Indian Economy - Banking

Role of Banks in Indian Economy - Yesterday, Today and Tomorrow

After independence the Indian Economy was a mixed economy and the India's Central Banking Authority known as Reserve Bank of India was nationalized on 1st of January, 1949 and Banking Regulation Act was promulgated in 1949 to regulate and control the Banks in India so that the Banks could play a major role in Indian Economy by equal distribution of credits in all the states and to ensure that the benefits of Banks reached each and every citizen and the deposits of the Banks were not cornered by big industrial houses alone. When the desired objective could not be achieved then under the leadership of Late Smt. Indira Gandhi, the then Prime Minister of India 14 largest commercial banks in India were nationalized.  These 14 banks contributed for more than 85% of total deposits in India at that time. Even Jai Parkash Narain, the veteran leader and freedom fighter hailed the decision as bold step towards India's Economic Development as a whole and the Government's will power to control the economic development to reach every corner of the Independent India. 6 more Banks were nationalized in 1980 and total number of nationalized  rose to 19 with the merger of New Bank of India into Punjab National Bank on 4th of Sep.,1993. These Banks had market share of 91%, thus bringing whole of Bank's credit under the control of the Government to launch social schemes. Growth of the Banks and Indian Economy remained at almost same level of 4% till 1990.
Banks were considered solvent due to strict control of Reserve Bank of India so that the depositor's hard earned money remained protected. Key Ratios in 1990 
  1. Cash Reserve Ratio                  =  15.00%
  2. Statutory Liquidity Ratio           =  38.50%
          Loan-able Funds with banks     =  46.50%

The higher rates of CRR and SLR were the tools to keep the Bank's health sound and solvent.  

Role of Banks - Post Liberalization in 1990's and Today:

The liberalization policy provided for license to small private banks like Global Trust Bank, UTI (Now Axis) Bank, ICICI Bank and HDFC Bank. The new banking policy shook the Banking Sector Completely and to enable these private banks to provide retail loans at cheaper rates the key ratios were lowered drastically which may effect the solvency of the Banks tomorrow.
  1. SLR Since August 2012           = 23%
  2. CRR Since February 2013       =   4%
          Loan-able funds                       = 73%

  1. Repo Rate                               = 7.50 % Since Sept 2013
  2. Reverse Repo Rate                 =  6.50 % Since Sept 2013
Prior to 2004 the Reverse Repo and Repo Rates were one and the same.

Role of Banks - Tomorrow

The Reserve Bank of India and Government of India needs to see the bold writing on the wall and when the most of the business is controlled by Multi National Corporate through foreign direct investment, the RBI and GOI, to control the money supply, should not only bring the SLR and CRR at old levels of yesteryears but also find ways and means to reduce dependence on deficit financing. When the Indian Economy and Banks will emerge stronger then not only India will be able to garner foreign loans at lower cost but Foreign Direct Investment will also come at faster speed in emerging and stronger economy as neither foreign lenders will like to loan funds even at higher cost to a country with weak and less secured economy but foreign investors and FII's will not risk their funds to be invested in less secured economies. If at all we lure the foreign investors with higher yields in the short term they will have the tendency to disappear from the Indian Capital Market after squeezing the juice in the short term. Every talented and serious investor will like to have the golden egg from the hen regularly then to slaughter the hen for all the golden eggs in one go, to repent in the future. We need to prepare a cash inflow and outflow not by selling our assets but by generating GDP and National Income, if we are to survive as word's strongest economy to be called once again as Golden Sparrow.

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