The Indian banking system stands on a solid foundation, experiencing its strongest financial health in a decade. The sector that was burdened with alarming levels of non-performing assets (NPAs), poor capital adequacy, and a negative return ratio had undergone a remarkable metamorphosis. In reality, this transformation was the result of a series of regulatory measures implemented over the years, along with a shift in the business model of the banks.
Bank history provides insight into the evolution of these institutions, their impact on the economy, and lessons we can learn from their mistakes. The city of Kolkata has significantly influenced the development of the modern banking system in the country. The bank of Hindustan, the first commercial bank in the country, was founded in Kolkata in the year 1770. The nineteenth century witnessed the establishment and eventual closure of multiple banks. Pivotal organizations, including the Reserve Bank of India and the State Bank of India (formerly Imperial Bank), were founded in the first half of the 20th century. The industry experienced a severe crisis that led to the closure of many banks between 1913 and 1969.
Post-independence, a series of banks were nationalized. In the aftermath of 1992, a series of measures were taken towards liberalization of the sector, ultimately enhancing efficiency in the system.
From manual bookkeeping to the use of AI and ML-led operations, the banking industry has undergone a tremendous transformation over the last 50 years. Along with the evolution of technology for banks, a series of regulatory measures like liberalization of the banking system, introducing capital adequacy norms, adopting Indradhanush framework, financial inclusion, NPA management and merger of banks ensures efficiency, and stability in the banking system and reduced the risk of collapse. The financial inclusion program has resulted in almost all Indian households having banks accounts. With over 10,000 fintech businesses operating, India is leading the fintech revolution. Fintech businesses either directly compete with incumbent banks, work together, or integrate microservices with them.
NPA resolution is another area where India has made great strides. Over the last seven years, the Government introduced IBC and Bad Bank frameworks to combat NPAs, and these have proven to be efficient in handling stressed assets in the banking system. The current IBC Ecosystem is robust and comprised of 4330 IPs, 109 IPEs, 15 benches of NCLT, 3 IPA and 5356 RVs. Since inception till June 30, 2023, a total of 6815 corporate debtors had undergone CIRP, out of which 4742 cases were closed with different outcomes. The resolution of stressed assets through bad banks was initiated with the formation of NARCL in 2021.
NARCL and IDRCL act as ARC-AMC frameworks for the acquisition and resolution of legacy stressed assets where the banks’ exposure is INR 500 Crore or more. NARCL already acquired a few large stressed assets namely Jaypee Infratech, SREI Equipment Finance, SREI Infrastructure Finance, and SMPL Infra.
The phrase ‘change is the only constant’ certainly applies to banking sector. With 4000 years of history, the industry has undergone numerous changes in areas of business model, technology, and regulatory environment and that has shaped what it is today. The banking industry will continue to change in the future, and in this journey, the most adaptable bank will survive, therefore “the banking will survive but banks may not”.
This article was contributed by Mr Vijay Maheshwari, Chairman, CII-ER Banking Core Committee & Director, Sumedha Fiscal Services Ltd. It was first published in CII – Sumedha Report on Banking: Remodelling India’s Corporate Banking Sector.