As the country enters the golden jubilee year of bank nationalisation today, banks themselves have little to celebrate about. The current generation of bankers working more on systems than on knowledge hardly seem to realise the rough patch Indian banking is going through today.
So how has the banking sector fared in these five decades of nationalisation?
During the first decade, to bring about a change in the mindset and meet the goals of bank nationalisation, the government and the RBI set up nearly 50 study groups and working committees. During the first five years, six groups studied the general functioning of banks, six more studied priority sector lending and nine teams devoted their attention to giving a direction to industry and trade.
In the next five years, 10 working groups concentrated on general functions while 12 studied lending to agriculture and allied activities and seven groups studied aspects related to industry and trade.
The Nabard had also been set up as a statutory body. Schemes such as IRDP, SEEUY, DRI came into being. This period also saw modifications to certain institutional mechanisms like the Lead Bank Scheme and Service Area Planning, and the setting up of Regional Rural Banks. Bank chairpersons had also visited villages and several farm enterprises.
The second decade saw a spurt in social lending, project finance for agriculture, with many a small and marginal farmers benefiting, and more lending to small scale industries. Directed lending came under attack with several borrowers defaulting. The late Rajiv Gandhi, in a public meeting then, mentioned that only 16 paise of every rupee lent was going to the beneficiaries of government- sponsored schemes.
The third decade changed the texture of banking in India. The Narasimham Committee in the wake of the liberalisation of the economy, had recommended more space for private banks to usher in a spirit of competitiveness among PSBs . IRAC norms were introduced and balance sheets built on accrued income basis were given a go-by.
Banks’ profitability and viability came to the fore front. Banks started viewing their rural lending portfolio and rural branches as being unviable. This period also witnessed the resurgence of private banking with the ICICI reverse merger, HDFC Bank, UTI Bank etc. The traditional private banks, with Federal Bank Ltd in the lead, also started making inroads into under-served areas. Retail banking and housing finance gained prominence in the lending portfolio. Micro finance institutions also made an aggressive push in the finance space. The fourth decade saw a surge in arm-chair lending and template-based lending. Systems started replacing humans in intelligent appraisal of loans. Asset reconstruction companies were born following the enactment of SARFAESI Act 2002.
The Indian financial sector also proved its resilience during the 2008 global crisis. Net banking made banks close the time gaps in serving customers, though these were largely urban based and computer savvy. The number of ATMs also grew exponentially.
The fifth decade saw the progressive downfall of the banking system. CDR, and the RBI’s Asset Quality Review, dubious lending to the corporate entities, poor surveillance, unconcerned boards, and poor governance led to the ₹10-trillion bad loans mess. This decade also the likes of Vijay Mallya, Nirav Modi and Mehul Choksi taking the banking system for a ride and thereby exposing the gaps in regulation.
Demonetisation exposed the infrastructural inadequacies in the banking system. Banks, to retain profits, started fleecing the customers with high service charges.
Banks today are also increasingly facing trust issues with their customers. Today, banks do more non-banking business with hefty commissions.
What is do be done
So what is the road ahead for policy-makers?
One: deal with the problems comprehensively and address them through collective and well-informed wisdom;
Two: trust in innovation and assess the innovation of its capacity to offer solutions material to the sector;
Three: Improve governance: create a pool of independent directors for the regulator to chose from ;
Four: Banks must not be left without a Managing Director even for a week;
Five: Make sure banks focus on their core activities and not sell insurance policies, mutual funds and other third party products that could also include laddus and medallions at pilgrim centres.
The writer is a former executive of SBI and currently Adviser to Government of Telangana .