Bank nationalisation expedited the
spread banking network
Says U S Ghose,General Manager,Allahabad Bank

Q.How would you look at the 25 years of nationalised banking from today's perspective?
A.The motto of bank nationalisation was equitable distribution of resources for balanced inter-regional and inter-sectoral growth and development of the country. Bank nationalisation helped spread of banking facility in the unbanked and underbanked areas. Moreover, it helped development of the banking habits among people. Responding to the rapid changes in societal affairs Indian banking has also undergone evolution in offering various products/services to the society. The first half of the period can be attributed as an era of rapid expansion of bank branches and the latter part as evolution in the development of products/services. Finally, through bank nationalisation formal credit sector made inroad to the rural sector that was earlier predominated by informal credit sector i.e. private moneylenders. The presence of formal credit sector and informal credit sector simultaneously, helped increase in flow of resources to the rural areas on one hand and decrease in the cost of credit i.e. interest rate on the other. Thus on today's perspective, bank nationalisation is the corner stone in the arch of India's quest for bank globalisation. In other words, nationalisation expedited the spread of banking network, which has been helping bank globalisation in a great way.

Q.What are the ill effects of bank nationalisation?
A.At the time of rapid expansion of branch network, the banks did not attend deeply the aspects of profitability and viability of a branch. Manpower policy was also not profit-oriented. Bank nationalisation attended a number of social objectives, specifically, ensuring resource flow to the rural sector and weaker sections of people of the country. This necessitated overall supervision and control on one hand and protection from external competition on the other. As we know, lack of competition leads to overall inefficiency and affects profitability, the banking system of the country plagued with low capital adequacy, high non-performing assets, poor house keeping and poor customer service among others inducing erosion of capital, squeezed profitability, financial frauds and forgery. These developments reached its pinnacle during the late Eighties and early Nineties, necessitating financial sector reforms, started in June 1991.

Q.How do you see the banking industry responding to the changes?
A.The financial sector reforms, guided mainly by the Narasimham Committee Recommendations, have been introduced in a phased manner to tide over the great crisis, the economy faced in 1991. Financial sector reforms remained the focal agenda in the package of economic reforms process. The response of the banking industry was adequate to the need of the hour as the public sector banks could strengthen their financial fundamentals during the first phase itself of financial sector reforms process. Prudential norms relating to capital adequacy, income recognition and asset classification immediately adopted by the banking system of the country.

Q.How do you see the banking industry in the new millennium?
A.One cannot expect any sweeping change during this period. Specifically as the financial sector reforms has been enacted in a phased manner. However, the banking industry has been passing through the second phase of financial sector reforms which is expected to trigger off intense competition, intra-group i.e. among the different banking groups, public sector, private and foreign banks and inter-group i.e. among banking sector and non-bank financial companies. Non-banking financial companies have already joined the competition by offering similar products/services.

Q.This year as a whole bank's financial results were better than expected - what do you attribute to this?
A.This can be attributed to overall improvement in efficiency during the decade, accelerated growth of income from non-fund and non-interest business, credit monitoring and management, stress on reducing non-performing assets, better management of investment portfolio etc.

Q.But priority sector credit targets have not been met in many cases - what is the reason behind it?
A.Although today 'profitability' is the watchword in the banking circle, ensuring credit flow to the social sectors vis-a-vis priority sector remains one of the prime concern of the banks. The industry has been responding to the national call for development of the rural sector since nationalisation. Though in recent period the share of priority sector credit in net bank credit has fallen but the quantum of priority sector credit has been increasing.

Moreover, quantum of advances in agriculture and small-scale industries is low but the number of beneficiaries is large. While in case of medium and large industries, the quantum of credit is high; the number of beneficiaries is less. However, from employment generation point of view, advances in agriculture and small-scale industrial sector are necessary.

Q.Do you think the uncertain political climate has hindered the development and unshackling of the banking sector in India?
A.Political uncertainty is always undesirable for any country specifically during the economic reforms process. In the context of our country however, the economic reforms process continued at its desired and phased pace and nothing specifically came into the way of the liberalisation process. Thus the liberalisation process of the financial sector was never hindered during the last decade.

Loan waiving policies adopted by some Government in different points of time are not conducive for healthy banking system. It augments the habit of being willful defaulters among the beneficiaries and they always look forward for such opportunity in future affecting the recovery of advances of banks.

Q.What is your opinion about 'open economy of India'?
A.India has accepted the challenge of opening up its economy to the globe. The process of opening up has been going on at a phased manner. In recent past some of the Southeast Asian nations which opened up their economy, faced currency crisis. India has to learn lessons from such happenings. To elaborate, India would have also faced a similar problem had capital account convertibility enacted in the country. However, due to phased reforms process we are getting adequate time to correct our policies with due circumspection.

Q.Any comments on Government policy?
A.So far the Government policies have addressed the aspects of globalisation and liberalisation. The economic policy introduced in June 1991 has been following its own course and the policy formulation of the country has accentuated the pace of it. The economic reforms policies has encompassed a host of policies including industrial policy, export - import policy, licensing policy, agriculture policy etc. among others. All these policies are moving in tandem with the countries quest for economic liberalisation policy.