While supporting the financial and economic structure of our country, banking itself has undergone evolutionary process and revolutionary changes during last 25 years.The nationalisation of 14 major commercial banks in July, 1969 followed by six others in April, 1980 added a new dimension to the role of commercial banks as catalysts in promoting the economic growth of the country. The banks were called upon to shoulder new social responsibilities and there was a major change of traditional concept of `class banking' to the new concept of `mass banking'.
The post nationalisation period witnessed commercial banks spreading mostly in rural and semi urban areas-thus reducing the density of banking coverage on reaching to the doorsteps of common man and diversifying the credit flow towards priority sector, implementation of a number of poverty alleviation schemes, setting up of employment generation opportunities and professionalisation of bank management.
Consequently, banking has seen a significant increase in the volume of deposit in relation to Gross Domestic Product from 13% in 1969 to 38% in 1991 and increase in credit from 10% to 25%. During the period, share of rural deposit increased from 3% to 15% and share of priority sector crossed 40% of net bank credit.
Thus this era was characterised by the decline of private banking and the dominance of social control over commercial banking.
Consolidation
The mid eighties saw the commercial banks consolidate the gains of expansions. At this point of time, 90% of the Commercial Banks were in the Public Sector and closely regulated in all respects. Prices of assets and liabilities (rate of interest of deposits and advances) were fixed by RBI, prices of services were fixed uniformly by IBA, composition of assets were also some what fixed towards priority sector lending, small loans etc. after meeting up CRR/SLR requirements. Locations of branches were approved by RBI; salary structures were negotiated by IBA and approved by the Government of India. In this way, commercial autonomy in vital decisions was at its minimum and productivity and efficiency were given low premium.
Reforms
As a result of the continuing financial profligacy of the government along with close control on vital functions, banking became dependent and inefficient in the early 1990s. It was a situation that called for drastic changes in banking and financial sector if the economic situation was to be brought under control. Partly as a result of internal crisis precipitated by the Foreign Exchange shortfall and partly as a result of external pressure emerging from global compulsions in the financial sector, initiating sweeping reforms became a matter of survival. To combat the situation, RBI introduced LERMS (liberalised Exchange Rate Mechanism system) in 1991, which was the beginning of an era of freedom to the banks in the history of Foreign Exchange transaction in a somewhat limited manner.
In 1991, the Narasimham Committee recommendations were a milestone in the direction of reforms and brought about a total transformation in the banking sector. The radical measures were :

• Preparation of Balance Sheet of Banks in a more transparent form
• Introduction of capital adequacy norms.
• Income recognition and asset classification norms and provisioning on loan assets.
• Partial deregulation of interest rates on deposits and advances
• Freedom of entry for private banks.
• Permission to public sector banks to approach the markets for raising their capital
• Upgradation of technology (computerisation)

If we look at the reforms we shall observe that they have basically two objectives viz.

• Improving the customer service and thereby making banking more competitive.
• Improving bottom lines of Banks by introduction of prudential norms and transparency in balance sheet.

This reform process has seen several banks posting losses and some of them having their capital base eroded completely. But after initial pangs, banks are eventually coming to terms with having to survive in a competitive market and are looking lot more healthier than they were in the years of total control.
The twin objectives of operational flexibility and financial autonomy have been largely achieved so as to continuously enhance efficiency, productivity and profitability of the banks.
The public sector banks as a group registered a strong turnaround from net loss of 3.71 billion in 1995-96 to a net profit of nearly 31 billion in 1996-97. Their operating profit also showed a rise to 88.88 billion and the level of net NPA fell to 9.1% by March, 1997. Net inflow of non-resident deposits recorded a three fold increase in 1996-97, reflecting increased confidence in the economic performance. Six years through the reform process indicates that the banking sector has apparently responded well to it.
Banks can look back with satisfaction at having responded effectively to the challenges posed before them from time to time- whether of social control or of reforms.
To sum up, banks will have to adjust their systems of functioning, venture into new areas, improve efficiency levels by inclusion of trained and skilled manpower and restructure their organisations. Only then they can face the challenges of the future more confidently and proactively.

• What are the ill-effects of bank nationalisation ?

Nationalisation of bank aimed, inter alia, at mobilisation of vast resources of the country, and simultaneously to channelise the same for higher productivity in a shortest possible time and to make the banking facilities widely available to the large section of the people. The nationalised banks were explicitly set quantitative targets to expand their network in semi-urban and rural areas and to direct credit to the priority sectors. Over a period of time, these banks became a major source of lending to the Government, and thus meeting the fiscal deficits. There was a dramatic expansion of Banks' branches throughout the country. Many of the branches though were unprofitable, but they did play a positive role in mopping up financial savings. The inflation remained reasonably low and real interest rates were only marginally negative. However, bank nationalisation was not free from its ill-effects. There was directed allocation of resources towards low productive assets (both credit and investment). As a result, the country had erected unprofitable and unsound financial sector.
The average return on assets was extremely low with the massive growth of branch expansion and the quality of service deteriorated. The real health of the banks could not be assessed, because of unscientific accounting procedure and the banking sector not having prudential norms to maintain its financial discipline. The banking industry was loaded with huge Non-performing Assets and per employee business dropped substantially.

• How do you see the Banking Industry responding to the changes ?

The economic reforms initiated by the Government of India in early 90s have brought a sea change in operational environment of financial sector, its functioning and outlook of Indian banks. The Indian Banking Industry has been undergoing a metamorphosis since the commencing of liberalisation in 1991 following the recommendation of the Narashimham Committee on the financial system. Measures like :

• Reduction in Reserve requirements
• Deregulation of interest rate
• Introduction of prudential norms relating to capital adequacy, income recognition, assets classification and provisioning
• Liberalisation of banks' licensing policy etc.
• Forced the Banks to re-look at their business strategies
• Opening up of doors to private sector banks and foreign banks have added to the competition

The financial markets will be continually characterised by four, significant trends, viz., financial liberalisation, disintermediation, internationalisation and technological advancement.
Financial liberalisation leads to the rise of nonbanks like finance companies, mutual funds, investment banks, insurance companies and even non-financial firms as purveyors of liquidity and risk management services.
Disintermediation erodes banks' share and role because banks evolved within a culture of very cautions credit risk-taking. This culture has been encouraged or even demanded by regulators for which banks have erected expensive credit, audit and risk management departments. The rise of secondary markets for bank loans not only helps to satisfy the liquidity needs of non-traditional investors but also conscripts banks' role.
Internationalisation is a result of liberalisation and disintermediation. It encourages consolidation and concentration within the industry.
Indian Banking is on major technological upgradation drive after having successfully absorbed the international standard in their operating norms. It is commonly perceived that technology is important to enhance the quality of customer service and to make it customer-friendly; it will also improve the operational efficiency and productivity. Banks are expected to use all new technological developments in the field of computerisation and communication.

• How do you see the Banking Industry in the new millennium ?

The transformation of the financial system in the new decade is certainly not beyond capabilities of Indian Banking Industry. The industry has enormous strength in the system alongside weaknesses. A highly talented manpower is definitely a potential asset, they only need to be motivated. In the year 2000 and beyond, it is definite that the banking industry has to strive very hard to achieve significant increase in productivity, efficiency and profitability in the competitive banking scenario.
They should maintain capital adequacy ratio prescribed by the Government and to meet their credit portfolio free from contamination so as to acquire quality assets.
The nationalised banks in particular have to go long way towards professionalisation in their operations to build up public confidence in banking system. The Banking Industry has to play active role to its Assets Liabilities Management to reduce risk and simultaneously to improve its profitability.
In the quest of providing better and efficient customer service a technological revolution is a must in the Indian Banking Sector.
Indian Banks have already experienced the impact of partial convertibility and marching ahead to play an important role in the challenging environment which is bound to surface out no sooner full convertibility comes into effect. The Financial Institutions in India are going to play a pivotal role in the Globalised Economy. Indian Market with its enormous potential will be a centre of interest of the World community and Indian Banks have to find their places in this competitive scenario.
It is the performing banks who will survive and those who are unable to keep pace with the changed scenario and unable to respond quickly to fast changes would be left behind in the race.

• This year as a whole bank's financial results were better than expected - what do you attribute ?

The key reasons attributed for achieving comparatively better results during this year by the Banking Industry as a whole were as under :

• The average call money rate normally remained below 8 to 9% throughout the year and Banks enjoyed better spread both in advance and investment portfolios.
• Reduction of CRR resulted into better liquidity due to announcement of YTM at a favourable rate on Governments securities.
• Average deposit growth of the industry was around 20%. The inflation rate was contained at around 6%.
• Better Credit off take by the Industries in the second half of the financial year.
• Better performance in the area of recovery.
• Most of the Banks improved their non-interest income. 

• But priority sector credit targets have not been met in many cases-what is the reason behind this ?

The reasons are primarily 

• Huge accumulation of NPA
• Poor recovery
• Fear of accountability on the part of the banks' officials
• Political interference in Credit disbursements
• The spread available in lending is low
• Available securities are not adequate to cover facilities extended by the bank
• High cost of stamp duties for creating mortgage of land and properties to be placed as security to the Bank
• Long drawn legal process for recovery of Bank dues
• Book-keeping/record maintenance are not professionally done-as a result the health of the unit sometimes cannot be ascertained
• Susceptibility of the unit becoming sick is due to poor infrastructural facilities and uncertain market demands.

• Do you think the uncertain political climate has hindered the development and unshackling of the banking sector in India ?

Changes in political climate alter the development process of Banking sector. When we aim at improving the financial system to international standards, it is necessary that supporting sub-systems like legal and labour laws, economic policies and environment confirm to international standards. These receive set back due to political uncertainties.

• What is your opinion about `Open Economy of India' ?

As of now the Indian Economy does not seem ready for `Open Economy' condition. After witnessing the economic crisis in South East Asian Countries it has been realised that without having a stable economic growth it is difficult for any developing countries to go in for free economy leading to capital account convertibility of the currency. India is now passing through a phase of liberalisation and is tightening its financial reforms. It is also to be understood that the financial reform already undertaken by India is irreversible and it is a matter of time only when these are implemented completely. We may definitely look for an `Open Economy' when we can visualise a situation where India's

• Current account deficit has been pegged at 2% of GDP
• GDP growth is 6% and above
• Exports have been growing at an annual rate of 17% in dollar terms;
• Non-oil import growth rate has stabilised at around 15% in dollar terms
• The country's foreign exchange reserves are equivalent to say 6 month's import requirement
• Interest rate is in line with international level of interest rate and
• Inflation rate is contained below 3%

• Any comments on Government Policy ?

Since no specific policy is mentioned, it is difficult to comment on this issue. However, so far as financial system is concerned, laws relating to recovery of loans, documentation, disposal of cases in courts and many other areas need to be reviewed and upgraded. Similarly, labour laws need to be amended to ensure higher productivity. In all these areas, as yet, no clear policy indicators are visible. As such, there are uncertainties and therefore, halting growth of the system.

• Do you have any observation on any other issues ?

No other particular issue comes to force at present. I am thankful to the editors of the magazine for giving an opportunity to express my views on the financial system of the country.
While supporting the financial and economic structure of our country.

Contributed by
Sharda Singh
Chairman & Managing Direcor
UCO Bank