BANKING ON CHANGE

Indian banking hs so far moved through five distinct stages.The first stage covering the period from 1900 to 1950 saw series of births of new banks and series of bank failures.This period also saw the birth of Reserve Bank of India,the monitor of banking system and enactment of Banking Regulation Act in 1949 giving powers to RBI to regulate supervise and develop banking system in India.
During 1950s and 1960s i.e in the the second stage efforts were directed at laying the foundation for a sound banking system in India.This stage also saw the development of necessary legislative frame work for facilitating the re-organisation and consolidation of the banking system for meeting the requirements of Indian economy.Transformation of Imperial Bank in to State Bank of India and redefinition of its role in Indian economy were the major developments during this period.
The third stage was the expansion stage.Expansion initiated in the mid-sixties gained momentum after nationalisation of 14 major banks in 1969 and got further intensified after the take-over of 6 more banks in 1980.The fourth satge which began in 1985 was the stage of consolidation.During this stage efforts were made to address the weaknesses noticed in the banking system as a consequence of speedy expansion.This period saw a marked slow-down in the expansion of branch network.Attention was paid to the improvement of house-keeping,customer service,credit management rationalistaion of interest rates,on deposits and advances,profitability,staff productivity etc.
Next came the stage of reforms.The macro economic crisis which was faced by India in 1991 paved the way for extensive financial sector reforms.Inspite of the impressive expansion of the banking system in the earlier stages Indian banking system was found financially weak and some of the banks had already become unprofitable and under-capitalised with high level of non-performing assets.
A significant development during the reforms stage was complete deregulation of interest rates both in respect of deposits and advances except for small loans up to Rs.2 lakhs.An important fall-out of deregulation of interest rates has been total change in approach to mannagement and governance of banks.Pricing of loans became free and as result banks have to develop a risk evaluation model for assets acquired by them.Different risks have to be identified,categorised and appropriately priced instead of being offered at a common cost plus price.In the emerging scenario banks have to shift their focus from process based management to risk based management.
Another important measure introduced in the reforms stage has been easing of norms for the entry of new players into the banking field.As result there has been significant increase in the number of private banks and number of foreign bank branches .Now there is a competitive set up in banking sector.New private banks have sensitised ordinary users of banking products and services and made them more and more quality conscious.As a result market for banking services has become buyers market.
As result f reforms there has been blurring of distinction between banks and financial institutions in India.Now there is increased accent on universal banking.In these days of virtual banking a vast network of branches which was a mesure of size and strength in the past may not remain so.Banks have to strive hard to build up themselves as strong and sound institutions and produce better and stronger balance sheets.THE MAJOR DEVELOPMENTS IN POST REFORM PERIOD INCUDED THE FOLLOWING-
1.Shift of emhasis to risk management and asset liability management on scientific and efficient lines.2Significant improvement in capiatl adequacy ratios of banks and also in profitability and productivity.3. Significant decline in NPA rates in all banks.4.Integration of financial markets in India.5.Better and higher provisioning for bad and doubtful debts and also provision of 1percent for standard assets.6.Introduction of loan review mechanism.7Establishment of asset reconstruction company.8Incresed disclosures to ensure transparency.9Enactment of SARFAESI ACT.10.Establishment of debt recovery tribunals.11.Implementation of competition enhancing measures such as opening of new private banks,market role enhancing steps such as reduction in SLR and other reserve requirements,introduction of pure inter bank call money market,auction based repos and reverse reposfor short term liquidity management,and prudential measures such as international best practices and norms on risk weighted acpital adequacy,management,accounting,income recognition,provisioning and exposure norms.12.Emegence of universal banking.13.Inforamtion technology revolution.14.Risk based supervision.15.new basel accord.16.corporate governance.17.Financial Inclusion.18.new bank licensing and branch licensing policies.19Permission to banks to access capital from the market up to 49 percent.20 Dismantling of BSRBs.
In my view future of Indian banking lies in rural sector the potential of which ahs not been fully exploted so far.Banks have to focus increasingly on ruarl operations in order to tap the rural business potential in the days to come.Bnaks must have claer vision of emerging challenges.
[Source-Bhavan's Journal dated 30th September 2001]