Synopsis: Indian banking has come a long way since the reforms were implemented in 1991. Private banks have been playing a vital role in bringing innovative technology and products to the banking space. However, despite these contributions, Indian banking is still a work in progress on some core issues.
The key focus of the 1991 reforms was directed towards the financial sector. In the Budget speech, the then finance minister Manmohan Singh highlighted that the objective of the reforms will be competitive efficiency and economic growth. Yet, 30 years later, the banking sector continues to be a major economic concern.
How has the journey turned out in the last 30 years?
In 1990, the country had 75 banks and the total value of the banking sector was 50 percent of the GDP or Rs.2.9 lakh crore. Out of this, the State Bank of India made up nearly 91 percent of the banking system, with private banks making merely 3.5 percent of the banking system. The return on assets was 0.39 percent.
Fast forward to 2020 and we see a mixed bag. In the last 30 years, the GDP multiplied 24 times, whereas the banking assets multiplied 63 times. This implies that banking assets are now 135 percent of GDP.
We can also see that the industry composition has changed significantly with the share of public sector banks (PSBs) in total banking liabilities declining to 61 percent. This decline has been captured almost in entirety by new private sector banks whose share stands at 26 percent in 2020.
In 1994, the RBI licensed the new private sector banks to usher in competition and there have been quite a few successes on this front. The new private sector banks, along with foreign banks, have led the rise in the percentage of capital and reserves to liabilities to 8.21 percent. Nearly five times the 1990 levels.
After 30 broad years of Indian banking reform history, we can see some strong positives in its growth and increasing privatization of the industry.
For some reason, the RBI has been giving licenses to new commercials. In the year 1990, the central bank gave 10 licenses followed by two each in 2000 and 2010. One can say the RBI has been quite liberal to banks.
In the late 1990s, it awarded 10 licenses to local area banks which turned out to be an unsuccessful experiment. In 2014, it gave 11 new licenses to payment banks and 10 licenses to SFB (Small Finance Banks).
Governance standards is always been an issue within the banking groups. Whether it is the government-appointed Board Members in public sector banks or private appointed Boards at private banks. There have been some serious errors that have to be considered in this aspect.
There is a historical association between bad governance and the banking crisis we have undergone since the 2008 global financial crisis.
The recent Indian banking crisis is once again an outcome of bad governance. The RBI has taken several measures to improve governance, but these are only limited to private banks as the government controls the public sector banks.
In Conclusion, yes the Indian banking has indeed come a long way since 1991. but the pandemic has hit the banking sector badly. This has bought forward some challenges but the overall impact has not been as bad as what was expected initially.
Unfortunately, we have to sum up the last 30 years of the banking sector in India as more the change, the more they remain the same.
