On July 19, 1969 the banking sector in India made a clean departure from its past with the nationalisation of 14 banks including Indian Bank.
The need for the nationalisation arose because private commercial banks were not fulfilling the social and developmental goals of banking which are so essential for any industrialising country. Despite the enactment of the Banking Regulation Act in 1949 and the nationalisation of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small-scale borrowers.
Banking has since evolved, growing with the growth in the economy. As the economy broke the barrier of Hindu rate of growth of 3.5% and moved upto 9% growth, banking also developed in terms of reach and penetration, tapping rural markets, in terms of providing services, innovation, process, structure customisation and in upgradation of technology. Undoubtedly, growth in banking and growth in economy are correlated.
The reforms of the 1990s brought about a sea change in the banking industry. In the post-reform period, banks have experienced strong balance sheet growth in an environment of operational flexibility. Concomitantly, the financial health of banks has improved significantly, both in terms of capital adequacy and asset quality. Moreover, this progress has been achieved while setting the groundwork for the adoption of international best practices in prudential and accounting norms. Increased competitiveness and productivity gains have also been enabled by proactive technological deepening and human resource management.
These significant gains have been achieved even while renewing our commitment to social banking viz., maintaining the wide reach of the banking system and directing credit towards important but disadvantaged sectors of society. The banking system?s wide reach, judged in terms of expansion of branches and the growth of credit and deposits indicates continued financial deepening.
Post reforms technology became an enabler, which has now become the key driver of banking business in India. Technology has led to quick and faster service which is accessible to a vast cross section of people with the minimum of cost. It has also expanded the reach of the banks through anytime and anywhere banking.
Now, in contrast to the stormy global scenario, India has by-and-large been stable despite experiencing the knock-on effects of the global crisis, through the monetary, financial and real channels. Our financial markets?equity market, money market, forex market and credit market?have all come under pressure mainly because of (i) drying up of overseas financing for Indian banks and Indian corporates; (ii) constraints in raising funds in a bearish domestic capital market; and (iii) decline in the internal accruals of the corporates.
All these factors added to the pressure on the domestic credit market and the export sector. The overall policy approach of both RBI and the Government of India has been able to mitigate the potential impact of the turmoil on domestic financial markets and the economy. In this regard the government introduced stimulus measures for the affected sectors to revive the economy. The Reserve Bank?s monetary policy stance has consistently been to balance growth, inflation and financial stability concerns. RBI has taken several measures aimed at infusing rupee as well as foreign exchange liquidity and to maintain credit flow to productive sectors of the economy.
Thanks to the finance minister and the governor of RBI, there are some signs of green shoots visible in the economy. The industrial sector has made a turnaround with a positive growth of 2.74% in the month of May?09. Manufacturing has also ended in positive territory. Core sector growth at 2.8% has lifted the sentiments that the revival in the infrastructure would pass on to the other sector.
A major area that should attract our focus, if India really has to become a global economic power, is to accelerate the developmental activities in the rural economy. Of the 6,34,321 villages in India, only 9,000 villages have more than one bank branch. This is despite the fact that there are 32,227 rural branches and they account for about 45 per cent of the total branch network. Close to 60% of rural households do not have a bank account and only 21% have access to credit from a formal source. Over 70 per cent of marginal farmers have no deposit account and 87 per cent have no formal credit. Less than 2% of rural households can access loans from a financial intermediary to meet unforeseen financial expenses.
The author is CMD, Indian Bank, winner of FE’s best nationalised bank award