The bank’s journey through 75 years
The development of a robust financial system is sine qua non for sustained economic growth. Commemoration of 75e anniversary of India’s independence, a look at the bank’s journey will reveal the task ahead. In historical perspective, banking practices were observed even in the Kautilya era (325-275 BC), but modern banking institutions date back to 1770 when Bank of Hindostan was established and operated until 1832. The three presidential banks – Bank of Bengal – 1806, Bank of Bombay – 1840 and Bank of Madras – 1843 formed the foundation of the banking structure which resulted in the formation of the Imperial Bank of India in 1921, assuming the role hybrid commercial bank and central bank of the country.
Starting with Allahabad Bank in 1865 which merged with Indian Bank in 2020, “Swadeshi Movement” in 1906 paved the way for the proliferation of several Indian-owned banks, some were established in the princely states of India. Some of them still thrive as public sector banks (PSBs).
At the time of independence, there were 97 regular commercial banks including Imperial Bank of India, 557 non-regular banks and 395 cooperative banks. A total of 1049 banks barely held deposits of Rs.1261 crores and loans of Rs. 475 million rupees. In the post-independence turmoil, there were large-scale closures and bank mergers.
On the recommendations of the Hilton Young commission in 1925, the Reserve Bank of India Act was passed in 1934 which led to the establishment of the Reserve Bank of India which commenced operations in April 1935. RBI was further strengthened by enacting the Banking Regulation Act -1949 authorizing it to regulate banks.
But the private banks in the early years of independence used to mobilize deposits generally from all walks of life, but provided loans mainly to certain large industrial houses and owner-managed entities. As the five-year plans were rolled out, the critical role of banks came under scrutiny. Unbalanced credit expansion and earned interest in loans led to the implementation of social control over banks in 1967 to ensure an equitable distribution of development credit. After the RBI became operational in 1935, the role of the Imperial Bank of India was transformed into a full fledged commercial bank. In view of its large-scale activities and spread, it was converted into the State Bank of India in 1955 by passing the SBI Act. SBI had thus become the first public bank in India long before the nationalization of the banks.
In the midst of the consolidation of the banking sector, just before the nationalization of banks – in June 1969 there were 73 banks with 8187 bank branches with 17% of the branches being in rural areas. Bank deposits could reach only Rs. 4646 crores and outstanding credit languished at Rs. 3599 crores too concentrated in few pockets.
- Bank after nationalization 1969 – 1991:
Seeing little impact of social control on banks and the slow growth of banks, 14 major commercial banks were nationalized on July 19, 1969 and 6 more in 1980, thus bringing 90% of the banks then into the fold of the government, including including that of the already state-owned SBI. .
After the nationalization of major banks, credit growth and deployment accelerated to expand the branch network in rural and semi-urban areas. Several policy initiatives have been undertaken to strengthen banking penetration. Introduction of the Lead Bank Scheme – 1969, State Level Banker’s Committee (SLBC) – 1971, Priority Sector Lending Standards – 1974 combined to give impetus to the expansion of credit to agriculture, industry, small entrepreneurs and certain identified sectors of the economy.
Regional Rural Banks (RRBs) joined in 1975 to help commercial banks reach unbanked centers more quickly. The establishment of the Indian Deposit Insurance and Credit Guarantee Corporation (DICGCI) in 1978 instilled confidence in depositors. The creation of NABARD in 1982 further consolidated the growth of the formal banking system in the hinterland.
For nearly two decades after nationalization, the PSBs made considerable efforts to extend banking services to rural areas. As a result, the number of bank branches reached – 59,752 in 1990 compared to 8,167 in 1969. Among them, the network of rural branches reached 58.2% compared to 17% before nationalization, the semi-urban presence was 19% while the rest were in cities. . During the period, bank deposits reached Rs 28,609 crore and outstanding credit reached Rs 17,352 crore. After the adoption of the new economic policy, banking reforms began in 1991, promoting competitive growth in the banking sector.
- Post-reform banking system 1991 – 2022
Based on the reports of the Narasimham Committee, banks have adopted internationally accepted prudential standards – capital adequacy standards under the Basel Committee, income recognition and asset classification (IRAC), standards provisions, the entry of new private banks and other reform measures have created systemic strength for PSOs to prepare to enter the buyer’s market.
The adoption of core banking technology, the formation of the National Payment Corporation of India (NPCI) in 2008, interoperability between banks, the issuance of RuPay debit cards in 2012, and the introduction of the app UPI in 2016 brought a massive shift towards digital banking. The demonetization of high-value currencies in November 2016 and the pandemic of 2020 gave the digital banking system a further boost. The entry of fintech and increased collaboration with non-banks, neo-banks (virtual banks), the entry of differentiated banks – small financial banks and payment banks have expanded the banking reach further towards the indoor courts serving people at the bottom of the pyramid.
The implementation of the “Indradhanush” reforms in August 2015 improved governance in PSOs as a follow-up to the deliberations of Gyan Sangam – I. The next round of reforms in PSOs led to the introduction of the framework of Improved Access and Service Excellence (EASE) in January 2018. EASE reform metrics was designed in collaboration with Boston Consulting Group (BCG) and Indian Banks Association (IBA) which has been updated every year and EASE 5.0 is currently being implemented in PSBs.
Another strategic move has been the large-scale consolidation of PSBs, reducing them from 26 in 2017 to 12 in April 2020. Stronger and larger PSBs, together with their private counterparts and non-bank financial intermediaries, have together created a healthy competitive banking landscape.
There was a massive surge in banking infrastructure after 1991. As of March 31, 2022, the number of bank branches has reached 1,51,320. ATMs have operated at 2,15,061 while POS terminals have reached 60,70,142. Debit cards were 917.6 million while credit cards reached 73.6 million offering alternative distribution channels.
Thanks to these massive efforts, bank deposits reached 169 trillion rupees while credit was close to 123 trillion rupees.
Led by the JAM trinity commonly known as – Pradhan Mantri Jan Dhan Yozana (PMJDY), Aadhar and Mobile, banking outreach has made significant progress. As a result, RBI’s Financial Inclusion Index reached 56.4 in March 2022 from 43.4 in 2017, while the Digital Payments Index (DPI) reached 349.30 against 100 in March 2018.
When the three distinct phases of banking development – 1949-1969, 1969-1991 and 1991-2022 spanning 75 years are looked back upon, the spread of banking in India has accelerated with the adoption of advanced technology and the rapid expansion of the banking sector. touchpoints touching the lives of millions of people. With more sophisticated technology and diversified products, banks should accelerate their role in spreading credit to move the economy towards a short-term US$5 trillion economy and a short-term US$10 trillion economy. here 2030.
The opinions expressed above are those of the author.
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