Good banking is produced not by good laws, but by good bankers.”
Disclaimer: All the views in the blogs are personal of the author not attributing to anyone.Introduction –
In a globalized world, every country’s economic nerve centres need to be interconnected, robust, sensitized to the needs of its citizens and capable of adjusting rapidly to changing economic dynamics. It is in this context that a country’s banking network assumes supreme significance. Following independence, Indian banking soon fell into the quagmire of crony capitalism and connected lending. The banks were mostly in the realm of the private sector, and high-value loans were liberally advanced to nepotistic borrowers, directly or indirectly connected to the bank promoters, and quite literally, bank owners. In addition, the era of the 60s witnessed a debilitating war with China, followed soon after by a war with Pakistan. Apart from the wars, the 1960s were also severely discomposed in the aftermath of two droughts, which set the stage for negative GDP growth rates, double-digit inflation, and declining foreign exchange reserves. It was against this backdrop that the then Prime Minister, Mrs. Indira Gandhi, announced the nationalization of banks on July 19th, 1969.
With the inauguration of the Modi era in India’s Union government in 2014, several initiatives have been taken towards the PM’s vision of a 5 trillion dollar economy. Among one of the flagship programmes in this context was the concept of Digital India. Vide this, the government has attempted to bring technology to the grass-roots of the Indian political economy. There are now opportunities for farmers getting real-time information on farm prices, the “Aayushman Bharat” initiative wherein technology has allowed ordinary Indians to receive medical advice online, the launching of education portals that bring quality learning even to students in remote villages, and the e-office idea which has thrown open job possibilities in the realm of back-office systems and call centres. A potent concept that has been delineated under Digital India has been the notion of online banking. Under this, MGNREGS workers now don’t need to go to distant areas to collect meagre wages. The money is now directly credited to their bank accounts. This has obviated the influence of usurious middlemen and money lenders, who had hitherto exploited uneducated villagers. To put this idea into practice, the government launched the Jan Dhan Yojana, under the aegis of which 15 million bank accounts were opened on a single day – a record included in the Guinness Book of World Records.
New horizons –In recent times, the RBI had set up an internal working group to deliberate on governance systems in private banks. One of the recommendations pertains to allowing domestic conglomerates to acquire controlling stakes in private banks. This has received myriad reactions – both positive and negative – from different segments of society. Former central bankers like Raghuram Rajan and Viral Acharya have expressed strong concerns, while some of India’s leading business houses like Tatas, Birlas and Piramals have welcomed the RBI panel’s recommendations and have expressed keen interest in setting up banking entities of their own. Presently, matters are still at discussion stage, but it may be mentioned that such deliberations can play a very important role in the evolving structure of Indian banking. For instance, the RBI will have to venture into issuing guidelines on consolidated supervision – basically to lay a strict roadmap on how such an entity’s economic role and performance has to be adjudged, given that the conglomerate would have financial and business interest in other sectors of the economy. On more sound footing was the RBI panel’s recommendation on allowing large NBFCs – those with an asset base of Rs. 50,000 cr or having 10 years of operation – to obtain banking licenses. This would be permitted even if the NBFC is part of a conglomerate. While welcomed by financial media, this idea is likely to receive only muted interest from NBFCs. This is because banking sector players are required to confirm with mandated CRR and SLR requirements, which may be far too restrictive from the perspective of NBFCs.
There are also discussions between economists and central bankers on certain issues like down-scaling of CRR and SLR. Basically, CRR or Cash Reserve Ratio is the mandated percentage of net demand and time liabilities which commercial banks have to keep with the RBI. The CRR is presently at 3%. As for the SLR or Statutory Liquidity Ratio, this is the amount of net demand and time liabilities which the commercial banks have to invest in liquid assets like gold, government bonds, or other approved securities. The SLR currently stands at 18%. A reduction in CRR and SLR would enhance systemic liquidity, while also ensuring that public sector banks meet their mandated priority sector lending targets. In addition, this move would reduce market distortions. These measures can “boost the banking sector’s ability to support credit, facilitate effective financial intermediation and reduce fiscal exposure”, according to Poonam Gupta, Lead Economist, World Bank, and Dhruv Sharma, Senior Economist, World Bank. While the mandated levels of CRR and SLR are open to discussion and debate, the fact remains that these are salient features of the Indian banking system – ensuring that any systemic downturn in the economy does not stifle the flow of funds, while ensuring that the monetary wealth of India’s savers and the capital adequacy of its banks is shielded from the vagaries of the financial economy.
In 2019, the government had announced the consolidation of 10 public sector banks into 4 entities. After this move, there are now 12 banks in the public sector space, down from 27 earlier. This was done in order to streamline their performance and give them opportunities of scale. The Finance Minister also announced new forms of governance in public sector banks to enable them to adjust in a more fluid manner to PM Modi’s initiative of achieving a 5 trillion dollar economy. There have also been efforts at introducing more effective and efficient risk and compliance management best practices in India’s PSBs. The number of private banks in India now stands at 22.
Finally, in an attempt to increase banking penetration and add renewed emphasis to its financial inclusion initiatives, the government has directed banks to open as many as 15,000 branches in the current fiscal year. As of early 2019, India had more than 120,000 bank branches and number of ATMs slightly exceeding 2 lakhs. However, the penetration of banking services in India’s rural districts is still woefully inadequate. In 2021, the government has mandated a reform push for banks, aimed at ensuring a bank branch within 15 kms radius of every village devoid of basic banking infrastructure.
Non-Performing Assets (NPAs) –The downturn in the automobile industry and the real estate sector, in addition to the ILFS debacle, had left banks stranded with rising NPAs. The negative sentiment was further exacerbated by the meltdown of IDBI Bank, followed by Yes Bank, and yet again by PMC Bank. It was against this backdrop that India entered the Covid era. The pandemic led to layoffs and muted salary payments in global economies, including India, which was already struggling with high unemployment figures. As increasing numbers of loans turned delinquent, banks and NBFCs started reeling under sky-rocketing NPA figures.
To deal with the rising defaults, the government has embarked on a loan restructuring programme in August 2020. Under this facility, it was decreed that loans that had not reported delinquency as of March 1st, 2020, would be eligible for restructuring.
While restructuring of defaulting loans will always be on the cards, the best route forward would be a recovery of the economy from the Covid induced recession. With vaccinations beginning in earnest across the global economy, and India assuming a leading role in manufacturing the vaccine at Serum Institute, it is but a matter of time when the economy emerges from recession and industries embark on higher employment figures with robust bottom lines. The banking sector’s renaissance will simply follow soon after.
Banking Statistics (as reported in popular media) –- Besides 12 public sector banks and 22 private banks, the Indian banking system consists of 46 foreign banks, 56 regional rural banks, 1,485 urban cooperative banks and 96,000 rural cooperative banks in addition to cooperative credit institutions.
- Assets (credit issued by public sector banks) stood at Rs. 107.83 lakh crores (US$ 1.52 trillion) in FY2020.
- During FY16 – FY20, bank credit grew at a CAGR of 3.57%.
- During FY16 – FY20, deposits grew at a CAGR of 13.93% and stood at US$ 1.93 trillion by FY20.
Let us compare our banking industry with developed countries banking industry with a table :
| India | Japan | UK | USA | |
| Population above 20 years | More than 50% of the population is below 25 years of age and more than 65% is below the age of 35. | Japan has a rapidly aging population, with about 48%people over the age of 65. Almost 83% of Japan’spopulation is over 20 years old. | Approximately 79% – 80% of Britain’s population comprises of people over the age of 18. | Almost 71.4% of American citizens are over 20 years of age. |
| Number of bank account holders | The total number of accountholders is around 29.48 crore, including 17.61 crore account holders from rural and semi-urban areas. | No information available in the public domain. But Japan is a developed economy, so it can be assumed that every citizen over the age of 18 would have access to a bank. This amounts access to a bank. This amounts to approximately 10.51 crores people as of 2019. | As of March 2021, there are approximately 5.47 crores individuals in the UK with a bank account of some description. There is very sketchy information in the public domain. Again, given that Britain is a developed economy, it may be assumed that citizens over the age of 18would have a bank account. This amounts to approx.5.28 crore. | There are approximately40 crore retail bank accounts in the United States, including checking and savings. |
| Number of banks | There are presently 34 banks operating in India, of which 22are private sector banks and12 banks are in the public sector domain. | Japan currently has 200 banks operating in its territory. | There are 367 banks operational in the UK, making it the biggest banking system in Europe and the fourth-largest in the world. | As of December 31st, 2019, there were 5,177 commercial banks and savings institutions functional in the US. |
| Credit extended by banks | Bank credit grew to Rs. 107.05lakh crores in the first nine months of FY21. | Japan’s domestic credit reached Rs. 123.6 crores in January 2021. | The composition of UK banks’ assets stands at around Rs. 44.11 lakh crore as in February 2021. | The bank credit extended by all commercial banks in theUnited States stood at about Rs. 1,152 cr as in March 2021 |
| NPAs | According to ICRA’s estimates, the Gross NPAs of Indian banks were reported at Rs. 7.4lakh crores, or 7.1% of advances, as of December 31st,2020 | The Non-Performing Loansratio of Japanese banks was recorded at 1.1% in September 2020. | As reported in the media, the NPA in British banks were noted at 1.1% in December 2018, the latest time for which data is available. | The United States NPL ratio stood at 1.6% in September 2020 |
| Profit of banks | As per latest information available -Private banks – Profit ofRs. 20,907.29 crores.PSU banks – Loss of. 75,513.1 crores. | Rs. 0.764 lakh crore in March 2020 | Rs. 2.3 lakh cr as of 30th June 2019 | Approximately 0.06 croresQ3 2020. (This downturn may be attributed to Covid. Corresponding data is not available for UK and japan, among developed economies). |
