How do you view the Indian Banking Sector's significant progress since independence?

Evolution of commercial banking in India is unique in the sense that during a span of around 30 years following nationalization it has emerged as the single most important financial intermediary of the country engulfing all sections of people. Before that Indian Banking System experienced a phase of regulated growth for the first time during 1949 to 1968. Enactment of Banking Companies Act in 1949, formation of term lending institutions to finance industrial sector and the appointment of the National Credit Council in 1967 for the necessary flow of bank credit to the preferred sectors of the economy etc. were important developments to be noted. It should be mentioned that till the late 60s agricultural sector was not supported by the banking system in any form. Total bank branches numbering 4288 as at December 1947 were concentrated in urban areas primarily having deposits of Rs.1164 crore as against the advance of Rs. 531 crore.

Indian banking system underwent sea changes after nationalisation in all spheres of its activities. Geographical expansion was the most important among other developments. For instance, during 1969 and March 1999, as many as 56,857 new branches were opened. On the eve of bank nationalisation, the total number of branches existing throughout the country was only 8,261. The population served per branch was as high as 65,000. The number of branches operating at the end of March 1999 rose to 65,118 and increased further to 66,255 in September 2001. Out of the 56,857 new branches opened during the last 30 years, 31,024 branches were opened in rural areas, of which 30,347 branches were opened during June 1969 to March 1989. The branches in rural areas now account for 50.46% of the total number of branches as compared to 22. 17% as at June-end 1969. The population per office has come down abruptly to 13,000. 

Aggregate deposits of the banking system crossed the 10 million mark at June end 2001 and reached Rs.1011461 crore on September 2001 from a meager amount of Rs.4665 crore at June ]969. At the time of independence, it was only Rs.1164 crore. 

The credit disbursement pattern of the banks also recorded remarkable changes both in its functional and geographical coverage during the last three decades. Total bank advances have increased from Rs.3,609 crore at the end of June 1969 to Rs.3,89,460 crore at the end of March 1999 and further to Rs.567707 crore in September 2001. C-D ratio has improved significantly from a mere 45.62% to 77.36% from 1947 to 1969 indicating a massive credit off take following nationalisation.

Along with the massive credit expansion, there has been appreciable change in the direction of credit flow. The share of rural credit increased from Rs.54 crores as at June 1969 to Rs.41,193 crores as at March-end 1999, an annual average growth of 24.99%. The share of credit in rural areas increased from 1.5% to 14.6% as at March-end 1989 and declined to 10.58% as at March end 1999. Thus, the phenomenal hike in rural credit has contributed immensely to the growth of Indian agriculture. It should be mentioned here that one-third of the total advances of the scheduled commercial banks has gone to rural and semi-urban areas.
The branch network, deposit mobilsed and outstanding credit of the Banking System are presented in the table below. 

What are the key issues faced by banking sector today?

Of late, the banking industry has undergone rapid changes, followed by a series of fundamental developments. Most significant among them is the advancement in information technology as well as communication system. This has changed the very concept of traditional banking activities and has been instrumental behind broadening the dissemination of financial information along with lowering the costs of many financial activities. Information Technology and the communication Networking Systems have revolutionised the functioning of the banks. In the highly industrialized countries, access to financial entities is on an on-line basis. Banks as well as other financial institutions in India have only recently entered the world of information technology and computer networking.

Secondly, increasing competition among a broad range of domestic and foreign institutions in product marketing area has become a prevalent practice.

Thirdly, in line with the increase in overall economic activities, financial Institutions, too, have modified themselves accordingly in all the spheres including customer services. Consequently, the institutional and systematic structure of the financial sector in general and the banking sector in particular has seen following major changes.

• Bank deposits are being replaced by directly issued securities.
• Emergence of markets for risks, in which exposures to specific market or credit risk can be transacted separately from the underlying financial assets.
• A sea change has been brought about in the business profile of financial institutions.
•  Presently, the banking service has been provided by the other institutions, while the banks are entering into non-banking activities.
• Mergers and takeovers are leading to transnational conglomerates, which offer both traditional, commercial banking services as well as investment banking and insurance services.

Faced by the newer challenges of meeting up the Capital Adequacy Norms stipulated by the Basle Accord what the Indian banks need today is to strengthen its capital base. In order to do so either they will have to go in for public issues to raise capital or merge themselves with stronger banks in order to raise their capital base. but in the later case, there would always be the possibility of raising their risk base. Foreign banks, on the other hand, do not face this problem of lower capital base due to WTO. 

Technology upgradation is another area of importance; There is a need for computerisation in a large number of areas of banking operation, with customer service as the main focus. For effective implementation of ALM systems and Risk Management, system, management information systems could be further improved by using modern information technology methods. To improve the productivity and efficiency in this stage of competition, public sector banks have stepped up IT investments. Increasing use of technology in finance is inevitable and it is expected that more and more transactions will take place across the internet and web in the near future. Banks has to make a stronger supervision at their end for effective electronic transaction. 

What is required is to enhance the quality of bank management by encouraging and pursuing market discipline through transparency, consistency and accountability for its actions. Corporate governance system in the banking sector are of critical importance for stable, robust, efficient and healthy banking system to be prudent in the pursuit of excellence.

What are your views on the future of Indian banking sector?

Future of Indian banking is directly correlated with the economic development of our country. The series of measures which could be taken up aggressively by the Banking sector in the coming days, are increasing the component of low cost deposits, recovery of non-performing assets, judicious investment of funds and curtailing of avoidable expenditure. In our-view, with the ongoing process of developing the human resources, the Banking sector is poised for further qualitative expansion in all spheres of banking. To maintain the financial stability of the country, it is necessary to safeguard the health of the financial system.

Where does Indian banking sector stand compared to international level?

The banking sector allover the world is passing through a process of change and our country is no exception to it. It was after the beginning of the Uruguay Round of multilateral trade negotiations under the aegis of General Agreement on Tariffs and Trade (GATT), cross border trade in services came under the purview of multilateral norms. It is important to note that the industrialised countries dominate the cross border trade in services. It may be pointed out that as compared to the 1980s and early 1990s, the share of foreign banks operating in India in the scheduled commercial banking increased significantly since mid-1990s in terms of almost all the indicators including income, deposits, investment, loans and advances and assets. Therefore, during the period following the establishment of the GATS, there has been considerable increase in market access of the foreign banking service providers in India's domestic market.

The process of integrating with the globalisation in a bid to develop a sound and efficient banking system in India at, par with international banking standards and practices has come into increased focus in recent years.

However, it is interesting that the share of foreign banks in the total profitability of the scheduled commercial banking sector in India has fallen considerably since mid 1990s. The increased competitiveness in the Indian banking sector in the post-reforms period, especially the entry of new private sector banks and increased efficiency of the public sector banks could be major reasons for the fall in the profit share of the foreign banks.

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

The fast pace of changes envisaged by the 'Open Economy set up of India', particularly since the financial sector reforms initiated in 1991, have radically and perceptibly transformed the operational environment, both quantitatively and qualitatively, of the banking sector in India. The introduction of structural reforms, stricter prudential and supervisory norms, greater transparency and increased accountability in the banking sector have paved the way to ensure the stability, safety efficiency and health of the financial system besides enhancing competitiveness towards globalisation of the financial system in India. The banking sector still continues to be a dominant player in the financial system of the country. The challenges and pressures of the new focused environment have been intense.

In their bid to be at par with the international level, Indian banking sector has seen the emergence of new private sector banks along with foreign banks equipped with latest technology. These have led to an increase in competition and a reduction in costs in the Indian banking sector.

Any comments on Government policy?

At the backdrop of the ongoing thrust on competitiveness, productivity and efficiency, there is a clear need for change in the mind-set of planners, policy makers and even those at the helm of affairs to meet the challenges of intensification and consolidation. Adequate development of infrastructure in the present day non-linear world cannot, however, be effectively addressed in isolation and therefore requires coordinated and concerted action from the government, the private sector, the industry, finance, banks, technology institutions, the users and stakeholders with a sense of urgency. It is required that the Government should prescribe for greater role of banks and FIs to meet the staggering requirements of infrastructure financing for enhancing the country's competitive edge in a wide range of activities.

Have you any observation on any other issues?

The most pertinent and alarming cause of concern of the banking sector in India is the amount of Non-performing Assets. Gross NPAs increased to Rs.63,883 crores as at March-end 2001 from Rs.60,408 crores as at March-end 2000. Net NPAs as at March-end 2001 amounted to Rs.32,468 crores as compared to Rs.30,073 crores as at March-end 2000. The ratios of gross and net NPAs to total advances however declined to 11.4% and 6.2% as at March-end 2001 from 12.7% and 6.8% as at March-end 2000 respectively. The gross NPAs of Public Sector banks as at March-end 2001 was Rs.54,773 crores as against Rs.53,033 as at March-end 2000. The share of PSBs in total NPAs of SCBs declined to 85.7% from 87.8% during this period. The ratio of gross NPAs to total advances declined from 14.0% as at March-end 2000 to 12.4% as at March-end 2001 and that of net NPAs to net advances declined from 7.4% to 6.7% during this period. 

The reason for increase in NPAs can be attributed to the inability in the existing process of debt recovery, inadequate legal provision on fore-closure and bankruptcy and difficulties in the speedy executions of court decrees. Any solution to this problem requires well-defined long term plan with both short and medium term action plan having specific definition of goals support action and process rather than ad hoc approach.

It is true that the problem cannot be solved overnight but it can be minimised by adopting proper credit assessments system and risk management mechanisms backed by proper legal system.