Strategies of public sector banks in India

Abstract

The origins of banking in India can be traced back to 1921 when the Imperial Bank was established under the British government of India. In 1935, the Reserve Bank of India (RBI) was established under the Reserve Bank of India Act as the central bank of India. Several indigenous banks including the Punjab National Bank, Bank of Baroda and Canara Bank were born in the heights of the Swadeshi movement in the early 1940’s. After independence, the RBI was nationalized in 1949 and given wide powers in the area of bank supervision through the Banking Companies Act (later renamed Banking Regulations Act). The State Bank of India Act of 1955 converted the Imperial Bank into the State Bank of India (SBI). This along with the subsequent acquisition of the State owned banks in eight princely states by the SBI in 1959 made the government the dominant player in the banking industry. The government’s financial policies focussed on rural and industrial development. To this end, a number of Development Financial Institutions (DFI’s)- such as ICICI and IDBI- were created. The DFI’s mostly used public funds to finance projects considered too risky or large for private finance to support. In keeping with its increasingly socialistic leanings, the Indian government nationalised 14 banks, each with deposits exceeding Rs.50 crores. Again in 1980, six more private banks each with deposits exceeding Rs.200 crores were nationalized. During this period, the government adopted a policy of capital rationing and allocating funds to certain industrial and “priority” sectors. These banks adopted a growth strategy focussed on expanding their branch network and achieving asset growth. This resulted in a banking network that grew from 8300 branches in 1969 to 60000 branches in 1991. Over the same period, the number of persons per bank also went down from 64000 to 14000. And bank deposits grew at 19 % compound per annum from 15.7 % to 24.2 %. However, largely because of the ‘priority’ lending practices, the number of Non-performing assets (NPAs) of the Public Sector Banks (PSBs) also increased at an alarming rate.