PROTAGONIST TO ECONOMIC TRANSFORMATION

Source: Yojana – January 2018

Authors: Vivek Kumar, Sanket Tandon, Shubhada Rao

2018 will see a sustained rise in banking services and therefore banking solutions and delivery would increasingly become sophisticated.

Response to Reforms:

Post liberalisation in 1991, the banking sector expanded rapidly in 2000s due to following reasons:

1. Deregulation of credit processes and interest rate structures;
2. Licensing of private sector banks;
3. Gradual reduction in pre-emption;
4. Migration to Core Banking Solutions.

Resultantly, deposits in banks and credit services increased. Also, the deposit and credit ratios with respect to GDP increased significantly.

Private sector banks slowly increased operations in this period. Private sector bank’s ownership of deposits has risen from 20% in FY07 to 24% in FY17.

Factors contributing to such increase in the operations of Private Sector Banks:

1. Vintage: Public Sector Banks undertook most of the industrial/infrastructural financing in the 1970s and were affected due to business downswings. The Private Sector Banks being the new entrant to a liberalised market expanded rapidly.
2. Technology: Private Sector Banks made use of latest technology and intensive solutions e.g. Point of Sale machines.
3. Controlled costs: Private Sector Banks have been able to keep their overall costs under control when compared to Public Sector Banks thus increasing profits and ensuring investments in important channels.
4. Flexibility: Privates Sector Banks have flexible hiring, retention and compensation policies and therefore have been able to hire the right talent.
5. Faster decision making: Faster decision making process regarding identification of stress and remedial measures.

Public Sector Banks:

Recent structural reforms undertaken by government in relation to Public Sector Banks:

1. Setting up of Bank Board Bureau
2. Splitting up of Chief Managing Director’s post into a non-executive Chairman and Chief Executive Officer
3. Recommendation of a longer tenure for CEO
4. Creation of Central Repository of Information on Large Credits (CRILC) and the implementation of the Insolvency and Bankruptcy Code
5. Large scale capitalization plan worth Rs. 2.11 lakh crore.

Trends for next generation banking in India:

1. Use of technology: Reliance on technologies like big data, cloud computing and smart-phones. Much needs to be done in this sector as there are over 946 million mobile users in the country but only 50 million mobile banking customers. The JAM Trinity (Jan Dhan-Aadhar-Mobile) can be useful.
2. Focus on increasing competition among banks and providing cheaper services to customers.
3. Priority on cashless and branchless banking and reducing costs on ATM uses.
4. New models to serve MSMEs – MSME sector contributes 8% of the GDP of the country. Therefore, focus must be on structures such as Cluster Based Financing, Capital Subsidy Policy for Technology Up gradation, MUDRA Bank, Credit Guarantee Schemes, Incubation Centres and start-up facilities.
5. Focus on entry of new age specialized banks.