Are Indian Banks Banking In The Right Way? Or Fooling People With Their Lagging Policies?

India is expected to be fourth largest economy by 2025. But is the economy controller, the lender, the investor ready to face the challenges of an emerging economy? Or are the banks, more precisely the banking policies, lagging?

Savings in India date back to the ancient times. Earliest savings were in the form of gold dug deep down in Earth. However, the first bank of India, Bank of Hindustan was founded in 1770 and got liquidated soon.

The largest and oldest in series is State Bank Of India. It is running since 1806. It started in Calcutta, which was the capital city at that time. Various private banks also emerged after that. HDFC Bank, ICICI Bank, Oriental Bank, Corporation Bank, Axis Bank, Bandhan Bank, are a few names amongst them.

The banker to all banks is Reserve Bank of India, which is often called the monetary policy regulator. 14 banks were nationalized by Indira Gandhi government in 1969 and later more banks in 1990. The nationalization was much needed to stimulate the shift of money management from home to bank and to build the trust of public in banks, which still lacks in rural areas.

Narsimha committee later altered the way banks work in 1991. The liberalization of the economy made it easy for private and foreign banks to enter. It reduced SLR (Statutory Liquidity Ratio) and CRR (Cash Reverse Ratio) to free bank resources. They recommended that decision of interest rates must rely on market forces.

Public banks then faced competition from private banks. As a result, in 1998, they started using technology. They started focusing on skill training and the much needed professional management of banks in order to make banks customer friendly.

Fast forwarding it to today, the present scenario of banking in India faces three key challenges:

• Low financial depth

• High share of NPAs (Non-Performing Assets)

• High concentration of PSB (Public Sector Banks)

The increase of NPAs from 2.78 LC to 7.33 LC from March’15 to June’17, led to declining of the ROA (Return on assets) and ROE (Return on equities) and contraction in PAT(Profit after Tax). These are alarming statistics that have led to a slowdown in industrial credit.

Recently, a 7-tier Mission, named Indradhanush was launched by the government. The salient features of this were:

• Bank Board Bureau - A body of eminent professionals and officials who will look after appointments.

• Capitalization – Investment of 70k crore in 4 years viz. 25k crore for the first two successive years and 10 k crore for the next two successive years.

• De-stressing – Flexibility and ease in issuing loans to various sector projects and implementing risk control.

• Framework of accountability - Introduction of quantitative and qualitative parameters for measuring banks performances and rewarding them accordingly.

• Governance reform - Gyan Sangam (a conclave of PSBs and FIs) to decide future policies and reforms

• Appointments - Separation of CEO and MD posts for smoothening and having a non-executive Chairman.

Banks reflect the way economy works in a country. In 2015, India outpaced China in GDP growth rate. However, there are 11 ATMs for 1 million people in India contrasting to a 37 ATM in China.

Banking sector must be made more competitive. Its governance must be improved. And additionally, to relieve the stress from banks of all financial institutions, there is a need for the development of corporate bond markets.

Keeping pace with the all-round development of our nation, banks need to introduce the next generation of banking with 4D’s (Development, Deregulation, Demographics, Disruption).

In the post demonetization era, we need to transform the way we bank from queues to smartphones. The emergence of cashless and branchless banking is a must. There is a need for innovation in ATM usage. To serve the MSME (Micro small and medium enterprises), new models must be formed.

It’s high time that banks change their vision, the way they work, and hence contribute their best to an emerging economy of the world.