BANK SYNERGY AND SCENARIO

History:

The amalgamation of all presidency banks started the emergence of modern banking in India (Bank of Calcutta, Bank of Bombay, and Bank of Madras) in 1921 to form the Imperial Bank of India, which was run by European Shareholders. They set reserve Bank of India up in 1935 to address the irregularities in the Joint Stock Company. Post-independence, they nationalized the RBI in 1949 as per the Transfer to Public Ownership Act. In 1955, State Bank was nationalized under the State Bank of India Act in Parliament. In 1959, seven subsidiaries of State Bank were nationalized.

In 1969, Indira Gandhi presented a paper entitled “Stray Thoughts on Bank Nationalization” at the annual conference meeting of the Government of India. The paper emphasized on nationalization of Banks. 

There were factors that led to the nationalization of banks. It was told that banks must play a social role in the economy and maintain social balance. They assumed capitalists to be imperialists. Indian freedom battles were against imperialism. Hence, people and government were conservative and influenced by the alternative to socialism. East India Company was a product of monopoly. There were few business people and rich authorities who used to dominate the banking sector and make a profit. The government of India wanted to stop this practice. Banks were set up in cities and also targeted the urban people who were very few at that time. It did not provide people living in rural areas with banking facilities. The banks before nationalization were focusing to perform transactions in the Corporate and Business sectors. They gave not much emphasis on infrastructure sectors. Despite being a country dependent on agriculture for its income and livelihood, they did not give farmers loans because of their poor economic condition.

In response to these factors, the major nationalization of Indian Banks was implemented within a month of the proposal. After this acquisition, the government-controlled around 91% of banking business in India.  

Post Nationalization Reforms:

Indian Banking System experienced a good turn after nationalization. With nationalization, the government focused on components that led to this event. In 1975, the first regional rural bank was set up. Branches of banks were set up in the rural areas of the country. In 2013, the number of branches reached 109,811. Loans to farmers were granted. People, according to their economic status, were given subsidies. In 1975, the first regional rural bank was set up. 

Nariman Committee:

In 1969, under the chairmanship of Shri F.K.F Nariman, new objectives were put forward to discharge social responsibilities and to implement Lead Bank Scheme (At least one bank should have a lead branch in one district).

Narasimhan Committee:

In 1975 and 1991, the Narshimha Committee (also known as Committee on Financial System) brought reforms in the banking sector by introducing the concept of big banks, three-tier system of banks, mega-banks, and more control.

In 1980, six more banks were nationalized. In 1993, Punjab National Bank was merged with the New Bank of India, which reduced the numbers of nationalized banks from 20 to 19. In 2018, Bank of Baroda was merged with Vijaya Bank and Dena Bank. In 2019, 10 more banks were merged into 4 major banks.

Need and Advantages of Mergers (Implementation of 4Rs: Regulate, Recapitalise, Resolution and Reform)

The number of PSBs is high. 27 Public sector banks in India were targeting the same potential customers. It made little sense for the government to compete to gain the same customers. Recapitalization will reduce if the mergers become successful. The government is facing fiscal constraints. Hence, a reduction in recapitalization is needed. The non-performing assets are very high in some banks. A proper check is required to reduce it. By merging, the regulatory burden on banks will reduce. Except for SBI, there is no big bank in India to compete on International Level. Merging banks will cause the formation of big banks with more total business and deposits.

Issues of Mergers

It is difficult for one bank to sync with a bank with higher NPAs. This might create complexities further and can have side effects. Different banks have their unique mission and visions. Merging the two different banks will need time to settle with the new system. If banks after merging are not assessed and controlled well can result in higher NPAs.

Why back to privatization?

 To solve these issues, a new agenda is required. With Globalization and competencies in the Economy, the Government of India is gradually shifting to the Libertarian side of the economy. The business of government is not to run a business. As per the RBI Financial Stability Report, the Gross NPA ratio is likely to increase. Also, because of financial limits, it is proposing private players come forward and invest in banking. Market capitalization in Public Sector Banks is less than the private sector banks. The money used to recapitalize the banks to recover the stressed assets should be used in development projects and the improvement of infrastructure. The budget presented in 2021 states Rs. 1.75 Lakh Crore worth revenue will be generated by Private Sector. There was much emphasis on disinvestment, too. The budget also says two banks will be privatized in this financial year. The government will have a bare minimum presence in running them. 

Privatisation is expected to decrease the recapitalization burden on government as India is already a capital starved country. Considering the business angle of the banking industry, PSBs are more leveraged than PVBs, making the former one risky. On the business expansion front, they have fallen way behind: their (y-o-y) CASA growth in September 2021 was 11.6 percent compared to 22.8 percent for PVBs and 17.2 percent for FBs.

Conclusion

Although much has been talked about privatization, the proper implementation and regulation is demanded so that banking reforms do not shift back to square one. In a country like where people expect populist reforms, we might not well appreciate this move. Also, bitter memories of private imperialism still haunt people. People can easily lose money in private banks if the employees of banks indulge them in malpractices. There is equal risk in public sector banks and the value of frauds in these banks is much higher than in private banks. The solution to every problem is better asset liability management and efficient use of capital, as well as policies. 

Country post-pandemic is facing issues of rising inequality and inflation. Privatisation at this point in time would be very stricter move as people are unsure about the policy changes. How these banks will try to cater to people from different income group and different sectors, is still a question?

REFERENCES

  1. Banking In India –Wikipedia (https://en.wikipedia.org/wiki/Banking_in_India)
  2. Data and image- Bloomberg Quint(https://www.bloombergquint.com/opinion/the-origins-of-the-great-indian-bank-merger)
  3. Draft Reports- RBI (https://m.rbi.org.in/scripts/PublicationDraftReports.aspx?ID=552)
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#Fincabulary 37 – Letter of Undertaking

depositphotos_46003477-stock-illustration-banking-agreement-icon

Source: https://depositphotos.com/

The term LoU or Letter of Undertaking has recently been in news in wake of the banking fraud concerning Punjab National Bank and Nirav Modi. A LoU is a provision of bank guarantees under which a bank can allow its customer to raise money from another Indian bank’s foreign branch in the form of a short-term credit. The LOU serves the purpose of a bank guarantee for a bank’s customer for making payment to its offshore suppliers in the foreign currency.

For raising the LOU, the customer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. Once the letter of credit is acknowledged and accepted, the lender (the foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU.

Budget Series 2018-19 : #2 Impact on Banking, Financial Services and Insurance Industry

By TJEF Editor Kriti Kanchan Sinha

Finance Minister, Mr. Arun Jaitley presented the much-awaited Union Budget on 1st February, 2018. The budget was focused on rural India with agriculture, insurance, housing and MSMEs being the biggest gainers. There were no big announcements regarding the banking sector apart from a reiteration of the bank recapitalization plan. Some of the key aspects of the Union Budget that will impact the banking, insurance and financial services industry are listed as below:

  • Long-Term Capital Gains Tax – Long-term capital gains exceeding 1 lakh will be taxed at the rate of 10%. However, all gains up to 31st January, 2018 will be grandfathered which means all gains made up till 31st January, 2018 will not be taxed. Distributed income by equity oriented mutual fund will also be taxed at the rate of 10%. This may introduce some investor churn in the short-term however as major capital gains are accrued to corporates and LLPs, a long-term impact on equity markets is unlikely.
  • Bank recapitalization – This recapitalization will help the public-sector banks in lending additional credit of 5 lakh crore.
  • Uncollateralized Deposit Facility – The RBI Act will be amended to institutionalize Uncollateralized Deposit Facility which will act as an instrument to manage excess liquidity without offering any securities as collateral. The funds parked with the RBI through this facility by the banks could earn interest.
  • Better Financing for MSMEs – Online loan sanctioning facility for MSMEs will help in prompt and larger financing of MSMEs and also considerably ease cash flow challenges faced by them. Tax rate reduced to 25% for companies who have reported turnover up to 250 crore in the financial year 2016-17. This will benefit the entire class of micro, small and medium enterprises which accounts for almost 99% of companies filing their tax returns.
  • Rural Regional Banks – Strong Regional Rural Banks will be allowed to raise capital from the market to enable them to increase their credit to the rural economy.
  • Tax Exemptions – The government has put forward a proposal to exempt transfer of derivatives and certain securities by non-residents from capital gains tax in order to promote trade in stock exchanges in IFSC. Further, non-corporate taxpayers operating in IFSC shall be charged Alternate Minimum Tax (AMT) at concessional rate of 9% at par with Minimum Alternate Tax (MAT) applicable for corporates.
  • Agriculture Credit – A 10% increase in the volume of institutional credit for the agriculture sector to 11 lakh crore for the year 2018-19 along with 1.5 times hike in Minimum Support Price of all crops will improve rural income and improve the banks’ credit offtake and asset quality for this segment.
  • Affordable Housing – The government will establish a dedicated Affordable Housing Fund (AHF) in National Housing Bank, funded from priority sector lending shortfall and fully serviced bonds authorized by the Government of India. Affordable housing will have a positive retail loan growth of banks and NBFCs.
  • National Health Protection Scheme – The National Health Protection Scheme will provide free medical care of up to Rs five lakh each to 10 crore poor families – about 50 crore beneficiaries (assuming five members per family). This will improve penetration of the Insurance industry in the rural markets.
  • Financing of NBFCs – Refinancing policy and eligibility criteria set by MUDRA will be reviewed for better refinancing of NBFCs. Public sector banks will be onboard the Trade Electronic Receivable Discounting System (TReDS) platform and linked with GSTN.
  • Bond Market – Reserve Bank of India has issued guidelines to nudge Corporates access bond market. SEBI will also consider mandating, beginning with large Corporates, to meet about one-fourth of their financing needs from the bond market.
  • Cryptocurrencies & Blockchain – It has been clearly mentioned that Government does not consider crypto-currencies legal tender or coin and will take all measures to eliminate the use of these crypto-assets in financing illegitimate activities or as part of the payment system. However, it is open to exploring block chain technology for ushering in a digital economy.
  • No announcement of any change in foreign holding limit in private sector banks from the present 74%.

References

Indian Banks going long on Data Analytics

By Manisha Sharma

Big data in banking

Source: https://i.pinimg.com/

Today companies like Paytm extensively use data analytics to provide an unparalleled experience to customers by extending faster and better services. If Indian banks don’t retaliate there are many other companies waiting in the wings to take away their businesses. Today, the need to build better data-centric products is driving the Banking Industry in India. Customer-centricity, combating cyber threat, compliance and risk management and cost containment are some of the key areas where data analytics is applied.

The first instance of usage of data analytics can be traced back to 2000s when HDFC Bank invested heavily in data warehouses and used descriptive and predictive analytics to track customer’s financial habits. This move created opportunities in the area of cross-selling which is currently one of the biggest tools to retain and attract customers in the Indian banking industry. Complex neural network scoring engine is used to assign a credit score to customers and thus help in reducing money laundering. Another bank that uses Business Intelligence (BI) and analytics to identify serious delinquencies (high risk) and early delinquencies (low risk) loans is ICICI Bank. The bank is using a ‘centralized debtors’ allocation model’ to allocate the right set of delinquent cases to the most appropriate collection channel. ING Vysya Bank created a central data repository via SAP BO in order to provide accurate reports to customers. India’s biggest public sector bank, SBI, is not behind in this quest. The bank uses Social Media Analytics to identify prospective customers and to analyse high delinquencies in loans.

But all that glitters is not gold. According to a latest McKinsey survey, most banks have invested significantly in data infrastructure and advanced analytics but are yet to derive expected results from it. Few common mistakes are not asking the right questions to the algorithms, lack of planning, using analytics on a project by project basis and not deriving the full potential of the tools at a detailed level.

In order to utilize technology for their benefits, banks need to develop two assets: a transformation strategy and a vigorous analytics organization to support the usage of analytics in their day to day activities. Different departments in banks contain a huge amount of data. Complete potential can be realized if small samples of information are brought together. Creating interactive dashboards by making the technology simpler to understand can attract more people to use the tools. Usage of feedback loops can help to market faster than competitors. A deep pipeline of analytics talent should be the top priority of banks.

According to a McKinsey survey, more than 90 percent of the top 50 banks around the world are using advanced analytics. Among other things, a combination of  talented pool of graduates, innovation labs, clear governance plan and robust data quality controls should be some of the significant tools that will help shape a bank’s future in the competitive banking and financial services industry of India.

References:

  • Gupta, B. (2015, February). Analytics in Indian Banking Sector – On A Right Track. Retrieved from: https://analyticsindiamag.com/analytics-in-indian-banking-sector-on-a-right-track/

Future of the Indian Banking Sector

– Manisha Sharma

 

Introduction:

A decade ago, visit to a bank would mean spending money on travel, waiting in long queues and missing a half day’s work. Now, with the growing usage of digital banking, the number of visits to bank branches have reduced.  The latest innovation by HDFC Bank in the self-service channel is the humanoid robot, so you no longer need to wait in long queues. Banks are aggressively using digital marketing strategies to attract new customers and enhance the experiences of existing customers. However, much of the banking sector depends on investment cycle, working capital demand, monsoon, commodity prices and government spending in some sectors such as infrastructure sector.

An assessment of the current scenario indicates that the credit growth has declined to 4.4% in 2016-17 from 8% in 2015-16. The asset quality has deteriorated further in the current fiscal leading to a Gross NPA Ratio of 9.5% with Public Sector Banks contributing the most. The macroeconomic indicator – inflation has dipped to a record low in 2017 and RBI intends to keep it at ~4% by the end of 2017-2018. This, coupled with softer commodity prices induces difficulty in recovery of credit growth. Is this scenario going to change in future?

The future of the banking sector will revolve around evolving customer expectations, technological innovations, improved regulatory requirements, increased competition and change in demographics. Following is the detailed explanation of how these forces will shape the banking sector in future.

A shift from product-centric approach to customer-centric approach:

The demand from customers are evolving and banks are focusing on providing tailor-made products in order to satisfy their needs.  Banks in India are also establishing their footprints in the hinterlands. With the advent of technology and deep branch penetration, agricultural loans will be delivered within 2-3 days in the future, a change from the current 3-4 days. The corporate loan portfolio’s growth rate is declining. This will lead to a shift in focus of the banks towards the retail lending. The banks will invent new loan products in the future to target the retail segment.

Evolving Technology:                                                                                                                  With the growing influence of fintech companies in India, banks will use new technologies like Artificial Intelligence, Machine Learning, Blockchain, Robotics, IOT, etc. not only to enhance customer experience but also to achieve operational efficiency.

 

Picture1Source: PWC Report

 

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