUY), Differential Rate of Interest (DRI) etc. We're talking of early schemes. Of late many more schemes have been added which include Sukanya Samriddhi Yojana, Mudra Yojana etc.

Regional Rural Banks: Considering that more than two third of Indian population lived in villages, government of the country felt that another layer of banks to cater specifically to rural areas was needed. Thus came the idea of Regional Rural Banks or  Gramin Banks. An ordinance was promulgated on 26 September 1975 later to be replaced with Regional Rural Bank Act 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. RRBs were established mainly to meet the credit requirements of small and marginal farmers, landless labourers, artisans etc. These were envisaged to be low cost financial intermediaries. RRBs were expected to carry local feel and familiarity with expertise of nationalised commercial banks. The first RRB, Prathma Bank came into existence on 2nd October 1975, birth anniversary of Mahatma Gandhi. Sponsor bank, central government and state governments are the stakeholders in  a RRB. After restructurings there are now about 56 RRBs in the country.

Banking reforms: With a view to make Indian banking competitive and in tune with globally accepted practices, various reform measures were initiated. Initial reforms were related to administered structure of interest rates, reserve requirements and credit allocation to certain sectors. Except for certain specific classes, interest rates in the banking sector have been largely deregulated. To enhance efficiency and productivity of government banks they were exposed to private banks. Guidelines were issued  for entry of new private banks and  foreign banks were allowed more liberal entry. After 1993, many new private banks were set up. Foreign direct investment in private banking space was permitted up to 74 percent subject to conformity with other guidelines. 

A number of measures were taken to enhance the transparency in banking system and strengthening regulatory standards. Disclosure norms were tightened too. Bank licencing policy was rationalised with enhanced freedom to individual banks in opening, closing and merging their branches.

On all important issues working groups were formed headed by eminent people. For example Committee on Financial Systems was headed by Shri M Narsimham, High Level Committee on Balance of Payments was chaired by Dr. C Rangrajan.

India has been associated with Basel Committee on Banking Supervision. With implementation of Basel II norms, commercial banks in  our country have adopted globally accepted standardized approach for credit risk and basic indicator approach for operational risk. Now Reserve Bank of India wants Indian Banks to ensure implementation of Basel III norms by March 2020.

The above reforms have wide positive impact on the Indian banking sector. The present capital adequacy of Indian banks is comparable to  those at international level. Profitability of banks and return of assets improved. By optimising manpower costs banks could achieve per employee higher productivity.

Technology in banks: The biggest transition Indian banking sector has been is the advent of technology. Moving from Advanced Electronic Ledger posting machines, banks could successfully adopt Core banking Solution which made anytime, anywhere banking possible. Most of the banking operations are now computerised with real time output generation. The first  automated teller machine (ATMs) in the country was installed in the country in 1987. Now ATMs can be found all across the country and people have got so used to it. Passbook printing machines, cash deposit machines, note sorting machines are being widely used. National Payments Corporation of India (NPCI) has made significant contribution in establishing robust payment and settlement system in the country. National Electronic Funds Transfer (NEFT) and Real Time Gross Settlement (RTGS) have simplified money transfer with reduction in paperwork.

Card culture in the country has got a boost with more and more people making payment through debit and credit cards. Mobile wallets have come as a big revolution with most banks having come out with their own wallets. Mobile phones have transformed into banking devices on which fund transfer, balance enquiry and transaction alerts have been facilitated. Internet banking  has become equally popular. All these technological developments have reduced the need to personally visit bank branches. More and more people are performing their banking operations on move.

The present decade is going to prove more revolutionary as far adoption of new technology is concerned. Blockchain, artificial intelligence and chatbots have been making their way in banks and soon it will not be unusual to find a robot answering your banking queries.

Contribution of Banking Sector: Today Indian economy is among the fastest growing economies in the world. Infrastructure is in a much better shape and consumer spending is on rise. In all these banking sector has made a significant contribution. Financial inclusion was a big challenge for a country of India's size, we've done well in this. Banks' financing to agriculture, micro, small and medium enterprises (MSMEs), and students (loan for higher education) have improved the country's social and economic lot. Payment banks and Small Finance Banks have added reach of banking. India Post Payments Bank is an unique experiment of its kind.

Present state of banking: A massive clean- up exercise was launched to strengthen the balance sheets of banks. With intensive efforts banks have been able to recover a large proportion of their non-performing assets. Restrictive measures like prompt corrective action are now being eased and government has done its best in recapitalising the banks to keep them in healthy shape. Even in the latest budget presented on 5th July 2019, a provision of Rs. 70,000 crore has been made to improve capital flow in government banks.

Challenges before banks: Banks are yet to recover some of their bad loans and have to reorient their efforts in this direction and ensuring that they continue to finance viable and genuine proposals. Equipping their manpower to meet emerging challenges has to be another area of attention. They have to create a balance in social obligation and financial prudence and learn from their past experiences. Already a new wave of merger between Public Sector Banks have been started with merger of Dena Bank and Vijaya Bank in Bank of Baroda. Few more mergers may be in offing. How to emerge stronger after merger is another challenge affected banks have to face.

(The author is associated with the banking sector and is based in Mumbai Email: v2j25@yahoo.in)

Views expressed are personal.