The Banking industry in India has historically been one of the most stable systems globally, despite global upheavals. The government has consistently strived to promote financial inclusion through various initiatives targeted to bring the country’s underbanked population under the banking gamut.
As a part of the Digital India initiative, the Govt. mandated an open API policy, known as India Stack, giving third-party providers access to the proprietary software for five key programs: Aadhaar (the Government’s biometric identity database), e–KYC, e–signing, privacy-protected data sharing, and the UPI. However, India’s Supreme Court has recently ruled that Aadhaar is mandatory only for income tax returns (ITR) and allotment of the permanent account number (PAN). Up to 74%, FDI is allowed in Private banking and Public Sector.
Total Banking Assets of US$2.32 trillion, growing as a 6.64% CAGR from FY14-19.
The Indian banking industry has recently witnessed the rollout of innovative banking models like payments and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the domestic banking industry. The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment Service (IMPS) being the only system at level 5 in the Faster Payments Innovation Index (FPII).
Overview Indian Banking Industry
The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign banks, 53 regional rural banks, 1,544 urban cooperative banks, and 96,248 rural cooperative banks that provide financial services to the regular public such as loans, wealth management, investment services, currency exchange, safe deposit boxes and more.
- Total transaction value in the Digital Payments segment amounts to US$81,197 million in 2020;
- Total transaction value is expected to show an annual growth rate (CAGR 2020-2023) of 3% resulting in a total amount of US$134,588 million by 2023;
- The market’s largest segment is Digital Commerce with a total transaction value of US$71,544 million in 2020;
- From a global comparison perspective, it is shown that the highest cumulated transaction value is reached in China (US$1,928,753 million in 2020).
History of Banking System in India
In India, the banking system is as old as the early Vedic period. The Rig Veda speaks only gold, silver copper, and bronze, and the later Vedic texts also mention tin, lead, iron, and silver. Recently iron coins were found in very early levels at AttranjiKheri (U.P.) and Pandu RajarDhibi (Bengal) since the days of Buddha. In ancient India during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. A money economy existed in India. Today banks have become a part and parcel of our life. There was a time when the dwellers of the city alone could enjoy their services. Now banks offer access to even a common man and their activities extend to areas hitherto untouched. Banks are one of the most important economic wings of any country. In this modern time, money and its necessity are very important. A developed financial system of the country ensures to attain development. A bank provides valuable services to a country. To attain development there should be a good developed financial system to support not only the economy but also the society. So, a bank plays a vital role in the socio-economic matters of the country.
|Sl. No.||Category||Number of Branches||Number of ATMs|
|1||Public Sector Banks||87,860||132,288|
|2||Private Sector Banks||32,375||73,188|
|4||All Co-Operative Banks||97,792||─|
|5||Other ATM Services||26,735|
Before the establishment of banks, financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there was no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. India is one of the top 10 economies in the world, where the banking sector has tremendous potential to grow. The last decade saw customers embracing ATM, internet, and mobile banking. India’s banking sector is currently valued at INR. 81 trillion(US$1.31 trillion). It has the potential to become the fifth largest banking industry in the world by 2020 and the third-largest by 2025, according to an industry report.
The face of Indian banking has changed over the years. Banks are now reaching out to the masses with technology to facilitate greater ease of communication, and transactions are carried out through the Internet and mobile devices. A bank is a financial institution that provides banking and other financial services to its customers. A bank is generally understood as an institution that provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. A banking system also referred to as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout the day. The banking system in India should not only be hassle-free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India’s banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role—accepting deposits and lending funds from these deposits.
Now, the existing situation has created various challenges and opportunities for Indian Commercial Banks. In order to encounter the general scenario of the banking industry, we need to understand the challenges and opportunities lying with the banking industry of India.
As per RBI provisional data on global operations, the aggregate amount of gross losses of PSBs and Scheduled Commercial Banks (SCBs) were INR. 806,412 crore and INR. 949,279 crore respectively. Secured Governance strategy designed to minimize the revenue loss of the banking sector. The value and valuation strategy offers sophisticated funding mechanism and tailored to the economic growth and generate huge employment opportunity.
Further to this, during 2019-2020 (up to December 2019), capital adequacy remained above regulatory requirements despite the NPA ratio increasing. RBI relaxed the leverage ratio for banks to boost lending. Moreover, Recovery of stressed assets improved during 2019-20 through the IBC, 2016 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.
Banks continued to post robust growth in retail loans in 2018-2019. Housing loans were supported by incentives for affordable housing such as the Pradhan Mantri Awas Yojana (PMAY) and the implementation of the Real Estate (Regulation and Development) Act (RERA). Furthermore, rationalization of risk weights and provisioning on standard assets in certain categories of individual housing loans in June 2017 gave a fillip to the segment. Auto loan growth also edged up.
Amalgamation and Merger of Banks
Recent developments like amalgamation and merger of banks resulted in the economics of sale. Cost rationalization, size matters in financing large-sized project finance and Govt plan of Infrastructure Pipeline of 7000 projects of INR. 111 lakh crores, Govt large focus on Physical, Social, Human and Digital infrastructure in the recent Budget with higher allocation for CAPEX of INR. 5,54,000 lakh crores in roads, railways, port airports, etc with a special focus on the role of the private sector in creating new capacities and on a PPP basis needs strong capitalized large size SCBs.
Recently Govt has also brought a far-reaching change in banking like privatization of two Public Sector Banks, the establishment of a Development Finance Institution for long term infrastructure projects. This DFI is called National Bank for Financing Infrastructure and Development (NaBFID). This new DFI will be established with presently INR. 20,000crores capital with a provision to reduce Govt shareholding to 26% in the future and Govt may offer up to 74% stake to domestic, foreign Institutions over time. Govt is planning a portfolio of INR. 5 lakh crores in the next three years.
Govt has also decided to set up Asset Reconstruction Company, AMC to manage NPAS. An Asset Reconstruction Company Ltd and Assets Management Co would be set up to consolidate and take over the existing stressed debt and then manage and dispose of the assets to Alternate Investments Funds and other potential investors for eventual value realization.
An Internal Working Group set up RBI has recommended large Corporates/ Industrial Houses may be allowed as a promoter of Banks only. after amendments to the Banking Regulation Act of 1949 to prevent connected lending and exposure between the Banks and other financial and non-financial groups cos and strengthening the supervisory mechanisms for large Conglomerates including Consolidated Supervision. It is to be watched whether RBI will examine this IWG recommendation and private Corporates to enter Banking. The committee has also recommended the cap on promoters’ stake, in the long run, maybe increased to 26% from the current level of 15%. As regards non-promoters cap on the shareholding uniform cap of 15% may be prescribed.
The digital push received for payments during and after Covid 19 through NPCI.As of March 2021 UPI 2.73 billion transactions with a volume of INR. 5.04 trillion rupees. Similarly, IMPS 3.63 billion transactions with a volume of INR. 3.27 trillion. The recent introduction of Fastag has already captured 1.93 billion transactions with a volume of INR. 3,086 crores for March 2021.
RBI may open Doors for Private Players to set up New Umbrella Entity for Retail Payments System Infrastructure Lot of Domestic financial players as well Foreign Players have shown interest and different Consortiums have been formed to submit bids for New Umbrella Entity(NUE).
Role of Commercial Banks in the Economic
Activities of the commercial banks in India are expanding at a rapid pace during the period after independence. There is territorial as well as functional. Banks which are conservative and conventional in their approach have come out from their shell and face the challenges of planned economic growth. In recent years non-conventional sectors are receiving the attention of commercial banks in India. A better understanding of the implications of financing the nonconventional sector by commercial banks is possible only if one looks back at the position of commercial banks during the pre-nationalization era. Banking in India before nationalization.
Commercial Banks are is the institutions that ordinarily accept deposits from the people and advances loans. Commercial Banks also create in India; such banks alone are called Commercial Banks which have been established in accordance with the provisions of the Banking Regulation Act, 1949.
Commercial Banks may be Scheduled Banks of Non-Scheduled Banks. Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, ‘a banking company is a company which transacts the business of banking in India.
According to the Reserve Banks of India Act 1934, ‘AScheduled Bank is that bank which has been included in the second schedule of the Reserve Bank’.
Role of Financial Institutions in Social Empowerment
Banks are one of the most important parts of any country. In this modern time money and its necessity is very important. A developed financial system of the country ensures attain development. A modern bank provides valuable services to a country. To attain development there should be a good developed financial system to support not only the economy but also the society. So, a modern bank plays a vital role in the socio-economic matters of the country. Some of the important roles of banks in the development of a country are briefly showing below.
- Promote saving habits of the people.
- Channelizing the Funds to Productive Investment.
- Capital formation and promote the industry.
- Smoothing of trade and commerce functions.
- Promoting export &import.
- Generate employment opportunities.
- Support agricultural & rural development.
- Applying of monitory policy.
- Balanced development.
Promote Saving habits of the people: Bank attracts depositors by introducing attractive deposit schemes and providing rewards or return in the form of interest. Banks providing different kinds of deposit schemes to their customers. It enables the creation of banking habits or saving habits among people.
Capital formation and promotion industry: Capital is one of the most important parts of any business or industry. It is the lifeblood of business. Banks are increasing capital formation by collecting deposits from depositors and convert these deposits into loans advances to industries.
Smoothing of Trade and Commerce Functions: In this modern era trade and commerce play a vital role in any country. So, the money transaction should be user-friendly. A modern bank helps its customers to send funds anywhere and receive funds from anywhere in the world. A well-developed banking system provides various attractive services like mobile banking, internet banking, debit cards, credit cards, etc. these kinds of services fast and smoothes the transactions. So, the bank helps to develop trade and commerce.
Generate Employment Opportunity: Since a bank promotes industry and investment, there automatically generate employment opportunity. So, a bank enables an economy to generate employment opportunities.
Support Agricultural development: Agricultural sector is one of the integral parts of any economy. Food self-sufficiency is the major challenge and goal of any country. Modern banks promote the agricultural sector by providing loans and advances with a low rate of interest compared to other loans and advances schemes.
Applying of Monitory Policy: Monitory policy is an important policy of any government. The major aim of monetary policy is to stabilize the financial system of the country from the dangers of inflation, deflation, crisis, etc.
Balanced Development: Modern banks spreading their operations throughout the world. It helps a country to spread banking activities in rural and semi-urban areas. The spreading of banking operations around the country helps to attain balanced development by promoting rural areas.
The modern bank plays a vital role in the socio-economic development of the country. A developed banking system enables the country to attain balanced development without any special consideration of rich and poor, cities and rural areas, etc.
Role of Commercial Banks in Economic Development
Commercial banks are one source of financing for small businesses. The role of commercial banks in economic development rests chiefly on their role as financial intermediaries. In this capacity, commercial banks help drive the flow of investment capital throughout the marketplace. The chief mechanism of this capital allocation in the economy is through the lending process which helps commercial banks.
Risk: One of the most significant roles of commercial banks in economic development is as arbiters of risk. This occurs primarily when banks make loans to businesses or individuals. For instance, when individuals apply to borrow money from a bank, the bank examines the borrower’s finances, including income, credit score, and debt level, among other factors. The outcome of this analysis helps the bank gauge the likelihood of borrower default. By weeding out risky borrowers, commercial banks lessen the risk of financial losses.
Small Business: Commercial banks also finance business lending in a variety of ways. A business owner may solicit a loan to finance the start-up costs of a small business. Once funded, the small business may begin operations and embark on a growth plan. The aggregate effect of small business activity generates a significant portion of employment around the country.
Wealth: Commercial banks also offer types of accounts to hold or generate individual wealth. In turn, the deposits commercial banks attract with account services are used for lending and investment. For example, commercial banks commonly attract deposits by offering a traditional menu of savings and checking accounts for businesses and individuals. Similarly, banks offer other types of timed deposit accounts, such as money market accounts and certificates of deposit.
Government Spending: Commercial banks also support the role of the federal government as an agent of economic development. Generally, commercial banks help fund government spending by purchasing bonds issued by the department of the Treasury. Both long- and short-term treasury bonds help finance government Operations, programs, and support deficit spending.
Secured Governance advocates a pragmatic approach of taking Advantage of Valuation of Assets Created
Indian banks — particularly public sector banks — are loaded down with many problems including non-performing loans are one of the major problems. This means that they find it difficult to grow their new lending to industry, and growth suffers. The financial industry should put in place a robust system to solve the NPA problem of the banking sector. Secured Governance is a novel strategy that consists of promoting infrastructure (Banking HUB) development that integrated with all key supporting sectors such as transport, power, telecom, healthcare, education, etc. This is not new. We all know when development takes place there is valuation in the property. Who benefits from this? Often it is incidental and taken advantage of by land and property sharks. Imagine a model where this valuation can be plowed back into the project and benefit the people around. First, the development cost of the Financial HUB is reduced and can actually be at negligible cost to the government if carefully planned. Next, the population sees it as benefitting them and so they participate more enthusiastically, helping with the early completion of the project rather than being an impediment. The strategy provides a generic pathway to capture a part of the increased value by the investment made by private stakeholders and helps repayment of loans for infrastructure (HUB) development. This mechanism helps to reduce the GNPA ratio drastically.
Benefits of Secured Governance in Banking Industry
- funding to the projects could be minimized through the SG concept.
- Enhance financing strategies and public-private collaboration through SG.
- Leads towards cost reduction, increase efficiency, improve productivity, and Contour economically the procedures & banking practices.
- Creative (Bankers) and innovative (private entrepreneur) actors come together to identify links and connections that can help find unexpected solutions to complex challenges and unleash the power of collective innovation.
- Drawing effectively public funding and support can unleash the Techno-Economic growth of the nation.
Secured Governance – Project Development & Bank Funding
The secured Governance concept focuses on strengthening the Private Public Partnership while substantially reducing governmental involvement. Government plays a supervisory and a monitoring role rather than getting entangled into the nitty-gritty of big projects. The majority of the investments will be made by private entities which would require huge bank funding. Now since most of the developmental work comes under public infrastructure and services the banks may not be able to fund such projects. We propose that Govt. against this infrastructure can grant more FSI to the private stakeholders for other projects in the same zone giving way to smooth flow of funds.
Value and Valuation of the allied projects will make it a self-sustaining mechanism while bringing unprecedented growth and development for the nation.
Supporting Productivity Enhancements by Technology Enhancements
- Foster collaboration across functional, Service, Agency, and national high-performance computing communities;
- New and advanced technologies can provide a wide range of productivity-enhancing benefits, including increased efficiency, cost reduction, increase speed, greater reach, and increased reliability of processes and transactions.
Over a significantly long period of time, countries embarking on a process of development within. The frameworks of mixed, capitalist economies have sought to use the developing banking function, embedded in available or specially created institutions, to further their development goals. The role of these institutions in the development trajectories of late industrializing, developing countries cannot be overemphasized. However, with the financial liberalization of the neoliberal variety transforming financial structures; some countries are doing away with specialized development banking institutions on the grounds that equity and bond markets would do the job. This is bound to lead to a shortfall in finance for long-term investments, especially for medium and small enterprises.
- Secured governance acts as a catalyst for reducing Non-performing assets (NPAs) in the banking sector drastically. Value of banking HUB which grows many folds.
- Banking HUB ─ A city or area that is a focal point for the Banking & Financial associated services. Synergy, or the potential financial benefit achieved through the combining of the banking sector with industries. The Special Purpose Vehicle (SPV) becomes an indirect source of financing for banks by attracting independent equity investors to help purchase the debt obligations.
- These HUBs are home to all types of public & private industries and enterprises. The financial services or functions will be provided by the banking industry to all business enterprises.
- Banks could provide loans to public and private industries for investment in infrastructure development.
- The banking industry could furnish CA, CPA (Certified Public Accountant) services such as auditing, bookkeeping, payroll processing, and tax return preparation.
Financial HUBs could minimize the monetary losses of the banking sector and would keep India on the global map as a Centre of excellence in the Financial & IT/ITeS Services. The impacts of HUB on values could recoup the private investment of infrastructure development and minimize the loan repayment. Moreover, it will create huge employment opportunities in the field of the financial service industry in India.
The Financial HUB’s value refers to financial gains from the appreciation of vicinity land because of Public-Private Participation. The HUB will be an emerging global financial HUB for which first time in India, designed to be at or above par with a globally benchmarked economic growth center. Companies from Financial Services, Technology, and all other services sectors will be targeted as potential occupants within the city.
Dr. P. Sekhar,
Chairman, Unleashing India,
Global Smart City Panel, MTGF
Award-winning reputed Banker and Ex CMD IOB