[Economy] New Bank Licences: Bandhan, IDFC, Bharatiya Mahila Bank; Differential Bank licences, Bimal Jalan Committee, Narsimhan Committee; arguments favor against, Bank nationalization, Historic evolution of Banking sector in IndiaDevendra Vishwakarma
- Banking sector in British India
- Birth of RBI
- Banking sector Post Independence
- Narsimhan Committee I (1991)
- Bank licences: 1st Round (1993)
- Narsimhan Committee II (1998)
- New Bank licences 2nd round (2001)
- New Bank licences 3rd Round (2013-14)
- Bandhan Microfinance and IDFC
- In principle approval
- What is Differential licenses?
- New Private banks: Pro and Against arguments
- Bharatiya Mahila Bank (2013)
- How is it a Mahila Bank?
- Business plan of Mahila Bank?
- Why Mahila Bank is mere publicity stunt?
important: SSC has uploaded halltickets for reexamintion of CGL-2013 to be held on 27th April. Respective players check your regional SSC sites accordingly. now coming to the subject…
Bandhan and IDFC got new licences, you already know that. it’s just two line current affairs. but for SBI /UPSC interviews, we need to some background information for questions like:
- After Sahara Scam and NSEL crisis, why should we risk giving bank licences to private companies? In fact why not simply nationalize the existing private sector banks so they cannot do any scams!?
- We already have large banks such as SBI, ICICI, BoB- all of them having pan-India presence, capable of fulfilling the goal of financial inclusion, then why is there a need to get new private sector banks?
To answer such “Devil’s advocate” type interview questions, we need to go back in history:
Banking sector in British India
There were two types of banks
|British Banks||“Swadeshi” Banks|
|Their target audience = British army, civil servants and judges||Target audience= big merchants, particularly raw-material exporters in Bombay and Madras Presidency.|
Overall, neither British Banks nor Swadeshi banks helped in the financial inclusion of poor people, they still had to rely on local money lenders and Zamindars.
Birth of RBI
- By early 30s, there were >1200 banks in India!
- But all of them under Companies law- there was no banking regulation, no RBI, no SLR, CRR, repo rate, reverse repo rate etc.
So the Civil service & BankPO aspirants of that era, were relatively “Stress free” compared to present generation.
- Problem starts with Great American depression (’29) => sharemarket and companies of US and Europe collapse= raw material import declines = desi merchants cannot repay loan EMIs = Indians banks starts collapsing one by one.
- therefore, British Indian government setups Reserve bank of India to supervise over these banks (’34)
Banking sector Post Independence
- from mid-50 onwards, there is gradual expansion of banking sector in India
- SBI, ICICI, PNB, BoB all start opening more and more branches.
- but still target audience= merchants, urban (upper) middle class and industrial houses
- Branches increased? YES
- Rural penetration? NO
- Did they help aid in Five year plans like giving cheap loans to farmers and micro-enterprises? NO
- All these banks were in the hands of industralists. (who owned majority shareholding => can vote majority of board of directors=> bank’s policy decision will only be made to suit those industrialists e.g. opening branches near factory-townships, giving loans @cheap rate for setting up new factories and so on….)
- Government gets impatient with ^all this.
- starts nationalizing banks (By taking over the ownership from those industrialists)
|’55||1||Imperial bank (SBI)|
|’69||14||banks with >50 cr. deposits.|
|’80||6||banks with >200 cr. deposits (Andra, Vijaya, Oriental bank of commerce etc.)|
Nationalization: more problems
- In theory, nationalization =government becomes majority shareholding in those banks => government can pick board of director of her choice = bank takes decisions to suit government’s Five year plan requirements= everyone’s happy, right? nope
- In reality, nationalization =created more problem than it solved. for example
- Now all the board members = politicians, their relatives, retired IAS/IPS etc. Result? Professionalism =nope, sycophancy=yes.
- Banks were forced to give loans @throwaway prices to farmers/ small enterprises, sometimes even cost of giving loan (staff salary, light bill, office rent etc.) would be higher than the profit involved.
- Local politician interfered in operations. Run “loan mela” in our Constituency, open all branches in RaiBareily and Amethi only, pass applications of our chamcha-log. They would get lakhs of rupees @4% interest rate (to buy cattle) and then circulate the same money to farmers @36% interest rate and so on…
- When banks tried to recover loan money from such political elements, t hey’d get stay order from courts, then “taarikh pe taarikh”.
- This politicization even came into Bank employee unions- they’d always demand higher wages and lower working hours, irrespective of how much profit bank made.
- adding insult to injury, RBI kept the CRR and SLR very high (15 & 40% respectively)
- =very less money left for banks to lend.
- Business man cannot get easy loans = no business expansion =export declines =in a way all this contributed to the Balance of Payment crisis (BoP) in 1991.
moral of the story = nationalization is not a solution – even if Sahara, NSEL, Ramalinga Raju, Ketan Parekh, Harshad Mehta or Mr.XYZ is doing scam- that doesn’t mean you should nationalize everything.
Narsimhan Committee I (1991)
By government of India in 1991. It recommended following:
|Government / RBI mustnot regulate the banks’ loan interest rates. Banks should be allowed to decide their home loan, bike loan etc rates by themselves.||RBI adopts BENCHMARK PRIME LENDING RATE (BPLR) => nowadays Base rate system.|
|setup Debt recovery tribunals. so loan defaulters cannot get stay orders from courts, no more “Taarikh pe taarikh”||DRT setup in 1993 => later SARFAESI Act in 2002 to give them more powers.|
|Liberate Branch expansion policy. Let the banks open branches outside Raibarely and Amethi also.||done. banks can open branches anywhere. only condition 25% of the new branches each year must be setup in rural areas. For more read Nachiket Committee article.|
|Reduce CRR and SLR so banks are left with more money to lend.||Done, gradually reduced. from (15,40)=>(4,23)|
|government should reduce its shareholding from public sector banks.||done, SBI shares sold, nowadays government owns ~60%. (this facilitates entry of professionals in the board of directors)|
|Allow entry of private sector banks and foreign banks.||done, leads to first round of bank licences, explained below:|
Bank licences: 1st Round (1993)
- RBI invites application 1993
- New private banks start Operation: 1994-95 onwards
- Total ten private banks given licences: 6 still running + 4 closed down.
- UTI=>became Axis bank (2007)
All of above running successfully, so that gives us “positive arguments”- that not all private entities are seamstress. in fact, ICICI, HDFC, Axis = top banks of India, even have presences abroad, employ lakhs of people. Hence no harm in giving bank licences to private players.
4 closed down
|Global Trust Bank||Oriental bank of Commerce||recall Ketan Parekh- he took money from Madhupura cooperative Bank, A’bad and used it to run scam in Sharemarket. Same Ketan had also taken some money from Global Trust bank also=> news stories =>junta panics and runs to take out all money=> business collapsed.|
|Bank of Punjab||Centurion bank||loss making. hardly any depositors and loan takers, couldn’t stand in competition against SBI, ICICI, BoB etc.|
|Centurion bank||HDFC||same as above|
|Times Bank||HDFC||same as above|
These four #EPICFAIL banks give us the “negative arguments” that private companies must not be given bank licences. Because they can also close down like ^these, creating panic among the clients, blood pressure, heart attacks and suicides.