History Of Commercial Banking

Published Date: 02 Nov 2017

By: Prof.Dr Rajesh Iyer

M.Com., MBA, CAIIB, Ph.D.

NIT Graduate School of Management,

Mahurzari, Katol Road, Nagpur

Contact 9850445557

Quo vadis ? (whither goest thou ? This is the poser that can be put to the public sector banks, especially the nationalized banks, which have completed 43 years of the landmark event of Bank nationalization in our country. July 19th, 1969 marks the water shed occasion when 14 major private banks were brought under 100% state ownership and control by deliberate legislative action. The primary aim of nationalization was to bring economic resources of the country under state control to utilize them as per national priorities. Much water has flowed in the country’s political stream since then and the socio economic priorities have been radically redefined in the last four decades. In this context the current structure and functioning of nationalized banks can lead to the valid question as to which direction are these banks headed and what is the future picture of mission , strategy and vision that they are expected to pursue.

HISTORY OF COMMERCIAL BANKING

The modern commercial banking in our country is legacy of British just like the Railways, Posts, Administrative and Judicial systems. The launch of Presidency Banks in early 18th Century, which later became Imperial Bank and now known as the very familiar and omnipresent State Bank of India, marked beginning of organized commercial banking in the country. Incidentally the Imperial Bank of India was performing role of Banker to the Government before formation of R.B.I in 1935 in the British era. The establishing of Allahabad Bank which is oldest nationalized bank (1865) , and later formation of Punjab National Bank, Canara Bank, Bank of India, Bank of Baroda, Union Bank of India etc in late 18th and early 19th century heralded the impetus to commercial banking in the pre independence period. Though some of these banks were founded by British in association with Indians few were exclusively conceived and floated by Indians fired with nationalistic spirit. (eg. the Punjab National Bank) The various nationalized banks which are ubiquitous in their presence today were all founded in the pre independence period and survived the tumultuous times to contribute to country’s growth and progress after India got rid of foreign rule. .

The Post independence period was very challenging for the country. To safe guard political freedom it was thought that protectionist economic policies were required. The nation was guided by socialist model of economic growth for four decades after we became a Republic. Most of the commercial banks were under private ownership and control, except for State Bank of India (SBI) , which had previous legacy of majority government shareholding, apart from private shareholders. As stated earlier the Imperial Bank of India of British era became State Bank of India in 1955 after an enactment to that effect in the Parliament. The various Associate Banks of SBI were brought under Government ownership and control by means of separate enactment. The SBI and Its Associate Banks, though part of public sector banks, have distinct identity and systems vis a vis the nationalized banks. The commercial banks were mostly owned and controlled by big business houses and it was the perception that they were subservient to interest of the business groups rather than function for broader national interests.

SOCIAL BANKING AND NATIONALIZATION

The sojourn of banking sector in post independence is marked by significant and radical changes in the orientation and functioning of the commercial banks. It is also marked by significant milestones which have no parallel anywhere in the world. These are briefly charted herein below. The Social Banking initiatives of the Government in decade of sixties was first step towards directing commercial banks to work for national goals. The government desired that banking services should be for masses and in consonance with welfare objectives. Since the response to social banking concept was not upto expectation of government the radical decision to nationalize fourteen major commercial banks was taken on 19th July 1969, and these banks became wholly owned and controlled by government. Thus the Government gained control over the "commanding heights of economy". Inspite of nationalized banks became fully "Sarkari" banks the "big brother " S.B.I. continued to enjoy status of Bank handling various government accounts/ transactions due to the past legacy. It is a point to ponder that how S.B.I. continued to have private shareholding during this period, when thrust was on complete state ownership and control of financial institutions. The nationalization of banks emboldened government to take more radical steps like nationalization of General Insurance and Coal sector in the early seventies.

The decade of seventies and eighties marked rapid expansion of public sector and nationalized banks branches across the length and breadth of the country. Remote, inaccessible areas were also connected with banking services. There was quantum leap in number of bank branches which increased from around 8300 in 1969 to nearly 59800 in 1990. Massive recruitment drives were undertaken to employ lakhs of staff to manage banking activities at thousands of bank branches. throughout the country. The main activity for nationalized banks was deposit mobilization and lending to priority sectors i.e. Agriculture, Small Scale Industries, Small Traders, Transporters and Professional / Self employed persons at preferential rates of interest.

Taking the story of bank nationalization further the script incorporated introduction of Lead Bank Scheme which envisaged predominant role for various nationalized / public sector banks in formulating and implementing development plans for rural and semi urban segments of districts across the country. The Regional Rural Banks (RRB) were floated in mid seventies as low cost, local flavour alternative delivery channel to branch expansion of public sector banks in backward districts/areas in various states. The performance of RRBs is subject matter of another lengthy discussion and cannot be covered here. However it can be stated that present state of affairs of RRBs is not quite satisfactory and their future is shrouded in uncertainty. In 1980 another chapter was written in history of Bank nationalization when 6 more banks were nationalized, on April 15, 1980, taking the number of nationalized banks to 20. Thus with this move virtually close to 95% of banking business of the country was under control of government, with only 3 to 5% business in hands of other private/ foreign banks operating then in India..

CRITICAL ISSUES AND PROBLEMS

In the decade of 1980s Nationalised banks became victims of political expediency rather than being managed as per sound economic policy. Massive financing was done by public sector banks under poverty alleviation programs of Government such as IRDP, SEEUY, SEPUP, 20 Point program etc in early eighties till nineties Banks were compelled to organize loan melas which were done with much gusto and fan fare where political leaders would be prominently present and bankers remained in background. The massive and unparalleled Agricultural Debt waiver of government in 1990 gave rise to culture of deliberate delinquency in repayment of bank loans. All these pressures took heavy toll of nationalized banks in financial terms, putting their viability at risk. The only anchor for these institution was that they were 100% owned by government. However inspite of government control and management there was a remarkable instance of failure of a nationalized bank in the 1990s. The mysterious collapse of New Bank of India (which had been nationalized in the second lot in 1980) around 1992 and its hasty merger with Punjab National Bank had raised many questions which till date have not received any answers. The forced marriage of the two banks caused much discontent amongst employees of both organizations and other problems of work culture, coordination and control. The number of nationalized banks resultantly came down to 19 thereafter.

It will be pertinent to bring on record here that even though the nationalized banks were working under total government ownership and control, the work culture, systems and ethos which were legacy of past ownership and control continued to prevail. Even though all banks were offering similar products/ services on identical terms, still the customer orientation and working systems inherited from past continued to dominate and prevail inspite of acquiring nationalized character. Even the passage of four decades plus years after nationalization has not been able to fully erase the past legacy of unique and distinct organizational culture of each of the nationalized banks. There is also considerable heterogeneity amongst the nationalized banks in terms of balance sheet size, business volume and branch network. It also should be noted that many smaller sized nationalized banks are more regional or confined to few contiguous states in terms of geographical spread. Thus any thought of integrating all nationalized banks has remained a pipe dream !

IMPACT OF LIBERALIZATION AND ECONOMIC REFORMS

The nineties ushered in the era of Reforms, blowing winds of Liberalisation, Privatisation and Globalisation. World over there was radical political and socio economic transformation and India too had to follow the trend due to economic compulsions. The first target of the reforms process were financial institutions, particularly the nationalized banks. The Narsimhan Committee report of 1991 charted the route map for banking reforms. It encompassed - Deregulation of interest rates, introduction of strict norms for Income recognition and assets classification for identifying Non Performing Assets (NPAs), emphasis on profit goals and gradual privatization were the dimensions of reforms implemented for the nationalized banks. The U turn from state ownership to again private ownership was indeed phenomenal. One by one all the nationalized banks went for public issue of shares paving way for increasing private ownership of these banks. Thus today even though Government holds majority stake in all nationalized banks, they all have got the public share holding and shares listed and traded on recognized stock markets. For many associated with banking sector events had come a full circle since they had witnessed and experienced transformation from private sector to nationalisation and then again privatization. The Narsimhan Committee II report of 1998 (on accelerated economic reforms) and Verma Committee Report of 2000 (on weak banks) gave further signals for increased privatization and merger of nationalized banks. Thus it is a lingering thought in the financial system, since two decades, for further privatization of these banks by divesting government stake and also mergers, but the same has not been implemented due to policy flip flop and political compulsions.

In the liberalized economic system the nationalized (now partially privatized) banks were having new set of goals – there was stress on competitive, profitable banking, technological transformation in systems and work procedures, compliance of capital adequacy and NPA norms, marketing orientation of business activities, focus on retail banking and fee based services (like mutual funds, insurance). There was also formidable challenge from the young, agile, aggressive and techno savvy new generation private sector banks. The nationalized banks proved more than equal to the task and even though the new generation banks did make initial dents in the business, the nationalized banks were able to maintain steady growth in business volumes in all segments. The technological transformation of nationalized banks was another phenomenal achievement, as the banks abandoned archaic manual procedures to migrate to contemporary Information Technology based systems, redefining the work processes and service delivery. The nationalized banks now offer world class AAA banking technology services (i.e. Anytime, Anywhere and Anyhow Banking), for convenient, accurate and speedy transactions.

CHALLENGES OF HUMAN RESOURCE MANAGEMENT

In the interim period the nationalised banks undertook drive for jettisoning of staff under Voluntary Retirement Scheme (VRS) in year 2000. While it yielded short term benefits in terms of reduced staff costs, it created massive vacuum in terms of skilled work force, which prompted these banks to undertake concerted large scale recruitment drives within 5 to 6 years of the VRS implementation. Today inspite of contemporary state of art technology nationalized banks are facing pressure in terms of heightened customer expectations, and problems in customer service arising out of under staffed branch network.

It needs specific mention that the staff of nationalized banks adapted themselves very effectively and efficiently to different roles and goals assigned to them all throughout the different transformational phases in the four decades post nationalization. Though strong and militant trade unionism was characteristic of the nationalized banking system, the banks never really evolved scientific Human Resource development policies and relied on short term manpower management procedures. Over a period of time though the trade unions in nationalized banks, have found their support base eroded due to multiplicity of unions, and inter union rivalries. This has prompted Bank’s managements to continue adopting ad hoc H.R. policies and practices specifically aligned with temporary goals and objectives. The recent Khandelwal Committee report of 2010 on H.R. policy reforms in nationalized banks is still being debated, hence no clear direction is visible on this front. .

NATIONALISED BANKS – A PICTURE OF CONTRAST AND CONTRADICTIONS

Thus the present scenario of nationalized banks is rather a patch work of conflicting objectives and goals and confusion as regards to direction and orientation. The part privatization of these banks and lack of clarity in government policy regarding future direction of ownership and control has put these banks in Hamlet type situation – (to be or not to be). They are expected to perform efficiently, and competitively like private sector organizations but are shackled by bureaucratic policies, procedures and systems. They are expected to earn profit yet perform social service. It is like running 100 metres sprint with one leg tied up ! The rural and semi urban branches network of nationalized banks are expected to continue for development of rural sector through financing under poverty alleviation programs .and financial inclusion initiatives. The urban and metropolitan brunches in contrast are to deal with retail customer and high net worth individuals apart from sophisticated corporate lendings ! Also thrown in are multiple business activities at metro centres like canvassing business for mutual funds, insurance, gold coins, depository and share trading services etc. To give an analogy an artist who was till now oriented to perform Kathak dance is suddenly asked to dance to tune of rock band !

There is also time and again talk about mergers amongst public sector/ Nationalised banks. The State Bank group has taken lead and two associate banks were merged with SBI in past but no new move has been made in last 2-3 years. Given the different organizational culture of various nationalized banks mergers merely based on financial and economic calculations, just to create big sized banks , may prove to be counter productive. Often it is argued that we need big banks to take on global competition. Simultaneously the nationalized banks are required to comply with Basel norms of international banking for capital adequacy and risk management. But the experience of global banking giants which have come crashing down heavily in the recent past provides effective counter point to above argument. Comparatively the Indian banks, particularly nationalized institutions have sustained the global economic downturn quite effectively. What is worrisome however is the massive inflation coupled with slow down/recession in commercial /business activities and overall dismal performance trends in economy, which may adversely impact working of the banks in our country, by increasing the amount of Non Performing Assets.

NEW ROAD MAP FOR EMERGING SCENARIO

The nationalized banks have always risen to the occasion and adjusted and adapted themselves efficiently and gracefully to all challenges posed to them during the last four decades. From private, elite, urban and class banking in 1969, these banks accomplished goals of mass, rural, agriculture oriented banking. The radical, about turn of 1991 economic reforms was managed by these banks in a responsible and diligent manner, without much hiccups. The technological transformation from manual ledger based system to computerized, network / internet based banking system was achieved smoothly without any major crisis. All along the nationalized banks have been effectively catering to needs of millions of the country men who are comfortable and reassured on seeing the familiar face of Manager or Cashier or other bank staff .at the bank branch. The nationalized banks are repository of trust and faith of millions of Indians not to mention the deposits of crores of Rupees mobilized by them and almost equal amount of loans given to needy and deserving borrowers. But the lofty goals for which banks were nationalized are now nowhere in sight as policy makers have made a complete volte face, embarking hastily and zealously on the perilous route to privatize the gigantic structure of nationalized banks.

It must therefore be clearly defined who are the real stakeholders of nationalized banks, the government / political system, the share holders/ investors, the management, the customers (depositors / borrowers) , the staff/employees or is it the millions of people of this country for whose welfare the banks have strived in the last four decades? Do we need a banking system more for global financial operations or needs and wants of 1 billion plus population of our country, most of which lives in rural hinterlands ? The imperative need is for a well thought out and studied , stable, long term vision document, to be designed by economists and bankers, for nationalised banks in India, which will chart their growth and development strategy for the decades to come, so that their monumental contribution to national development gets multiplied in manifold terms.

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