1. KAL AAJ AUR KAL
An Overview of the Indian Banking sector
against the backdrop of Politico, social,
economic and cultural environment.
By Sanjeev Kumar
2. Preview
This is a report on the health of the Indian banking sector
of the past, present and the future under relevant
circumstances and various views be it social, political
economic or culture attached to it. If I shall start with an
incident related to my native place Raxaul – a sleepy town
in the east of Bihar. Few years back a report was published
in one of the leading newspaper of India that the district of
East champaran is among the poorest of the districts in
whole country and it ranks at last position in the listing of
the total 543 districts of India. It gave me a shock, not only
because i am a native but also because we have seen the
best of times during late seventies and eighties.
3. To understand this circle of developments First we should
review the backdrop of the events that happened during the
post independence era of sixties, seventies eighties and
nineties.
4. 1951-54: In a survey of Bhartiya grammen saakh sarvekhan (Indian
villages credit report) it was said that commercial banks contributed to
only 0.9% of the farmers total income. While lenders have contributed
24.9% and commercial lenders has 44.8%.
1955: Nationalisation of State Bank Of India.
Between 1969 and 1980: More banks had been nationalised.
Establishment Of National Agricultural and Rural Bank Of India
(NABARD), ICICI, IDBI and SIDBI etc.
FIRST THE ECONOMIC AND POLITICAL VIEWPOINT:
5. 1984: Operation Blue Star- Late Mrs. Indira Gandhi gave the green signal
to operation blue star which launches the state in the swift and bloody
war against Sikhs and terrorists.
October’ 1984: The charismatic leader was assassinated.
December’ 1984: Rajiv Gandhi lead congress to form Government at the
centre after landslide victory at the general elections, garnering an
unparallel 400 plus seats in the parliament.
6. 1985: A new messiah called Dhirubhai Ambani emerged in
the India stock market. His penchant unabashedly
rewarding his shareholders made him the darling of Dalal
Street.
1985-1986: From 265 in Dec 84 the BSE index scaled to 322
points by march 1885. In February 1986 it doubled to 638.
In 18 months the rise had been a good 131%, meaning an
equated annual jump of 75%
7. 1987: Rajiv Gandhi lost his midas touch. A series of breath taking
scandals lead to a direct confrontation with the media.
1989-91: 3 different governments were formed and dissolved during a
short period of three years.
1991: Gulf war erupted between Jan and May between the oil
producing nations and few superpowers of the world. Berlin wall fell ,
Germany was unified.
May 1991: India went to polls again three years ahead of schedule. Rajiv
Gandhi assassinated on May 21’1991. P.V. Narasimha was nominated as
new PM of India and he made Dr. Manmohan Singh Finance Minister.
8. June 1991: India was drifting into economic collapse. We
almost defaulted on the installment obligation which we
owned to the World Bank. Inflation has touched a high of
18%. Export was coming to a grinding halt, stagflation was
imminent. Rupee was fast becoming an international joke,
leading to the flight of Indian capital. Foreign reserve was 1
Bn. Dollars, an amount that could foot just a fortnight’s
import bill. It meant that the country was on the threshold of
Bankruptcy and whole system on brink of collapse.
9. Late 1991: Sensex reached 1000 mark for the first time.
1992: Raja J Chellaiah’s Fiscal reform papers with wide ranging
suggestions for a mind boggling clean-up in the direct and indirect tax
front came in handy.
Two sharp doses of devaluation were followed up by a series of savage
import restrictions and a belt tightening credit squeeze that had most
industries choking.
MRTP: Monopoly restrictions trade practices &
FERA: Foreign Exchange Regulations Act were edited beyond
recognition.
10. Industrial licensing was done away with and capital goods and raw
materials were allowed to be freely imported.
1992-93: Private sector was allowed to enter the mutual funds
market and foreign institutional investors were given free
access to Stock Market.
Jan 1992: Sensex crossed 2000.
Feb 29’ 1992: It crossed 3000.
April 22’1992: Sensex zoomed to 4500 before closing at 4467.
11. The same day great bond scam broke out and the market
began its inexorable slide downwards.- The Rs. 4000 crore
scam was perhaps to be written off as development
expenditure for capitalism.
1991-94: Emergence of Asian Tigers economies- Singapore,
Malaysia, Indonesia, Taiwan and Korea.
1991-92: USSR under the leadership of Mikhail Gorvachev
embraced Capitalism but with disastrous consequences. It
lead to disintegration of USSR.
12. 1993: World Trade Organisation- as a member of WTO India signed the
General Agreement on Tariff and Trade, a multilateral treaty subscribed
to by 107 governments, which together accounts for more than 90% of
the world trade.
With that the world became “Borderless” in the words of Kenniche
ohamas.
Till 1996: P.V. Narsimha Rao’s governance with prudence worked
towards development at all fronts. Major achievements were
devaluation of rupee, FDI started in Indian corporate for the first time.
Disinvestments in the Public sector Units to make them more
competitive and to align them with the market.
13. 1999-2004: A.B. Bajpayee’s 1st BJP’s government named
National Democratic Alliance (NDA) was formed at the centre.
Major achievements were Continuation of liberalisation
activities in terms of FDI and FII’s investments, opening the
Indian Market space further.
Flexibility in Exchange rates and full convertibility of Current
and Capital account.
14. 2004-09: First term of Dr. Manmohan Singh’s Congress government
named United Progressive Alliance (UPA) was formed. They took major
steps towards reforms in Money market, SEBI, PFRDA, Stock markets,
RBI, Consolidation of nationalised banks, Mutual Funds etc.
15. 2009-2014: In May 2009, 2nd Congress’s UPA government
under the leadership of Dr. Manmohan Singh was formed at
the centre. Although it will be remembered for many financial
Scandals which broke out during the 2nd stint. These include
the infamous telecom Scam, Commonwealth Games Scam,
Coal Mines allotment Scam, Adarsh Housing Scam and many
others. Various scams lead to its defeat in next general
elections of May 2014.
16. CRISIS Of 2008-09:
After growing at around 9% per annum between 2002-2007, the Indian economy started
began to slow down in the early to late 2007, much before the global crisis happened.
The main problem in August 2008 seemed to be inflation which has reached 17.8% due
to sharp rise in crude in July 2008 at $ 149/barrel. Food inflation was at 11.4%.
As per the economic survey of 2008 from September 2007 to January 2008 FII inflows
were at $22.5 Bn. as against $11.8 Bn. from April till July 2007. The outflows of FII’s
started in 2008; they fled due to the unwinding of stock positions and to replenish cash
imbalances abroad. There was net outflow of portfolio investments amounting to $16
Bn. between Feb and June 2008. With the outflows of FII’s there was depreciation in
the rupee’s value and the stock market also witnessed a collapse. The rupee value fell
from Rs. 39-40 to dollar in Jan-April to Rs. 50/dollar.
17. The stock market crashed twice in the year 2008, first in Jan it fell 1430
points and then in the month of Nov it fell 1982 points.
The overall impact of the crisis on the Indian economy was first evident
in the shrinkage of GDP growth falling from 7.8% in the first half of
2008-09 to 5.8% during 2nd half of the year. Growth improved to 6.1% in
the first quarter of 2009-10 & to 7.9 in 2nd quarter of the financial year
09-10.
18. ROLE OF RBI AND GDP GROWTH:
The other aspect of the sector was that during these times of turbulence of nineties and
early 2000 the RBI has constantly been performing the required role of a regulator with
continued prudence in deciding the essential bank rates, viz. CRR, SLR, repo rates, and
other lending rates.
To get an overview of this if we will see the plot of graph between GDP quarterly
growth rate against time over a period of 10 years from 2005 till 20114-15, the same
shows a flat near 8% growth between 1st quarter 2005 till quarter 4th of 2010-11 with a
dip to 3.8% during Q3-Q4 of 2008-09, which again improved in Q3 2009-10. And a
second dip during Q1-Q4 of 2012-13 to just above 4.5% which is now improving to
7.5%.
19. Figure 1: QUATERLY GDP GROWTH 2005-06Q1 TO 2014-15Q4 (Per cent)
0
2
4
6
8
10
12
14
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15
Q1 Q2 Q3 Q4
Sources: Office of Economic Adviser, Department of Industrial Policy and Promotion, Central Statistics Office, Reserve
Bank of India and National Stock Exchange
20. THE SOCIALAND CULTURAL VIEWPOINT:
The social and cultural impact of this growth is self-explained in terms of the growth of
the Indian Economy and the impact of the same on the banking sector. To understand
these first we need to understand the following limitations of the Indian Banking sector.
Household Savings:
Household savings continue to be the largest contributor to gross capital formation.
Household savings has two components- financial and physical, where the latter
typically does not lend itself easily to financial intermediation in the economy. If we see
a plot of the household savings in the banks in past few years we can observe that
contribution of physical assets to the household savings has stood stubbornly above
60% throughout the last decade. However the recent reports says that the proportion
of the two has improved with a skew towards financial assets at 56.53% and
towards physical assets at 43.47% in the year 2016.
21. 0
5
10
15
20
25
2004-05 2009-10 2010-11 2011-12 2012-13 2013-14
Household (Financial) Household (physical)
Figure 2: Household savings in the banks in past few years.
Source : Central Statistics Office. Caveat: New method employed in
2013-14.
22. Double Financial repression on the balance sheet of Indian Banks:
INTRODUCTION
The policy discourse around banking in India has thrown up many specific ideas and
challenges recently, prominent amongst them being the problem of stressed and
restructured assets, the difficulty in acquiring the resources to meet the looming
Basel III requirements on capital adequacy, and the need for governance reform
(see for example the Nayak Committee Report). These pertain to mostly PSB’s.
Stepping back from these proximate issues allows a deeper analytical diagnosis of the
problems of Indian banking which in turn provide the basis for more calibrated
solutions. These pertains to both public sector as well as private sector banks.
The challenges in the Indian banking system lie elsewhere and fall into two
categories: policy and structure. The policy challenge relates to financial
repression. The Indian banking system is afflicted by what might be called “double
financial repression” (Figure 3).
24. 1. Financial repression on the liability side:
Figure 4 plots the average rate of return on deposits in all scheduled commercial banks
in India over the last 14 years. These are calculated as the difference between the
weighted average return on term deposits as reported by the Reserve Bank of
India minus the CPI-IW Inflation rate for that year as reported by the Central
Statistics Office. High inflation and limited return on banks’ assets has ensured that the
rates maintained by banks fetched households a negative real rate of return on deposits.
Financial repression on the liability side has arisen from high inflation since2007,
leading to negative real interest rates, and a sharp reduction in households’ financial
savings.
25. Figure 4: Average rate of return on deposits
-6
-4
-2
0
2
4
6
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Average Real Rate Of Return On Deposits
Source: RBI and Central Statistical Units
26. As India exits from liability-side repression with declining inflation,
ranging in between 5-6% in past 5 years (2011-2016), the time may
be appropriate for addressing its asset-side counterparts.
The structural problems relate to competition and ownership. First,
there appears to be a lack of competition, reflected in the private sector
banks’ inability to increase their presence. Indeed, one of the paradoxes
of recent banking history is that the share of the private sector in overall
banking aggregates barely increased at a time when the country
witnessed its most rapid growth and one that was fuelled by the private
sector. It was an anomalous case of private sector growth without
private sector bank financing. Even allowing for the irrational
exuberance of the Public Sector Banks (PSBs) that financed this growth
phase, the reticence of the private sector was striking.
27. 2. Financial repression on the Assets side:
Financial repression on the asset side of the balance sheet is created by
the statutory liquidity ratio (SLR) requirement that forces banks to
hold government securities, and priority sector lending (PSL) that
forces resource deployment in less than- fully efficient ways
The Statutory Liquidity Ratio is a requirement on banks to hold a certain
share of their resources in liquid assets such as cash, government bonds
and gold. In principle, the SLR can perform a prudential role because
any unexpected demand from depositors can be quickly met by
liquidating these assets.
28. Statutory Lending Ratio (SLR):
SLR requirements have traditionally been high. From 38 per cent in the
period before 1991, there was a dramatic decline to about 25 per cent at
the end of the 1990s. Since then however, the number has hovered
around the quarter century mark, only recently falling to 22 per cent. As
of Feb 4, 2015 the minimum requirement is 21.5 per cent of total assets.
Banks typically keep more than the required SLR, the current realised
SLR is in fact over 25 per cent. In practice, the SLR has become a
means of financing (at less than market rates presumably) a bulk of
the government’s Fiscal Deficit, suggesting that SLR cuts are related
to the government’s fiscal position. It makes a case for gradually
reducing this requirement- both to free up capital for the banks and to
make the market for government bonds more liquid
29. Priority Sector Lending (PSL)
A key component of equality of credit in India has been the so called “priority sector
lending”. All Indian banks are required to meet a 40 per cent target on priority sector
lending. The law states that all domestic commercial banks, public or private, have to
lend 40 per cent of their adjusted net bank credit (ANBC) or credit equivalent
amount of their off balance sheet exposure— whichever is higher—to the priority
sectors, and number for foreign banks (with more than 20 branches) is 32 per cent.
Further, public sector banks have clearly defined rules they have to follow in the
subcategories- agriculture, micro and small enterprises, education, housing,
export credit and others. The most important amongst them is that 45 per cent of
all priority sector lending must be made to agriculture.
From previous many decades the most challenging factors of the Indian
banking sector has been the funding of Government’s Capital account
deficit and Fiscal deficit through the SLR which resulted in the squeeze
on the balance sheets of the public sector banks. And the other aspect is
the Priority sector lending PSL.
30. 3. Comparative analysis of banking and credit:
We start with the size of credit in India. In terms of a number of
indicators, the Indian financial sector does not appear to be an outlier.
The overall credit- GDP ratio as well as the proportion of total credit
accounted for by the banking sector is not out of line taking account of
India’s level of development. Moreover, its size hasn’t increased
dramatically over time compared to other countries. While the boom
years of the last decade both spawned and were fed by a credit boom,
originating in the public sector banks, irrationally exuberant behaviour
was not out of line with similar experiences in other countries.
31. 0
50
100
150
200
250
1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
CHN IND JPN KOR
Figure 5: Domestic Credit to GDP% Ratio. India below low middle income
countries
32. 4. Comparative analysis of Public sector banks and Private sector banks:
In the context of the Structural Problems related to Competition and
Ownership.
A primary concern of the health of the banking sector
in India has been lack of sufficient internal
competition. Private banks have slowly been brought
into the arena since 1990. It is important to note that
India’s approach was not privatisation of public sector
banks, rather it was based on allowing entry of new
private banks. This strategy worked reasonably well in
the telecommunication and civil aviation sectors but
did it work in banking? The results have been mixed.
33. Figure 5 A and B show that India saw a steady rise in the
size of private sector banks till 2007 both in relation to
deposit and lending indicators. Thereafter, the process
slowed considerably (and of course in the aftermath of the
Lehman crisis, there was a flight to safety toward the PSBs).
So, one of the paradoxes of recent banking history is that
the share of the private sector in overall banking aggregates
barely increased at a time when the country witnessed its
most rapid growth and one that was fuelled by the private
sector. It was a case of private sector led growth
without private sector bank financing. Even allowing
for the irrational exuberance of the PSBs that financed this
growth phase, the reticence of the private sector was
striking.
36. INCLUSIVE GROWTH OF BANKING SECTOR:
RBI has taken several steps during 2005 to set up a full
network of financial services all across India. These
steps were regulatory as well as others. In the starting
the banks were asked to open up no-frills account or
zero balance accounts in all the unbanked areas
viz. Small villages, blocks and talukas all across the
country in 2012 this was called Adharbhut bachat
bank savings account and later the same was termed
and are now known as JAN DHAN Accounts.
37. Rangrajan Committee:
The financial inclusiveness was the primary goal for which a Committee was
formed under in 2008. In the advices of this committee among several steps
the important ones were savings, credit, micro insurance and refund and
safety of funds to the poor.
As a result to implement the recommendations of this committee, the banks
were asked to take up any one district to achieve the target of 100% financial
inclusiveness.
Banks were given a target to provide facilities in all the distant villages at low
cost based on ICT (Internet Communication and Technology) banking
correspondent model.
The board has started in 2010 a three years financial inclusiveness plan FIP.
Prepared a roadmap to reach all the villages of population up to 2000 till
2012, and in villages of population between 1000 and 2000 till 2013.
Availability of at least 4 banking products.
Opening of at least 25% new branches in the unbanked villages of the
country.
Kisan Credit card started to be issued in this direction was another
important step.
38. THE NPA Resolution:
In the meantime the following other challenges in the
form of NPA’s Non performing Assets came to bother
the banks across all levels. If we see the plot of level of
NPA’s in all the banks during 2011 to 2016-06-30, the
same shows a steep climb.
40. When we see the level of NPA’s across various
Industries based on size then we see that it is majorly
provided to the Big and medium sized units rather to
the medium and small enterprises.
In recent developments starting of Small and medium
enterprise/unit development and reconstruction
agency MUDRA. Banks started to provide loans to
small enterprises whose financial requirements were
below 10 lacks
42. REFERENCES
My Personal Diary
Newspaper reports and Magazines
Indian Economic Survey 2014-2015
Yojana – A Government. Publication.
RBI Reports
Central Statistical Organisation.
World Bank databank.
