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Banking System
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Banking System
Background and overview
In this section, India's banking sector is to be presented. As is going to be obvious after reading the section through, the severe systematic flaws of the banking sector might come to be a big obstacle to India's future growth.
The Reserve Bank of India (RBI) is India's central bank and therefore the central banking institution. It is the sole authority for issuing bank notes and the supervisory body for banking operations in India. It supervises and administers exchange control and banking regulation, and administers the government's monetary policy. It is also responsible for granting licenses for new bank branches. 25 foreign banks operate in India with full banking licenses. Several licenses for private banks have been approved. Despite fairly broad banking coverage nationwide, the financial system remains inaccessible to the poorest people in India. The RBI lays down restrictions on bank lending and other activities with large companies. These restrictions, popularly known as "consortium guidelines" seem to have outlived their usefulness, because they hinder the availability of credit to non-food sector and at the same time do not foster competition between banks.
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India has an extensive banking network, in both urban and rural areas. All large Indian banks are nationalized, and all Indian financial institutions are in the public sector. The banking system in India has three tiers. These are:
· The scheduled commercial banks
· The regional rural banks
· The cooperative and special purpose rural banks
There are approximately 80 scheduled commercial banks, Indian and foreign: almost 200 regional rural banks; more than 350 central cooperative banks, 20 land development banks; and a number of primary agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.
Though the banking sector is currently dominated by public sector banks, numerous private and foreign banks exist. India's government-owned banks dominate the market. Their performance has been mixed, with a few being consistently profitable. Several public sector banks are going through a much-needed restructuring, and in some the government either already has or will reduce its ownership. The RBI has granted operating approval to a few privately owned domestic banks; of these many commenced banking business. Foreign banks operate more than 180 branches in India. The entry of foreign banks is based on reciprocity, economic and political bilateral relations. An interdepartmental committee approves applications for entry and expansion. A major problem for foreign banks has been their inability to provide long-term rupee funding. This has its cause in the fact that the foreign banks lack the vast branch networks of the domestic banks, having a total of about 64 000 offices in 1998 as compared to the foreign banks' 180. Getting a branch license in India is by some foreign bankers seen as winning a lottery. Whether true or not, arguably foreign banks have had problems getting branch licenses. Foreign banks in India are subject to the same regulations as scheduled banks. They are permitted to accept deposits and provide credit in accordance with the banking laws and RBI regulations.
Regulation and weaknesses in the system
All commercial banks face stiff regulations on the use of both their assets and liabilities. The high liquidity ratio and cash reserve requirements severely limit the availability of deposits for lending. The RBI requires that domestic Indian banks make 40 % of their loans at concessional rates to priority sectors selected by the government itself. These sectors consist largely of agriculture, exporters and small businesses, i.e. "traditional" sectors for government protection. Since July 1993, foreign banks have been required to make no less than 32 % of their loans to these mentioned sectors. Foreign banks however, are not required to make loans to the agricultural sector.
A big problem in the bank sector is that the legal system is both weak and over-burdened, not punishing Indian borrowers defaulting on their debts. Usually, Indian creditors that pursue their claims through the courts soon find that lawsuits can drag on for years. Another problem is the lack of transparency in Indian banks. It is very hard to evaluate the real non-performing assets of financial institutions and banks. Many banks are now listed, which gives hope of future increased sharing of information in this and other matters. Still though, there are rules prohibiting a public ownership of below 55 %. A final problem is the fact that the banking sector is overwhelmingly owned, controlled and directed by the government. Firstly, whenever a big savings institution totters, the government runs to its rescue. Therefore, savers happily stash their money in a state bank that is technically bankrupt. This is apparently not good grounds for a well-functioning banking sector. Secondly, that grants that the actual health of the Indian banking sector tends not to be well publicized. Also, the bank sector itself has no effective mouth pieces by which to make its voice heard.
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