Indian Banking Growth

From docile also rans to go-getters, our banks have come a long way

Sandeep Singh
Posted online: Friday, August 10, 2007

Plush computerised branches, high profile corporate culture and aggressive nature is what the Indian banking sector looks like now, six decades away from when customers lacked access and banks lacked growth. It has been a slow but steady movement over the past 201 years since State Bank of India got established in 1806 (as Bank of Bengal), to now when we have 88 scheduled commercial banks in the public, private and foreign banks category offering a wide variety of services.

The major changes in the banking system started post-Independence. In 1949 came the Banking Regulation Act which empowered RBI to regulate, control and inspect Indian banks. New banks were now required to take licences from RBI to start operations. Between 1949 and 1969 a lot of steps were taken. First the RBI assumed the power to reconstruct and compulsorily amalgamate banks, as a result of which over 200 banks were merged or liquidated between 1962 and 1980. An important move in 1961 was the deposit insurance, which insured depositors’ money.
Under the New Bank Branch Licensing Policy in 1962, which has not been successful in its motive, the stress was on opening branches in unbanked or underdeveloped areas of the country. We still have around 500 million unbanked people in our country and that is the prime area of focus of bankers today, said KV Kamath, managing director and CEO of ICICI Bank: “The biggest challenge today is to bank the unbanked.”
Nationalisation of 14 big commercial banks happened in 1969. Six more private sector banks got nationalised in 1980. This gave the government sizeable control over credit delivery. With nationalisation of banks coming up, growth of banks started to pick up in terms of operations. Demand deposits and savings deposits started picking up fast.
But like all other sectors, 1991 was the turning point for banks as well. The Narsimaham Committee suggested phased reduction of the CRR/ SLR along with reforms in accounting standards, income recognition and capital adequacy norms. Licences were given to private banks, which revolutionised the banking sector in India. Private banks have brought growth. ICICI Bank, carved out of ICICI in 1994, is second only to SBI which has a two century old history.
Backed by technology, private banks raised service standards. Demand deposits expressed as a percentage of GDP, which stood at 0.4 per cent in 1950, rose to 1 per cent in 1972 (the year of nationalisation), to 4.8 per cent in 1991 to 22 per cent in 2006. In short, the growth spurt has come only post-liberalisation.
Going forward, the focus of 28 public sector banks, 29 private banks and 31 foreign banks is going to be consolidation, growth, quality and penetration. Reason: the industry is smaller than the top 50 banks of the world. Clearly, while banks have come a long way in the past 60 years, the way’s longer over the next 60 years.

http://www.indianexpress.com/story/209654.html