Small beginnings, big advances

From Rs 1,200 crore to Rs 23,48,000 crore of assets, from a moneylender to a one-stop financial shop, from a 9-1 neighbourhood branch to a 24x7 seamless entity, the Indian banking sector has undergone a makeoverin the six decades since independence.

From Rs 1,200 crore to Rs 23,48,000 crore of assets, from a moneylender to a one-stop financial shop, from a 9-1 neighbourhood branch to a 24215;7 seamless entity, the Indian banking sector has undergone a makeover in the six decades since independence. The makeover, shaped by circumstances and drawing from accumulated experience, has changed the dynamics for every stakeholder, from banks to the regulator, from borrowers to depositors, from employees to shareholders.

Leading up to independence and till 1969, banks were primarily controlled by business houses or communities. For instance, Punjab National Bank was set up Lala Lajpat Rai, Central Bank of India by the Parsis. Functioning largely within their narrow identity-based boundaries, they became self-serving vehicles of finance and failed to acquire any kind of mass appeal or spur economic development. Worse, indiscriminate lending and the absence of regulatory supervision resulted in many small banks going bust, prompting the government to take control.

In 1969, 14 big banks were nationalised, six more in 1980. Armed with greater regulatory powers, the Reserve Bank of India RBI merged or liquidated about 200 banks between 1960 and 1982. Under the aegis of the state, cooperative banks and regional rural banks became a movement.

Social objectives shaped policy and severe regulatory controls were applied on every aspect of banking. The concept of 8216;branching8217; took shape in this period, but it was directed 8212; for every branch they opened in urban areas, banks had to open four in rural and semi-urban areas. Similarly, loans were dictated by directives on who to lend to, how much and at what rate.

Excessive regulation and the absence of incentives led to sloth. Says K. Raghuraman, executive director, Punjab National Bank: 8220;Since interest rates and margins were fixed, there was no competition, which led to armchair banking and inefficiency.8221; While geographical reach increased, the sector was in shambles 8212; the percentage of bad loans was huge, service was poor 8212; and there was a glaring absence of a big picture.

The financial crisis India found itself in 1991 acted as a catalyst for economic change, an integral part of which was deregulating the banking sector. On the one hand, licences were given to private players. On the other, the painstaking task of strengthening existing banks was undertaken in four steps. First, deposit and lending rates were freed in phases, which let banks set rates based on commercial considerations. Second, banks were asked to account for bad loans within six months of a default in interest payment, not postpone it endlessly. Recounts Raghuraman: 8220;All public sector banks went from being profit-making to loss-making.8221; Third, banks had to raise more capital so as to withstand shocks better. Four, they were given operational freedom.

Probably, for the first time, the focus of banks turned to profits 8212; and the customer. From a seller8217;s market, it turned into a buyer8217;s market. The new private banks and foreign banks, both of which leaned heavily on technology, set the standard, and public sector banks were forced to follow. Service improved dramatically: banks became computerised, ATMs and plastic money became the norm in urban areas, Internet banking came in, cheque processing became faster8230; Interest rates fell, and retail lending took off. Today, for instance, retail assets comprise 65 per cent of ICICI Bank8217;s loan portfolio; even a public sector bank like PNB has 23 per cent in retail, compared to virtually nil a decade ago.

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Banks are shaping to become one-stop financial shops, for companies and individuals alike. Technology is expected to play a big role towards this end. Says V. Vaidyanathan, country head-retail, ICICI Bank: 8220;We are now focusing on lowering infrastructure costs and adding more speed.8221; The Indian banking sector is far from reaching maturity and, much like the last 15 years, it will continue to be characterised by change and growth.