The Hindu Business Line : 60 credit-worthy years

As independent India turns 60, banks are poised for a leap into the future. Significantly, international rating agency Moody’s has rated the country’s banking system as ‘stable’.

Commercial banking has a 200-year history in India. Three presidency banks were born in early-19th century to support commerce and industry. At the turn of the century, some princely states and individuals set up banks with local flavour, with some jo ining the international league. The Reserve Bank of India was established in 1935 in the private sector, but was later nationalised in 1949.

In 1947, there were 96 banks doing business with just Rs 1,019 crore of deposits and Rs 424 crore of credit. In the six eventful decades that followed, banks played a big role in promoting savings and investments, helping the nation’s economic independence. With present deposits at Rs 26,68,187 crore and credit Rs 18,95,801 crore, the growth has been highly impressive. Savings has grown from 10 per cent in 1947 to 32.5 per cent today.

Social banking

By nationalising the Imperial Bank of India in 1955, the Government laid the foundation for social banking. State Bank of India began reaching out to smaller towns and the nationalisation of 14 major banks in 1969 gave a boost to branch expansion. Population per branch came down from 64,000 in 1969 to 16,000 in 2007, despite population explosion.

The launch of the lead bank scheme in 1972 heralded a planned and coordinated effort for the development of backward and rural areas. Agriculture and small industries and trade received an impetus during the 1970s and 1980s. Based on experience, the government shifted emphasis from area development to beneficiary-specific schemes for employment generation and elimination of poverty. ‘Class banking’ transformed itself into ‘mass banking’.

Farm credit recorded steady growth despite distortions such as loan melas and periodical write-offs. About Rs 500 crore of credit, spread over 14 lakh accounts in 1972, improved to Rs 25,000 crore and 248 lakh accounts in 1995. The past decade saw the figures soar to Rs 1,72,684 crore and 290 lakh accounts.

At the other end of the spectrum, banks have done admirably well in handling foreign trade, investments and remittances, with the burgeoning trade, capital inflows and the $215-billion strong reserves bearing testimony.

Reviving sick banks

Revival of sick banks cost the exchequer thousands of crores of rupees. That the current market value of the capital is much more than the cost is a matter of satisfaction. Accepting market realities and the need to raise further capital, the Government allowed dilution of its stake in public sector banks.

Wilful defaulters looked to litigation as a way out to avoid loan repayment. But after several measures, the recovery climate has improved.

Swift reforms

The RBI, hitherto known for caution and conservatism, moved swiftly on reforms. To avoid conflict of interest and focus on its regulatory functions, it created the Board for Financial Supervision in 1994 and introduced the offsite monitoring and surveillance system in 1995. Responding to rising concerns over money laundering, it tightened the ‘know your customer’ norms in 2002. Growing volumes saw banks flounder in the accounting, fraud prevention and customer service areas. The securities scam broke out in 1992. Self-preservation prevented trade unions from accepting mechanisation.

In the 1990s, new private banks were allowed to open shop with Rs 100 crore capital and 100 per cent computerisation upfront. This had the desired effect of stirring the PSBs and their unions into action. As subsidised funding dried up as a consequence of reforms, and commercial banks ventured into term lending, ICICI and IDBI sensed the blowing winds of change and opted to become universal banks through backward mergers. Retail banking was pursued aggressively, with heightened lending for houses, cars, personal needs and small and medium enterprises. The move, in turn, helped generate jobs in the construction, automobile and services sectors.

Micro-credit mantra

At the turn of the millennium, the Government turned its attention to micro-credit as a means for credit delivery to the poor through self-help groups. Though four-crore families have been brought under the micro-credit umbrella with the help of 26 lakh SHGs, the qualitative aspects leave much to be desired. Just enough to meet consumption needs, the average credit hardly enables a sustainable income-generating investment. Drinking water, healthcare, education, storage, roads, transport and marketing do not find a place in the plan.

Access to credit is important but not at a usurious rate of 24-36 per cent. There is a clear case for restructuring and improved regulation of ‘microfinance’. The proposed new legislation on money le nding is expected to address this issue. Of the 8.9-crore farm households in India, 59 per cent have bank accounts. Only 51 per cent have access to formal credit, with another 21 per cent managing credit from other sources. World over, governments are worried over the progress of economic reforms to the ‘exclusion’ of large segments of vulnerable people. Aiming at 100 per cent coverage and unmindful of the pitfalls of such statistics-oriented approach, lately India too has embarked on ‘inclusive banking’. A no-frills savings-bank account is not an end but only a step in that direction. Provision of credit and other inputs is far more important. The real test also lies in accomplishing the gigantic task of leveraging technology. Real-time banking With the advent of core banking solution, a customer deals with a bank and not just the branch. Anywhere, anytime banking (through ATMs), instant money transfers, electronic clearing and funds transfer at point of sale have radically transformed banking, minimising paperwork, frauds, delays and transit losses, and leading to better cash management in business. Truncation of cheques is under implementation. Paperless and cashless society is no more a pipe dream.

Challenges ahead

Past achievements pale in the face of the challenges ahead. Customer orientation continues to be supreme. An ombudsman, a slew of products, competitive rates and best of technology can’t be substitutes for excellent service, innovative products and a problem-solving approach. It is the ‘attitude’ and not the ‘aids’ that can deliver. Sophisticated asset-liability and risk management will limit business losses. Adopting best international practices in compliance and corporate governance, prudent accounting and sound legal standards would be hallmarks of efficiency and excellence in management. Consolidation is a vital issue that needs to be addressed as Indian banks would be vulnerable in international markets where size and strength matter. In a service industry, human resources are crucial. Indian Banks Association and the Indian Institute of Banking and Finance should focus on empowering bank employees with knowledge, skills and the right attitude to meet the challenges of the ever-changing contours of banking.

(Statistics: RBI)

The author is a former Managing Director of State Bank of Mysore.