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Indian Banking: Journey from Nationalisation to Globalisation By Arun Kaul, CMD, UCO Bank

Indian banking sector’s progress since nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer although banks in India except the State Bank of India, continued to be owned and operated by private individuals. But a debate had started in various forums about the need for nationalization of the banking industry.

The Government of India, through an ordinance, nationalized the 14 largest commercial banks on July 19, 1969. Thereafter the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill which received the presidential approval on 9 August 1969. [With subsequent round of bank nationalizations, as on 31st March 2011 there are 20 public sector banks in the country excluding the State Bank group].

More than anything else, nationalization resulted in a significant shift in the focus of bank lending towards social banking and inclusive growth. The ‘priority sector’ concept was introduced by bringing inter alia agriculture and small-scale industry within its ambit and it was made mandatory for banks to provide 40 per cent of their net credit to these ''priority'' sectors. Apart from these measures, ever since nationalization, banks were also actively involved in various poverty alleviation and employment generation programmes.

The policy initiatives did yield results. Enhanced agricultural credit by the banks led to the success of green revolution. Sharp rise in export activities by small-scale manufacturers during the ‘80s and ‘90s is attributable to bank credit provided to them.

Then came the financial sector reforms which were ushered in the early 90’s when the then government embarked on a policy of liberalization, licensing a small number of private banks. These were the New Generation tech-savvy banks. This move, along with the other reform measures dramatically changed the banking scenario in the country with the focus shifting to institutional soundness and profitability.

Banks were mandated to follow prudential norms such as maintaining capital adequacy, identification and provisioning for bad debts and so on. Interest rates were also deregulated.

These measures coupled with the rapid growth in the economy of India, helped the banks to register strong balance sheet growth in an environment of operational flexibility. The health of the banks improved significantly, both in terms of capital adequacy and asset quality. Side by side, the PSBs were made to follow international best practices by adopting Basel guidelines.

Post-liberalization the Indian banks had to embrace IT in a big way to compete with the tech-savvy international and private banks. The new wave ushered in a modern outlook and technology enabled business processes in traditional banks. The face of Indian banking underwent a sea-change as technology became a key enabler for the banks to  improve efficiency, service delivery and back end processing. Technology empowered banks like never before allowing quick and faster service accessible to a vast cross section of people at a minimum cost through alternate delivery and distribution channels that supplemented the brick and mortar branches. People experienced the comfort and convenience of anytime and anywhere banking.

Throughout this transformation, the policy makers, regulators and the bankers never lost sight of ensuring inclusive growth. Banks remained committed to social banking by reaching out to all sections of the society in every nook and corner of the country and directing credit towards important but unreached section of the population.

The key issues facing banking sector today
Financial strains have started to affect the real economy across the globe. The global economy is in turmoil following debt concerns, slackening economic activity and weakening financial systems. In the days ahead, the Indian financial markets will continue to be conditioned by the evolving macroeconomic developments, both global and domestic.

In this environment, Indian banks, the dominant financial intermediaries in the country, face several challenges.

Capital: The crises have highlighted the importance of maintaining sufficient level and quality of capital by the banks. Banks, therefore, have to strengthen the quality, consistency and transparency of their capital base.
Liquidity:  Apart from inadequate capital, illiquidity of banks can threaten its solvency and also adversely impact the stability of the financial system. Keeping in mind the turbulence in the financial sector,   there has to be a framework for liquidity risk regulation and supervision.
Managing Profitability and Maintaining Asset quality: There will be pressure on banks to manage profitability and maintain asset quality. Some of the recent increase in interest rates will have to be absorbed by the banks causing their NIMs to decline. Banks are faced with a situation where credit growth is slowing down. NPAs are rising with stress building up in sectors such as aviation, telecom, State power utilities, real estate, textiles, SMEs and construction. Moreover, banks have to deal with the stricter norms for lending to the priority sector.
Risk Management: While expanding market is a matter of survival, challenge for the banks would be to ring-fence its operations by establishing a sound risk management system. This would require better enterprise-wide assessment of both quantity and quality of risks, more so as banks in India prepare themselves for the 'Basel III' regime.
Human Resource Management: Management and development of Human Resources would be another key factor defining the characteristics of a successful banking institution. Banks have to adopt/ implement various technology initiatives as also deal with more stringent compliance and regulatory requirements. They will therefore need employees with specific skills. Qualities like job knowledge, customer-centricity, and professionalism would be the key to acquire depositors and borrowers. For the banks, therefore, the challenge will be to undertake large scale re-skilling of existing employees on one hand and attract and retain fresh talent on the other.
Leveraging Technology: In the emerging scenario, the challenge before the banks would be, while adopting newer and more advanced technologies they have to ensure that technology makes the products and services cheaper, faster and convenient keeping in mind the security issues.
Challenge of financial inclusion: Banking industry has to find solution for the complex challenge of formulating an economically viable model for financial inclusion. Otherwise ensuring financial stability would be difficult if large section of populace remain financially excluded.

The future of Indian banking sector
For banks, India offers both challenges and opportunities. India is a USD 1.2 Trillion economy growing at 8% or thereabouts and having a population of 1.25 billion. But more than 50% of our populace remains outside the ambit of formal banking. There is no dearth of opportunity for the banks in India to grow.

According to a recent McKinsey report on the Indian banking industry

Although, the banking sector in India will see an overall growth over the next few years, the biggest boost will come from banking in the rural and semi-urban regions. These areas are expected to generate Rs 78,000 crore in revenue by 2015.

With branch restrictions on rural areas being removed, regulations on business correspondents being liberalised and mobile banking being deregulated, it will be easier for banks to capitalise on opportunities in the rural and semi-urban markets. The rural banking is projected to  see the biggest growth, of about 20 per cent by the year 2015.

On one hand, banks have to mitigate the risks in the current economic environment through superior management and greater operational excellence, while on the other they have to fundamentally transform their business processes to capture the opportunity.

Looking ahead, admittedly bank profitability could decline somewhat in the immediate future. But from a long term perspective, Indian banks appear distinctly well placed compared to its western counterparts to weather the storm in global finance. They are well regulated, adequately capitalized and have access to stable retail deposit. And the country’s economy provides Indian banks the opportunity to grow. Even if real economy grows at 7%, the banking industry will grow 18 to 20% year on year.

Steps to improve service delivery of UCO Bank
The Bank is creating focused verticals leading to “sales & service” approach to banking. The non-customer facing jobs are being shifted to the back offices to allow branch staff concentrating on Customer Relationship Management.

UCO Bank is leveraging its pan-India branch network and impressive technology deployment to offer new products and services that would attract the customers particularly the young generation. The Bank is giving focused attention to augment its customer base by constantly scanning the market competition and coming out with appropriate offerings to attract new customers. The Bank has already put in place facilities like:

CBS in all branches
e-Banking facilities
Facilities for easy fund transfer, utility bill  payments & tax payments (state & Central) on e-Platform
Transaction based Mobile Banking
Apart from card operated  ATMs, Bio Metric ATMs that have the facility of ten finger registration on one hand and authentication by a random combination of any three fingers on the other.
The Bio metric ATMs also offer voice guidance coupled with multiple color band screen display for different withdrawal amounts for illiterate customers as also Braile-enabled keypads for the visually challenged ones.
CBS-enabled Mobile VAN
Online Share Trading

The Alternate Delivery Channels implemented by the bank provide a fast, secure and authentic mode to transact in real time from anywhere, anytime.

Some of the Bank’s future plans include:
Opening 3000 branches & Installing 3000 ATMs by Mar’2013
Suitably upgrading  / expanding the CBS infra structure (including WAN) to handle transaction processing for 3000 branches with guaranteed uptime and response time
Having  Straight through processing of NEFT/RTGS transactions (including positive confirmation to remitter) at all 3000 branches
Installing Self-Service Customer Lobby with Cash Dispenser, Transaction Kiosk and Self-service Passbook Printers at strategic locations
Introducing online loan application facilities for more and more schemes

Future strategy of UCO Bank
Manifold increase in customer base
Substantial enhancement of Retail and SME portfolio
Boosting recovery and reducing NPAs
Leveraging Bank’s technology prowess to offer 24 x 7 x 365 banking convenience for the customers
Enhancement of employee productivity through motivation, up skilling and reward and recognition of stand-out performance
Induction of fresh blood with specialized knowledge.

The banking industry in the year 2020
At present, about 40 crore Indians are in the age group of 15 to 35 who were all born post- bank nationalization. The young citizens aspire for a better way of life than that lived by their ancestors. The banking sector, the principal financial intermediary in the country, has to support and accelerate the engine of growth and make people’s aspirations a reality.

According to a study, by 2020, bank branches will grow 2x, ATMs 5x, Investment Banking 10x and mortgage business will cross Rs. 40 trillion.

By the end of this decade, experts are predicting some major technology developments - “Cloud computing”, Analytics with ‘Big Data’ (a combination of proprietary and public data), User-focused technologies ( to leverage the social media) etc. - that would impact the banking business in a big way. Banks, which are able to leverage these technological innovations, will be able to create a significant advantage over their peers. Furthermore, with more and more focus on sustainable development and green initiatives, banks have to go in for paperless operations to the maximum extent possible so as to improve efficiency, save our natural resources, and also reduce overhead expenditure.

Concluding remarks
At the time of their nationalization, the banks were mandated to perform a solemn duty of creating an environment conducive to nation-building by taking banking to the unbanked, making cheaper credit available to people, providing capital to the industries, supporting development of physical infrastructure and human capital. During the last forty two years the Indian Banking sector left no stone unturned to bring this mandate to fruition. But the mission of nation-building remains an ongoing process.

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