Development of robust financial system is sine qua non for sustained growth of the economy. Commemorating the 75th anniversary of Indian independence, a relook at the journey of banking will unveil the task ahead. Going into the historical perspectives, banking practices was seen even during Kautilya’s time (325-275 BC) but modern banking institutions dates back to 1770 when Bank of Hindostan was established that functioned until 1832. The three presidential banks – Bank of Bengal – 1806, Bank of Bombay – 1840 and Bank of Madras – 1843 formed the bedrock of banking structure that culminated into formation of Imperial Bank of India in 1921 undertaking hybrid role of a commercial bank and central bank of the country.
Beginning with Allahabad Bank in 1865 which got merged with Indian Bank in 2020, ‘Swadeshi Movement’ in 1906 paved way for proliferation of several Indian owned banks, some were set up in the princely states in India. Some of them still thrive as Public Sector Banks (PSBs).
At the time of independence, there were 97 scheduled commercial banks including Imperial Bank of India, 557 non-scheduled banks and 395 cooperative banks. Total of 1049 banks hardly held deposits of Rs.1261 crores and loans of Rs. 475 crores. In the turmoil that followed independence, there were large scale closure and amalgamation of banks.
On the recommendations of Hilton Young commission in 1925, Reserve Bank of India Act was passed in 1934 leading to establishment of Reserve Bank of India that commenced its operations in April 1935. RBI was further reinforced by enacting Banking Regulation Act -1949 empowering it to regulate banks.
But privately owned banks in formative years of independence used to mobilise deposits at large from all walks of life but provided loans mostly to select large industrial houses and owner driven entities. When 5-year plans were rolled out, the critical role of banks came under scrutiny. The lopsided credit expansion and vested interest in lending led to implementation of social control on banks in 1967 to ensure equitable distribution of developmental credit. After RBI became operational in 1935, the role of Imperial bank of India was changed into a full-fledged commercial bank. Looking to its large-scale business and spread, it was converted into State Bank of India in 1955 by passing SBI Act. SBI thus had become the first state-owned bank in India much before nationalisation of banks.
Amid the consolidation of banking sector, just before nationalisation of banks – in June 1969, there were 73 banks with 8187 bank branches where 17 percent of branches were in rural areas. Bank’s deposits could reach to just Rs. 4646 crores and outstanding credit was languishing at Rs. 3599 crores that too concentrated in few pockets.
- Banking after nationalisation 1969 – 1991:
Finding not much impact of social control on banks and sluggish growth of banks, 14 major commercial banks were nationalised on July 19, 1969 and another 6 in 1980 thus bringing 90 percent of banking then into the fold of government including that of already state owned SBI.
After nationalisation of major banks, growth and credit deployment picked up pace to expand branch network in rural and semi-urban areas. Several policy initiatives were undertaken to reinforce the banking penetration. Introduction of Lead Bank Scheme – 1969, State Level banker’s Committee (SLBC) – 1971, Priority Sector Lending norms – 1974 combined together to provide impetus for expansion of credit to agriculture, industry, small-scale entrepreneurs and certain identified sectors of the economy.
Regional Rural Banks (RRBs) joined in 1975 to support commercial banks for faster reach to unbanked centres. Setting up Deposit Insurance and Credit Guarantee Corporation of India (DICGCI) in 1978 infused confidence to depositors. Establishment of NABARD in 1982 further consolidated growth of formal banking system in hinterland.
During close to two decades after nationalisation, PSBs did formidable efforts to spread banking services in rural areas. As a result, the number of bank branches reached – 59,752 in 1990 as against 8167 in 1969. Out of them, rural branch network reached 58.2 percent as against 17 percent before nationalisation, semi-urban presence was 19 percent while the rest were in cities. During the period, bank deposits reached Rs.28,609 crores and credit outstanding reached Rs.17,352 crores. After adoption of New economic policy, bank reforms began in 1991 pushing competitive growth in banking sector.
- Post Reform banking 1991 – 2022
Based on the Narasimham Committee reports, banks have adopted internationally accepted prudential norms – capital adequacy standards under Basel Committee framework, income recognition and asset classification (IRAC), provisioning norms, entry of new private banks and other reform measures created systemic force for PSBs to gear up to enter buyers’ market.
Adoption of Core banking technology, formation of National Payment Corporation of India (NPCI) in 2008, interoperability among banks, issue of RuPay debit cards in 2012 and introduction of UPI app in 2016 brought massive change towards digital banking. The demonetisation of high value currency in November 2016 and pandemic from 2020 further provided fillip to digital banking system. The entry of fintech and increased collaboration with non-banks, neo banks (virtual banks), entry of differentiated banks – Small finance Banks and Payment banks expanded banking outreach further to interior terrains serving people at the bottom of the pyramid.
Implementation of ‘Indradhanush’ reforms in August 2015 improved governance in PSBs as a follow up of deliberations in Gyan Sangam – I. The next set of reforms in PSBs led to introduction of Enhanced Access and Service Excellence (EASE) framework in January 2018. EASE reforms metrics was designed in collaboration with Boston Consulting Group (BCG) and Indian Banks Association (IBA) that was upgraded every year and EASE 5.0 is now under implementation in PSBs.
Another strategic move was the large-scale consolidation of PSBs reducing them from 26 in 2017 to 12 by April 2020. The stronger and bigger PSBs together with private peers and non-bank financial intermediaries together created a healthy competitive banking landscape.
There was massive spurt in banking infrastructure after 1991. As on March 31, 2022, the number of bank branches reached 1,51,320. ATMs worked out to 2,15,061 while the POS Terminals reached 60,70,142. The debit cards were 917.6 million while credit cards reached 73.6 million providing alternate delivery channels.
Due to such all-round massive efforts, the bank deposits reached Rs.169 trillion while credit stood close to Rs.123 trillion.
Led by the popularly referred JAM trinity – Pradhan Mantri Jan Dhan Yozana (PMJDY), Aadhar and Mobile, the banking outreach made significant progress. As a result, the financial inclusion index of RBI reached 56.4 in March 2022 up from 43.4 in 2017 while digital payment index (DPI) reached 349.30 against 100 in March 2018.
When the three distinct phases of banking developments – 1949-1969, 1969-1991 and 1991-2022 spanning across 75 years is seen in retrospect, banking spread in India accelerated with adoption of state-of-the-art technology and rapid expansion of banking touchpoints touching the lives of millions. With more sophisticated technology and diversified products, banks should accelerate their role in credit dissemination to move the economy towards the US $ 5 Trillion economy in near term and US $ 10 trillion economy by 2030.
Views expressed above are the author’s own.
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