Raravikar’s new booklet on Indian banking is just the kind of quick reading for a novice who would like to have a grasp of the Indian banking system over the past 75 years. The timing is appropriate as the nation celebrates its 75th year of independence. A foreword by Bibek Debroy adds the embellishment to this work.
Raravikar, who works in the RBI, has a ringside view of the system and working with the ministry of finance earlier adds to the nuanced view he takes on the system. He traces the history of the banking system even before independence and it will be of interest to note that professional banking started around 500 BC.
There is also mention of such activity in Kautilya’s Arthashatra where the concept of bills of exchanges, also called hundis, were used for carrying out transactions. The first bank in India was Bank of Bombay which was set up in 1720. This kind of trivia would hold the interest of the reader as the evolution process has been put together in just around 50 pages.
The author divides his narration across time periods, the first one starting post-independence till around 1967. Banking was largely driven by private players and the concept of interconnected lending remained where deposits mobilised were used for financing their own group of companies. There was not much focus on what we call inclusive banking today, which at that time pertained to agriculture. There were bank failures as early as 1948 and the RBI was not what it is today. The RBI got its authority in 1949 with the Banking Companies Act being passed. The author takes us then through the concept of bank mergers of failed banks as well as the setting up of Deposit Insurance Corporation of India in 1962. The Sixties were also typified by droughts where the government had to spend a lot of money and the RBI followed an accommodative stance. To enable this, interest rates also tended to be fixed with minimum and maximum rates.
The phase post 1967 till the time of reforms was typified by nationalisation, when the structure of banking was geared more towards meeting the larger expectations of the national aspirations. Public control of banks made it easier to also push through government agenda on spreading banking to rural areas as also ensuring banks lent money to agriculture, which was the need of the hour post the droughts. This also led to ‘loan melas’ to further credit growth. The author subtly points out that all this led to quite a bit of chaos in the system as the government, too, was borrowing from the system with the SLR being kept very high. Inflation resulted in rather large numbers. In a way the author is also indirectly cautioning on what could happen if the system is not regulated in an appropriate manner today.
The post 1991 scenario is split by the author in two phases, where the first one takes us swiftly through the myriad changes with a thrust on soundness and freeing the markets in every way. In a way it is a tribute to the Narasimham Committee that drew the blueprints for financial sector reforms. The focus continues with a larger description of what all was done on the recovery front post-1998, which was when the Asian crisis erupted. The models which were used in some of those countries were templates that could be used in India. The concept of what we talk of bad banks today as well as ARC sand SARFAESI concepts germinated from these experiences.
The author then takes us through the phase post financial crisis of 2008 with Basel being the fulcrum as BIS set the guidelines that all central banks took up and followed at their pace depending on local conditions. The reform under Indradhanush was the next big thing for Indian banking in 2014, which is still in the process of being followed.
The author also highlights governance issues where he believes the board and management need to be given more autonomy for running banks in a professional manner. One can guess that he is alluding to public sector banks as there is also talk of alignment of compensation of staff. This is a strong message being transmitted here.
This is a rather interesting narrative on the evolution of the banking system with some strong messaging along the way probably highlighting what pushed us back in the past which should not be repeated. The booklet should be useful for anyone who wants to know everything about this story in a concise form.
Madan Sabnavis is chief economist, Bank of Baroda
Indian Banking in Retrospect: 75 Years of Independence
Pp 79, Rs 99