essay about private sector banks in india

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Privatization of Public Sector Banks in India: Why, How and How Far

Banks play a critical role in economic growth. In India, the banking sector, dominated by public sector banks (PSBs), has underserved the economy and their stakeholders. The under-performance of PSBs has persisted despite several policy initiatives during the past decade. Meanwhile, private banks have further improved their performance and have gained significant market share. In this paper, we have made the case for privatization of PSBs. Due to its better performance and adhering to the development view of the PSBs, we propose that the State Bank of India (SBI) may remain under government ownership for now, but all other banks should be privatized. In order for them to set an example for the success of future privatizations, the first two banks for privatization should be the ones with better asset quality and higher returns. The most critical element for privatization to succeed would be the withdrawal of the government from the post-privatization board of the bank. The paper proposes a couple of different pathways to successfully transition the sector toward private ownership. It cautions that the status quo will result in further erosion of the market share of PSBs toward oblivion, while impeding India’s economic growth and inflicting substantial costs onto the depositors, firms, taxpayers and the government as their majority owner in the interim.

Privatization of Banks: Benefits and Concerns – Explained, pointwise

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• 1 Introduction
• 2 About the Ownership Trend in Banking Sector in India
• 3 What have been the benefits of nationalization of banks?
• 4 What are the arguments in favour of Privatization of Banks (NCAER Report)?
• 5 What are the challenges in Privatization of Banks?
• 6.1 Recommendations of the NCAER report
• 6.2 Recommendations of PJ Nayak Committee
• 6.3 Recommendations of Narashimham committee
• 6.4 Other Measures
• 7 Conclusion

Introduction

A report by National Council of Applied Economic Research (NCAER) has recommended  that the Union Government should privatize all Public Sector Banks (PSBs), except the State Bank of India (SBI). The Report further states that the Government ownership hinders the ability of the RBI to regulate the sector. The recommendation of complete privatization of banks has led to sharp reactions from the critics. According to them complete exit of the Government will give rise to systemic risks in the financial sector. The Union Government is aggressively pursuing the exercise of disinvestment.   For the ongoing fiscal year FY22, the Government has set a disinvestment target of Rs 1.75 lakh crore. The plan includes privatization of two public sector banks, public listing of the Life Insurance Corporation of India, Shipping Corporation of India, and many other PSUs.

About the Ownership Trend in Banking Sector in India

After the formation of Reserve Bank of India in 1935, to the period till Independence (1947), there were 900 bank failures in India. From 1947 to 1969, 665 banks failed. The depositors of all these banks lost their deposited money. T he Government nationalized 14 major banks in 1969. After this 36 banks failed but these were rescued by merging them with other government banks. This included even bigger banks like Global Trust Bank. 6 more banks were nationalized in 1980.

However, since the liberalization of the economy in 1991, the discourse on bank onwership has changed significantly. Guidelines for setting up private banks were established in 1993 and the ICICI Bank was set up in 1994. Since then the Private Banks have expanded their footprint.

Simultaneously, the approach of the Government has been to reduce its presence in the Banking Sector and reduce the number of Public Sector Banks. In 2019, after a massive consolidation exercise, the number of PSBs reduced from 28 to 12.

During the Union Budget 2020-21 presentation, the Government announced a new policy for strategic disinvestment of public sector enterprises. This policy provides a clear roadmap for disinvestment in all non-strategic and strategic sectors. The Banking Sector falls under the strategic sector. The Government  announced privatisation of two PSBs as a part of its disinvestment plan. 

What have been the benefits of nationalization of banks?

The nationalization of private banks in 1969 resulted in the penetration of banking sector in the rural areas of India. Private Banks were reluctant to open branches in rural India due to low profitability. However, nationalized banks followed the mandate of the Government and helped in financial inclusion.

The Share of Bank Branches in rural areas increased from <18% in 1969 to ~60% by 1990. This shift happened due to several initiatives by Public Sector Banks like the Lead Bank Scheme launched by the RBI in 1969.

Only after nationalization of banks could small borrowers get credit and there was a shift from class banking to mass banking .

Banks were used to bring about a revolution in agriculture and to carry out activities related to it.

The Sectoral allocation of Bank Credit underwent a change after nationalization of banks. The Share of Agriculture improved from 2.2% in 1968 to 16% in 1989. The share of credit to Industry decreased from 67.5% in 1968 to 37.5% in 1989. This shift happened due to expansion of rural branches and Priority Sector Lending norms.

The proliferation of branches created job opportunities for large section of educated youth. It also benefitted local rural economies.

There was an increased public confidence in the banking system . The growth rate of saving bank deposits witnessed a rapid rise post 1969.

42 crore ordinary people have opened bank accounts as a result of the immense contribution of state-owned banks in opening Jan Dhan Yojana accounts .

What are the arguments in favour of Privatization of Banks (NCAER Report)?

First , private banks have emerged as a credible alternative to PSBs with substantial market share.  PSBs have lost ground to private banks, both in terms of deposits and advances of loans. Since 2014-15, almost the entire growth of the banking sector is attributable to the private banks and the SBI.

Second , Government ownership hinders the ability of the Reserve Bank of India (RBI) to regulate the sector.

At present PSBs are under the dual control of the RBI and the Department of Financial Services of the Ministry of Finance. The RBI handles the governance side of the PSBs under the RBI Act, 1934 . The Department of Financial Services maintains the regulation of PSBs under the Banking Regulation Act, 1949. Thus, RBI does not have the powers to revoke a banking license, shut down a bank, or penalize the board of directors for their faults. Privatization will provide the powers to RBI to control them effectively.

Third , barring SBI, most other PSBs have lagged behind private banks in all the major indicators of performance during the last decade. These PSBs have attained lower returns on assets and equity than their private sector counterparts. The non-performing assets (NPA) of PSBs remain elevated as compared to private banks even as the government infused US$ 65.67 billion into PSBs between 2010-11 and 2020-21 to help them tide over the bad loan crisis.

The market valuation of PSBs, excluding SBI, remains ‘hugely’ below the funds infused in such banks as of May 31, 2022.

Fourth , the under-performance of PSBs has persisted despite a number of policy initiatives aimed at bolstering their performance during this period. These initiatives include: (a) Recapitalisation of PSUs; (b) Constitution of the Bank Board Bureau to streamline and professionalize hiring and governance practices; (c)   Prompt corrective action plans ; (d) Consolidation through mergers .

Fifth , the steady erosion in the relative market value of PSBs is indicative of a lack of trust among private investors in the ability of PSBs to meaningfully improve their performance.

Sixth , the current fiscal position of the Union Government is not strong enough to provide huge sums for recapitalization and keep on sustaining sick PSBs.

Seventh , the privatization of banks will have a positive impact on the economy by bringing stability at the macroeconomic level. Privatization of a few loss-making PSBs will ensure that market discipline forces them to rectify their strategy, and this will have a ripple effect on other PSBs. 

The pandemic has led to the severe decline in the economic curve of the nation and has made a negative impact on banks as a whole, which makes it imperative to take all possible steps to revive the banking sector.

What are the challenges in Privatization of Banks?

First , as per the stated policy of the Reserve Bank of India, banks cannot be run by industrial houses .  However, excluding the industrial houses, there are no entities that have the required financial capability to take over any of the government banks.

Second , private banks have a long history of failures, as noted above (>1500 banks failed between 1935-1969). Recently, the RBI had to come to the rescue of Lakshmi Vilas Bank and YES Bank by pumping of capital by other entities to save these banks. Bank failures and lack of Government intervention will increase the risk in the banking system.

Third , Banks owned by the sovereign government provide more comfort level to depositors . Expansion of private sector in banking will reduce consumer confidence in the sector.

Fourth , Private banks operate with the sole aim of adding shareholder value . In contrast, the government banks also try to serve society and ensure implementation of all government programmes for the social sector. Privatization might have a negative impact on financial inclusion, agriculture credit etc.

Fifth , bank workers are opposed to privatization . as they fear loss of jobs.

What should be the approach going ahead?

Recommendations of the ncaer report.

The two banks chosen for privatization must be the ones with the highest returns on assets and equity, and the lowest NPAs in the last five years. It has recommended Indian Bank and Bank of Baroda as the two top choices for privatization. This would set an example for the success of future privatizations.

It also makes a case for corporate ownership in banks with due diligence as there is “scarcity” of potential large-scale investors in banks. The government must allow foreign investors, including foreign banks and domestic investors, as well as corporate houses to enter the auctions with due diligence

Any potential risk may be minimized by letting a consortium of corporations enter the bidding with the stake of any single corporation capped.

Recommendations of PJ Nayak Committee

Though the Government approved the Bank Board Bureau, the government has to provide enough support for proper functioning. The government can split the Chairman and Managing Director roles. Further, they should be allowed a fixed tenure of 3-5 years.

Recommendations of Narashimham committee

The Government can explore the concept of Narrow Banking. Under this weak PSBs will be allowed to place their funds only in the short term and risk-free assets. This will improve the performance of PSBs.

Other Measures

The Government must create strong recovery laws and take criminal action against wilful defaulters. The challenges in the Insolvency and Bankruptcy Code (IBC) must be addressed. This will provide a faster resolution process. In the meantime, the Government can explore alternate steps such as the concept of Bad Banks.

Privatizing all the PSBs and complete exit of the Government might have significant negative consequences. The Government must find ways to strengthen the governance of banking system and ensure safety of depositors’ money. Complete exit may not be an option, for now.

Source: Business Standard , The Hindu BusinessLine , Outlook , CNBC

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Private Sector Banks in India, Functions, Advantages, Disadvantages

Private Sector Banks are financial institutions that are owned and operated by private individuals or corporations. Read all about Private Sector Banks in India, Functions, Advantages & Disadvantages.

Table of Contents

Private Sector Banks

Private Sector Banks are financial institutions that are owned and operated by private individuals or corporations, rather than the government. These banks operate with the objective of making profits for their shareholders. Private Sector Banks play a significant role in the banking sector by offering a wide range of banking and financial services, competing with Public Sector Banks and other private banks. Examples of private sector banks in India include ICICI Bank, HDFC Bank, Axis Bank, Kotak Mahindra Bank, and Yes Bank, among others.

Read about: Banking System in India

Private Sector Banks in India Importance 

Private Sector Banks in India have made significant strides since their inception, transforming the banking landscape with their innovative practices and customer-centric approach. Here is an overview of the performance of private sector banks in India, highlighting some landmark events:

Liberalization and Entry of Private Banks (1990s)

• With the liberalization of the Indian economy in the 1990s, private sector banks were allowed to enter the market, breaking the monopoly of public sector banks.
• HDFC Bank, one of the leading private sector banks, was established in 1994, followed by ICICI Bank in 1994-1995.

Technological Advancements and Digital Banking

• Private sector banks were early adopters of technology, revolutionizing banking services in India. They introduced online banking, mobile banking, and innovative digital payment solutions.
• For instance, ICICI Bank launched India’s first Internet banking platform in 1996, setting the stage for digital banking transformation.

Expansion and Network

• Private sector banks expanded their network rapidly, setting up branches and ATMs across the country. They focused on urban and semi-urban areas, aiming for higher profitability.
• HDFC Bank, as of March 2021, operated over 5,608 branches and had more than 16,087 ATMs in India.

Financial Performance

• Private sector banks have consistently delivered strong financial performance. They have reported robust growth in deposits, advances, and profitability over the years.
• For example, in the financial year 2020-2021, HDFC Bank reported a total income of over ₹1.50 lakh crore (around $20 billion) and a net profit of ₹31,116 crore (around $4.2 billion).

Mergers and Acquisitions

• Private sector banks have engaged in mergers and acquisitions to expand their market presence and enhance their capabilities.
• ICICI Bank’s merger with Bank of Madura in 2001 and the acquisition of Bank of Rajasthan by ICICI Bank in 2010 are notable instances of consolidation in the private banking sector.

Regulatory Changes and Governance

• Private sector banks have adhered to regulatory guidelines and adopted good corporate governance practices. They have worked towards strengthening risk management frameworks and compliance standards.
• The Reserve Bank of India (RBI) has implemented various regulations to ensure the stability and transparency of private sector banks.

Read about: List of RBI Governors of India

Private Sector Banks Advantages

Private Sector Banks offer several advantages, including:

Efficiency and Innovation

Private sector banks are often more efficient and agile in their operations compared to public sector banks. According to the Reserve Bank of India, private sector banks had a lower cost-to-income ratio of around 42% in 2020, indicating better operational efficiency.

Technology and Digital Banking

Private sector banks are at the forefront of technological advancements and digital banking services. They have invested heavily in digital platforms, mobile banking apps, and online services, offering customers convenient and user-friendly banking experiences.

Customer Service

Private sector banks generally focus on providing excellent customer service and personalized banking experiences. They strive to understand customer needs and offer tailored solutions, leading to higher customer satisfaction.

Product Innovation

Private sector banks are known for their ability to innovate and introduce new financial products and services. They often bring innovative offerings, such as customized loan products, wealth management solutions, and specialized banking services catering to various customer segments.

Risk Management

Private sector banks typically have robust risk management practices, ensuring the soundness of their operations and minimizing risks. Their focus on risk assessment and mitigation helps maintain a healthy loan portfolio and reduces non-performing assets (NPAs).

It’s important to note that while private sector banks have these advantages, they may also have limitations.

Read about: Types of Banks in India

Private Sector Banks Disadvantages

Private sector banks also have some disadvantages, including:

Higher Interest Rates

Private sector banks often charge higher interest rates on loans and credit products compared to public sector banks. This can make borrowing more expensive for individuals and businesses.

Limited Rural Penetration

Private sector banks tend to focus on urban and semi-urban areas, resulting in limited access to banking services in rural and remote regions. This can hinder financial inclusion and access to banking facilities for rural populations.

Profit-Driven Approach

Private sector banks prioritize profitability and shareholder interests, which can sometimes lead to a focus on high-net-worth individuals and corporate clients. This may result in less emphasis on serving low-income groups and small businesses.

Lower Government Support

Private sector banks do not have the backing of the government, unlike public sector banks. In times of financial crisis, they may face challenges in obtaining government support and bailouts.

Concentration of Power

In some cases, private sector banks may become dominant players in the market, leading to concerns about the concentration of power and potentially anti-competitive practices.

Read about: Indian Financial System

Private Sector Banks UPSC

Private sector banks are an essential topic in the UPSC Syllabus , particularly in areas like economics, governance, and banking sector reforms. Understanding the functioning and significance of private sector banks is crucial for aspirants preparing for the UPSC exam. To enhance their knowledge, candidates can avail themselves of UPSC Online Coaching that covers the intricacies of private sector banks, along with the UPSC Mock Test to assess their understanding of banking sector reforms and related topics.

Read about: India’s GDP Growth Rate

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Private Sector Banks FAQs

What is private sector banks with examples.

Private sector banks are financial institutions owned by private individuals or corporations, such as HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, and Yes Bank.

What are the different private sector banks?

Different private sector banks in India include HDFC Bank, ICICI Bank, Axis Bank, Kotak Mahindra Bank, Yes Bank, IndusInd Bank, and Federal Bank, among others.

Which is the No 1 private sector bank?

As of current data, HDFC Bank is considered the No. 1 private sector bank in India based on factors such as market capitalization, asset size, and profitability.

Which bank is safest in India?

There is no definitive answer to which bank is the safest in India, as the safety of a bank depends on various factors such as financial stability, regulatory compliance, and risk management practices.

Which nationalised bank is best?

Different nationalized banks in India have their own strengths, and determining the "best" nationalized bank is subjective and can vary based on factors like financial performance, customer service, and market perception.

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FINANCIAL PERFORMANCE OF PRIVATE SECTOR BANKS IN INDIA

2020, Sambodhi ISSN: 2249-6661 (UGC Care Journal)

Purpose: Present paper aims to analyse the financial performance of selected private sector banks in India. Design/methodology/approach: To analyze the financial performance, researchers have selected seven key financial ratios viz. Return on Assets, Return on Equity, Financial Return, Financial Cost, Financial Margin, Net Margin, and Operating Profit Margin. And to know the relation among the financial ratios mentioned above, researchers have calculated the correlation. Findings: It is found from the study that ROA, ROE, financial return and net margin of private sector banks have continuously decreased throughout the study period. Originality/values: Researchers have selected ten private sector banks for the study, and required data have been collected from annual report of each bank for a period of five years, from 2015 to 2019.

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Ravikumar Undi

Abstract: Purpose: Present paper aims to analyse the comparative financial performance of select public and private sector banks in India.&lt;br&gt; Design/methodology/approach: To analyze the financial performance, researchers have selected seven key financial ratios viz.&lt;br&gt; Return on Assets, Return on Equity, Financial Return, Financial Cost, Financial Margin, Net Margin, and Operating Profit Margin.&lt;br&gt; And Paired t-test has been calculated to know if there is any difference in the ratios between both the sectors.&lt;br&gt; Findings: The study finds that the private sector banks are performing better than the public sector banks as their average financial&lt;br&gt; ratios are better than public sector banks during the study period.&lt;br&gt; Originality/values: Researchers have selected ten public and ten private sector banks in India for the study and required data have&lt;br&gt; been collected from annual reports of each bank for a period of five years, from 2015 t...

ijetrm journal

Ijetrm Journal

The Indian economy's overall growth and development depend heavily on banking. In India, banks keep the country's entire financial system lubricated and operating efficiently. Money that supports and fuels growth across all industries and the nation is provided by it. India has a sizable branch network, a wide range of financial services, and an extensive banking system. This study compares the financial results of the two biggest private and public sector banks in India. The following metrics were used to assess the financial performance of banks: net profit, assets, liabilities, income, expenses, margin ratios, and return on equity ratios. The study found that private banks outperformed public banks after analysing financial data from 2017 to 2021.The study also highlights the impact of non-Performing assets on public sector bank's poor performance. This study's findings will benefit the bank in reviving its performance to the expected level.

Research review international journal of multidisciplinary

Hetal Solanki

IAEME PUBLICATION

IAEME Publication

The banking system is vital to a country’s economic process. Most of the financial statement analyses focus on firms belonging to industries that either contributes significantly to economic figures in a highly competitive business environment. The study investigates performance of public and private banks SBI and ICICI Bank are during the period of 2019 to 2023 of of two largest banks in India. Financial ratios of profitability tools are used to measure the performance of banks.

Abstract:&lt;br&gt; Purpose: The paper aims to analyse the financial performance of selected public sector&lt;br&gt; banks in India.&lt;br&gt; Design/methodology/approach: The researchers have chosen ten public sector banks&lt;br&gt; for the study. To analyze the financial performance, researchers have selected seven key&lt;br&gt; financial ratios viz. Return on Assets, Return on Equity, Financial Return, Financial Cost,&lt;br&gt; Financial Margin, Net Margin, and Operating Profit Margin. And to ascertain the relation&lt;br&gt; among the financial ratios mentioned above, researchers have calculated the correlation.&lt;br&gt; Findings: Public sector banks have an average financial return of 7.26, financial cost of&lt;br&gt; 5.08 and the difference between these two is reflected by the average financial margin of&lt;br&gt; 2.19 (rounded off), which infers that public sector banks are contributing 2.19 % of their&lt;br&gt; total assets to meet the non-operating expenses. However, net m...

Banks have significance role in the economic growth of every country especially private banks. Therefore, the present study is concerned about the performance of major three private sector banks, listed on both the National Stock exchange (NSE) and Bombay stock exchange (BSE). Financial ratios are used for the statistical analysis on banks performance. Three important indicators namely, Return on Assets (ROA) which measures Internal-based performance, Tobin's Q model (price/Book ratio) which measures market-based performance and Return on equity (ROE) which is a key profitability ratio that investors use to measure of the amount of a Bank's income that is returned as shareholder equity have been used to measure financial performance of the selected private banks. The data has been selected for the period 2006 to 2017 of the selected banks. Multiple regression technique has been used to find the financial performance measured by the three indicators based on independent variables, banks size, credit risk, asset management, operational efficiency and debt ratio. Results indicate that all the selected ratios have impact on financial performance of Private commercial banks.

Strad Research

Balakrishnan .S

Profitability is the main goal of all commercial undertakings. The economic strength of any business can be measured through its profitability positions and business organisations cannot endure without profits. In view of the significance of improving profitability of the banking sector in recent years, the present study is aimed at investigative the profitability of private sector banks of India using four ratios as return on assets, return on equity, net profit margin and return on capital employed. The result of the study carried for the period 2011-2020 shows that ICICI banks are in better profitable positions than the SIB bank.

International Journal of Management Studies

Dr. Sunita Sukhija

International Research Journal Commerce arts science

Banks form a fundamental component of the financial system and are also active players in financial markets. An efficient banking system capable of mobilizing the savings and channeling them to productive purposes are essential for the development of any economy. The objective of the study is to analyze and compare the overall financial performance of selected public and private sector banks in India

Economics, Commerce and Trade Management: An International Journal (ECTIJ)

In This Era, the banking sector is one of the fastest growing sectors, and a lot of funds are channelized through banks thereby making the banking system more and more complex wherein lies the importance to examine and evaluate concurrent performance of the banks: hence the researcher tries to present a case study of India in this context. To evaluate the performance of the Indian banks, the researcher has opted to compare the financial performance of different Scheduled Commercial Banks (SCBs) applying the parameters
Return on Asset, Return on Equity and Net Interest Margin. Furthermore, his study proves if any significant difference of profitability means among different banking groups really exists. For this purpose, he has chosen the parameter of quantitative research using Analysis of Variance (ANOVA) from 2009 to 2013 following the global financial slump of 2008. To state, ROA for Public Sector Banks was recorded 0.97%in 2010 from 1.02% of 2009. For the State Bank of India group (SBI), it was a notch lower at 0.91% (2010) than 1.02% in 2009. ROE for all banks saw a decrease during 2009-2013: but the OPSBs and the NPSBs recorded increase in ROE from 14.6 % and 10.6 % in 2009 to 16.22% and 16.51% in 2013 respectively. For all the banks, NIM shows a significant rise during 2011-12 excluding the FBs. Furthermore, the result indicates that there is no significant means in difference of profitability among various banking groups in respect of ROA and NIM, yet a significant means of difference is seen among the peer groups in terms of ROE.

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Banking Sector: Opportunities and Challenges

• 01 Jan 2024
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• Monetary Policy

This editorial is based on “Banks are fine, but there are risks” which was published in The Hindu Business Line on 029/12/2023. The article points out that State finances, an overheated stock market, and inter-connected lending are concerns, even as banks are undeniably in good health. 

For Prelims: Banking Sector , Reserve Bank of India , Non-Performing assets , Prompt Corrective Actions . 

For Mains: Challenges in the Banking Sector 

In recent times, there has been a noticeable resurgence in India's banking system following almost a decade of grappling with escalating bad loan challenges. Thanks to the concerted efforts of policymakers and the proactive measures taken by banks, the sector is currently on a more secure footing.  

Nevertheless, considering historical patterns, the positive trajectory for Indian banks remains susceptible to the impact of monetary policies and external uncertainties, such as geopolitical risks. 

How have Indian Banks Evolved over the Years? 

• In the period before Independence (up to 1947), the Swadeshi Movement led to the establishment of numerous small, local banks, most of which faced failure primarily due to internal frauds, interconnected lending, and the amalgamation of trading and banking activities.  
• Indian banks enabled the consolidation of resources, mobilised through retail deposits, towards a limited number of business families or groups, consequently overlooking the flow of credit to the agriculture sector. 
• The government successfully severed the link between industry and banks by nationalising 20 major private banks in two phases (1969 and 1980) and introducing priority sector lending in 1972.  
• These measures led to a transition from 'class banking' to 'mass banking' and had a favourable effect on the widespread expansion of branch networks in rural India, substantial mobilisation of public deposits, and increased credit flow to agriculture and allied sectors. 
• During this period, significant reforms were implemented, including the issuance of new licences to private and foreign banks to introduce competition, improve productivity, and enhance efficiency.  
• These changes involved leveraging technology, introducing prudential norms, offering operational flexibility with functional autonomy, prioritising the implementation of best corporate governance practices, and fortifying the capital base in accordance with Basel norms .  
• From 2014 onward, the banking sector has embraced the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and granted licences to Payments Banks and Small Finance Banks (SFBs) to attain last-mile connectivity in the pursuit of financial inclusion. 

What is the Current Status of the Indian Banking Regime? 

• Not too long ago, Indian lenders faced a dire situation with bad loans, leading to a spike in stressed assets. Government-owned banks were particularly affected, with gross NPAs reaching 14.6%.  
• To counter these challenges, the government and RBI implemented a 4R strategy— Recognize NPAs transparently, Resolution and recovery, Recapitalization of PSBs, and Reforms in the financial ecosystem.  
• After grappling with seething government and bad loan issues for nearly a decade, the Indian banking system has experienced a remarkable turnaround in 2023. 
• In FY23, the gross NPA ratio for banks in India plummeted to 4.41%, the lowest since March 2015. Cumulatively, PSBs crossed the Rs 1 lakh crore-mark in profit.  
• As per RBI's Financial Stability Report , the capital-to-risk-weighted assets ratio (CRAR) stands at a robust 16.8%, indicating a strong financial position for scheduled commercial banks.  
• This underscores the sound financial health of Indian banks, reflecting positively on their ability to absorb potential risks and maintain stability in the financial system. 
• Reforms introduced over the past eight years focused on credit discipline, responsible lending, improved governance , and the adoption of technology. Mergers of PSBs were instrumental in reducing NPAs. 
• Banks exhibit strong liquidity levels , measured by funds available for lending. Despite the RBI’s recent monetary stance of "withdrawal of accommodation," banks maintain a Liquidity Coverage Ratio at least 20% higher than the minimum requirement.  
• Additionally, major banks, including SBI, PNB, and Union Bank, demonstrate a capacity to lend "higher for longer," with Credit-Deposit ratios below 72%. 

What Obstacles Lie Ahead for the Indian Banking Sector? 

• Bank lending for upcoming infrastructure and capital investments, particularly those linked to State government entities, poses a risk of defaults due to stretched State finances.  
• Banks are advised to set internal exposure limits based on fiscal/financial assessments of individual States. 
• The seemingly runaway stock market , creating an illusion of wealth, presents a risk to retail exposures. Increased demat accounts and high PE ratios across sectors are indicators of this risk. 
• Integrated supervision and rigorous stress tests on retail portfolios are recommended to address this emerging risk. 
• The possibility of default becoming a contagion due to interconnected lending and lax governance norms poses a significant challenge.  
• Focused risk monitoring is necessary, emphasising that regulation cannot substitute for good governance. 
• The re-globalization of the world and geopolitical shifts may challenge  Small and medium-sized enterprises(SMEs), especially in the face of Free Trade Agreements (FTAs) and regional ambitions.  
• Banks need to carefully assess and prepare for potential risks to SMEs, considering potential disruptions to cash flows. 
• The character of liabilities is changing with digitisation and evolving consumption trends, impacting retail deposits. Banks with higher credit-deposit ratios may face challenges in liquidity coverage.  
• A structural shift in Indian savings requires caution and prudence from bankers, necessitating a careful watch amidst favourable conditions. 

How Can the Indian Banking Sector be Fortified Moving Ahead? 

• The second tier could include numerous mid-sized banks, including niche institutions, with a widespread presence across the economy.  
• Consistent with these suggestions, the government has already consolidated certain PSBs and taken measures to establish entities like a Development Finance Institution (DFI) and a Bad Bank. 
• Essentially, these specialised banks would facilitate financial access in specific areas such as retail, agriculture, and MSMEs.  
• Additionally, establishing proposed DFIs or niche banks as specialised entities would provide them with access to low-cost public deposits and enable improved asset-liability management. 
• Enhanced risk management can be achieved, and neo-banks have the opportunity to harness this technology for advancing digital financial inclusion and supporting the increased growth of an aspiring and emerging India. 
• In the realm of Indian banking, the implementation of technologies such as Blockchain holds the potential to facilitate prudential supervision, making oversight and control over banks more streamlined. 
• Until now, the occurrence of public sector banks failing has been infrequent, primarily due to the concealed sovereign guarantee, instilling greater trust in the public. Nevertheless, the ongoing privatisation of PSBs challenges this assurance.  
• Consequently, the upcoming wave of banking reforms should emphasise the necessity for increased individual deposit insurance and efficient orderly resolution mechanisms. This aims to reduce moral hazard and systemic risks, minimising the financial burden on the public treasury. 
• It could be beneficial for Distinctive Banks to consider listing on a reputable stock exchange and embracing the ESG (Environmental, Social Responsibility, and Governance) framework. This approach aims to enhance value for stakeholders over the long term. 
• To address vulnerabilities, the government should refine regulatory measures, enabling banks to develop diversified loan portfolios , instituting regulators for specific sectors, and granting increased authority to handle deliberate defaults effectively. 
• In order to establish a responsive banking system in a dynamic real economy, there is a requirement to promote the growth of the corporate bond market, thereby transitioning away from a bank-centric economic model. 
• Develop and implement internal risk models tailored to individual States, similar to the Bank Exposure Risk Index , to assess potential risks associated with lending to State government entities and infrastructure projects. 
• Recognize the changing nature of liabilities influenced by digitisation and evolving consumption trends. Develop strategies to adapt to shifts in retail deposits, especially in Tier 1 and 2 centres. 

Conclusion  

While celebrating the current success of the banking sector, it is crucial to adopt a proactive and vigilant stance to navigate the complexities and uncertainties of the times we live in. 

UPSC Civil Services Examination, Previous Year Question (PYQ) 

Prelims .

Q1. With reference to the Banks Board Bureau (BBB), which of the following statements are correct? (2022) 

• The Governor of RBI is the Chairman of BBB. 
• BBB recommends for the selection of heads for Public Sector Banks. 
• BBB helps the Public Sector Banks in developing strategies and capital raising plans.  

Select the correct answer using the code given below: 

(a) 1 and 2 only    (b) 2 and 3 only  (c) 1 and 3 only    (d) 1, 2 and 3 

Ans: B 

Q2. Consider the following events: (2018) 

• The first democratically elected communist party government formed in a State in India. 
• India’s then largest bank, ‘Imperial Bank of India’, was renamed ‘State Bank of India’. 
• Air India was nationalised and became the national carrier. 
• Goa became a part of independent India. 

Which of the following is the correct chronological sequence of the above events? 

(a) 4 – 1 – 2 – 3    (b) 3 – 2 – 1 – 4  (c) 4 – 2 – 1 – 3    (d) 3 – 1 – 2 – 4 

Mains 

Q. Pradhan Mantri Jan Dhan Yojana (PMJDY) is necessary for bringing unbanked to the institutional finance fold. Do you agree with this for the financial inclusion of the poorer section of the Indian society? Give arguments to justify your opinion. (2016)

• Bank Exam Articles

History of Banking in India

Banking in India forms the base for the economic development of the country. Major changes in the banking system and management have been seen over the years with the advancement in technology, considering the needs of people.

The History of Banking in India dates back to before India got independence in 1947 and is a key topic in terms of questions asked in various Government exams . In this article, we shall discuss in detail the evolution of the banking sector in India.

The banking sector development can be divided into three phases:

Phase I: The Early Phase which lasted from 1770 to 1969

Phase II: The Nationalisation Phase which lasted from 1969 to 1991

Phase III: The Liberalisation or the Banking Sector Reforms Phase which began in 1991 and continues to flourish till date

History of Banking in India PDF:- Download PDF Here

Given below is a pictorial representation of the evolution of the Indian banking system over the years:

Candidates can get details about the  functions of Banks  at the linked article.

Further below in this article, we shall discuss the different phases of Bank industry evolution.

Pre Independence Period (1786-1947)

The first bank of India was the “ Bank of Hindustan ”, established in 1770 and located in the then Indian capital, Calcutta. However, this bank failed to work and ceased operations in 1832. 

During the Pre Independence period over 600 banks had been registered in the country, but only a few managed to survive.

Following the path of Bank of Hindustan, various other banks were established in India. They were:

• The General Bank of India (1786-1791)
• Oudh Commercial Bank (1881-1958)
• Bank of Bengal (1809)      
• Bank of Bombay (1840)    
• Bank of Madras (1843)   

During the British rule in India, The East India Company had established three banks: Bank of Bengal, Bank of Bombay and Bank of Madras and called them the Presidential Banks. These three banks were later merged into one single bank in 1921, which was called the “ Imperial Bank of India. ”

The Imperial Bank of India was later nationalised in 1955 and was named The State Bank of India, which is currently the largest Public sector Bank. 

Given below is a list of other banks which were established during the Pre-Independence period:

If we talk of the reasons as to why many major banks failed to survive during the pre-independence period, the following conclusions can be drawn:

• Indian account holders had become fraud-prone
• Lack of machines and technology
• Human errors & time-consuming
• Fewer facilities
• Lack of proper management skills

Following the Pre-Independence period was the post-independence period, which observed some significant changes in the banking industry scenario and has till date developed a lot.

Related Links:

Post Independence Period (1947-1991)

At the time when India got independence, all the major banks of the country were led privately which was a cause of concern as the people belonging to rural areas were still dependent on money lenders for financial assistance.

With an aim to solve this problem, the then Government decided to nationalise the Banks. These banks were nationalised under the Banking Regulation Act, 1949. Whereas, the Reserve Bank of India was nationalised in 1949.

Candidates can check the list of Banking sector reforms and Acts at the linked article.

Following it was the formation of State Bank of India in 1955 and the other 14 banks were nationalised between the time duration of 1969 to 1991. These were the banks whose national deposits were more than 50 crores.

Given below is the list of these 14 Banks nationalised in 1969:

• Allahabad Bank               
• Bank of India                          
• Bank of Baroda
• Bank of Maharashtra         
• Central Bank of India
• Canara Bank         
• Indian Overseas Bank
• Indian Bank
• Punjab National Bank                         
• Syndicate Bank             
• Union Bank of India
• United Bank 

In the year 1980, another 6 banks were nationalised, taking the number to 20 banks. These banks included:

• Andhra Bank
• Corporation Bank
• New Bank of India
• Oriental Bank of Comm.
• Punjab & Sind Bank
• Vijaya Bank 

Apart from the above mentioned 20 banks, there were seven subsidiaries of SBI which were nationalised in 1959:

• State Bank of Patiala 
• State Bank of Hyderabad 
• State Bank of Bikaner & Jaipur 
• State Bank of Mysore 
• State Bank of Travancore 
• State Bank of Saurashtra 
• State Bank of Indore

All these banks were later merged with the State Bank of India in 2017, except for the State Bank of Saurashtra, which merged in 2008 and State Bank of Indore, which merged in 2010.

Note: The Regional Rural Banks in India were established in the year 1975 for the development of rural areas in India. Candidates can get the list of RRBs in India at the linked article.

Impact of Nationalisation

There were various reasons why the Government chose to nationalise the banks. Given below is the impact of Nationalising Banks in India:

• This lead to an increase in funds and thereby increasing the economic condition of the country
• Increased efficiency
• Helped in boosting the rural and agricultural sector of the country
• It opened up a major employment opportunity for the people
• The Government used profit gained by Banks for the betterment of the people
• The competition decreased, which resulted in increased work efficiency 

This post Independence phase was the one that led to major developments in the banking sector of India and also in the evolution of the banking sector. 

Refer to the Government exam preparation links below:

Liberalisation Period (1991-Till Date)

Once the banks were established in the country, regular monitoring and regulations need to be followed to continue the profits provided by the banking sector. The last phase or the ongoing phase of the banking sector development plays a hugely significant role.

To provide stability and profitability to the Nationalised Public sector Banks, the Government decided to set up a committee under the leadership of Shri. M Narasimham to manage the various reforms in the Indian banking industry.

The biggest development was the introduction of Private sector banks in India. RBI gave license to 10 Private sector banks to establish themselves in the country. These banks included:

• Global Trust Bank
• Bank of Punjab
• IndusInd Bank
• Centurion Bank
• Development Credit Bank

The other measures taken include:

• Setting up of branches of the various Foreign Banks in India
• No more nationalisation of Banks could be done
• The committee announced that RBI and Government would treat both public and private sector banks equally
• Any Foreign Bank could start joint ventures with Indian Banks
• Payments banks were introduced with the development in the field of banking and technology
• Small Finance Banks were allowed to set their branches across India
• A major part of Indian banking moved online with internet banking and apps available for fund transfer

Thus, the history of banking in India shows that with time and the needs of people, major developments have been brought about in the banking sector with an aim to prosper it. 

The entire period of evolution of the banking industry is ongoing, and each day new changes can be seen in the banking sector for the betterment of the economic growth of the country.

Candidates who are willing to apply for the upcoming Government exams must ensure that they have proper notes and sufficient study material to prepare for the exam. For any other assistance, they can turn to BYJU’S.

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