Banking is as old as our civilisation. However, in Indian context, it assumed a contemporary new organised form during British rule. The earliest of the ‘joint stock banks’ was the Bank of Hindustan set up in 1770.
Headway Post Independence
Later, post Independence, a major headway in Indian banking scene came with the setting up of Reserve Bank of India (RBI) on April 1, 1935 under RBI Act 1934 on the recommendations of John Hilton Young Commission 1926, which was also called Royal Commission on Indian Currency & Finance. The RBI is the central bank of the country and was nationalised with effect from January 1, 1949. Originally it was a shareholders’ bank, which was taken over by the Central Government under Reserve Bank (Transfer of Public Ownership) Act 1948 with a paid up capital Rs. 5 crore. RBI’s head quarter is in Mumbai. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) “to regulate, control, and inspect the banks in India.” The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a licence from the RBI, and no two banks could have common directors.
Nationalisation and Mergers
Nationalisation of commercial banks commenced with the nationalisation of Imperial Bank of India and its conversion into State Bank of India in July 1955. Then, conversion of eight major State-associated banks into subsidiary banks of SBI happened in 1959. Later, the Union Government issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969.
A second dose of nationalisation of six more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19.
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks. New Generation tech-savvy banks included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank (earlier as UTI Bank), ICICI Bank and HDFC Bank.
On April 1, 2019, the state-run Bank of Baroda became India’s second largest public sector bank after the merger of Dena Bank and Vijaya Bank with it.
On August 31, 2019, Union Finance Minister Ms. Nirmala Sitharaman announced a major consolidation plan of the Public Sector Banks (PSBs)— merging 10 of them into just 4 entities.
Reserve Bank of India
RBI has authority in India to issue currency notes (called bank notes) under signatures of Governor. The stock of currency is distributed with the help of currency chests spread all over the country. RBI transacts government business and manages public debt. SBI or any other bank is appointed Agent where RBI does not have office. It provides Ways & Means advances to Union Government. RBI is said to be Bankers’ Bank since it keeps a part of deposits of commercial banks (as CRR) and acts as lender of last resort by providing financial assistance to banks. It provides export credit refinance, Liquidity Adjustment Facility & Marginal Standing Facility. RBI is also called as controller of banks as it provides banking licence and puts names of banks in 2nd Schedule of the RBI Act. It issues directions, carries inspection (on-site as well as off-site) and exercises management control. RBI controls credit in the country. It is the RBI which formulates the Monetary Policy of the country and controls the supply of money. The main objective of monetary policy is to investigate inflation and control the interest rates with cash flow or quantitative squeeze. RBI can fix interest rates (including Bank Rate) and exercise selective credit controls. Various tools such as change in Cash Reserve Ratio, stipulation of margin on securities, directed credit guidelines, etc. are used for this purpose. It also carries sale and purchase of securities which are known as open market operations. RBI is responsible also for maintaining external value of Indian currency as well as the internal value. Foreign exchange reserves are held by RBI and it has a wide power to regulate foreign exchange transactions under Foreign Exchange Management Act, 1999.
Indian Banking Industry Today
Indian banking industry has recently witnessed the roll-out of innovative banking models like payments and small finance banks. The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments Innovation Index (FPII).
As of October 2019, the Indian banking system consists of 20 public sector banks, 22 private sector banks, 44 foreign banks, 44 regional rural banks, 1,542 urban cooperative banks and 94,384 rural cooperative banks, in addition to cooperative credit institutions. India’s retail credit market is the fourth largest in the emerging countries.
As of September 2018, the Government of India launched India Post Payments Bank (IPPB) and has opened branches across 650 districts to achieve the objective of financial inclusion. The total value of mergers and acquisition during 2017 in NBFC diversified financial services and banking was $2,564 billion, $103 million and $79 million respectively.
In May 2018, total equity fundings of microfinance sector grew at the rate of 39.88% to Rs. 96.31 billion from Rs. 68.85 billion in 2017-18. A number of steps have been taken to promote the functioning of PSBs, including, inter alia, the following:
1. Reforms, as per the PSB Reforms Agenda adopted by PSBs –
i. increasing access to banking services from home and mobile through digital banking and enhanced customer ease,
ii. enabling easy accessibility to senior citizens and the differently-abled, through online update of pension life certificates, etc.
iii. instituting efficient practices for effective coordination in large consortium loans by restricting number of lenders in consortium and by adoption of standard operating procedures,
iv. strict segregation of pre- and post-sanction roles and responsibilities for enhanced accountability,
v. ring-fencing of cash flows and use of technology and analytics for comprehensive diligence across data sources for prudent lending,
vi. institution of transparent and robust one-time settlement mechanism with automated escalation and monitoring,
vii. monitoring of loans above Rs. 250 crore through specialised agencies for effective vigil,
viii. establishment of stressed asset management verticals in banks for focused recovery and timely and effective management of stressed accounts,
ix. institution and implementation of a risk appetite framework for a structured approach to manage, measure and control risk and check aggressive and imprudent lending,
x. monetisation of non-core assets for strengthening capital base,
xi. enabling faster bill realisation for MSMEs through discounting by banks on the Trade Receivables electronic Discounting System (TReDS),
xii. enabling proactive reach-out to borrowers and stepping up cluster-based financing to MSMEs, and
xiii. developing human resources by rewarding top performers and enabling specialisation through job-families, and role based learning for executives.
2. Comprehensive checking of all accounts above Rs. 50 crore that involves Non Performing Assets (NPAs) being checked for willful default and fraud.
3. In-principle approval for MSME loans up to Rs. 1 crore within 59 minutes by PSBs through the 59 minutes portal.
4. Strengthening governance through professional and arms-length top-level appointments of Whole Time Directors (WTDs) and Non-executive Chairmen of PSBs through the Banks Board Bureau, institution of performance-based extension in WTD appointments and bifurcation of the position of Chairman and Managing Director (MD) into those of non-executive Chairman and an MD & CEO.
The Non Performing Assets and Solutions
Over the last decade or so, the Indian banking sector has been grappling with the problem of NPAs. However, the good news is that according to an RBI report, the NPAs of Indian banks reversed trend in March 2019 after rising for seven years, helped by a conducive policy environment and Insolvency and Bankruptcy Code, 2016 (IBC). The NPAs declined to 9.1% in March 2019 from 11.2% in 2018.
The SARFAESI Act has been amended to make it more effective, with provision for three months’ imprisonment in case the borrower does not provide asset details and for the lender to get possession of mortgaged property within 30 days. Also, six new Debt Recovery Tribunals have been established to expedite recovery.
PSBs have created Stressed Asset Management Verticals for stringent recovery, segregated pre- and post-sanction follow-up roles for clean and effective monitoring, initiated creation of online one-time settlement platforms, and committed to monitoring large-value accounts through specialised monitoring agencies. Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms are expected to provide further impetus to banking growth. With government determined to provide enabling environment, India’s banking sector seems set for robust growth in times to come. On a positive note, it is worthwhile to note that India’s digital lending stood at $75 billion in FY2018-19 and is estimated to reach $1 trillion by FY2023-24 driven by the five-fold increase in the digital disbursements.