10 Years of Modi Government: Changing Scenario of Indian Banking

In the last few years, the banking sector is going through a structural change, in the year 2014, on the initiative of the Prime Minister, about 52 crore people have opened their accounts under the Pradhan Mantri Jan Dhan Yojana.
PM Narendra Modi
PM Narendra Modi

By Dr. Brajesh Kumar Tiwari

The bank plays a crucial role in our modern-day lives. Individuals, society, and all economic stakeholders in the country solely utilize banks for their financial transactions. It is recognized as one of the most ancient occupations in existence. The Modi government at the Centre has reached its ten-year milestone on May 26. Several changes have been done in the banking sector throughout this period, with a specific emphasis on enhancing the economic well-being of the country. The Modi administration allocated an exceptional amount of Rs 3.11 lakh crore to provide additional capital to Public Sector Banks (PSBs) from fiscal year 2017 to fiscal year 2021. The recapitalization initiative offered crucial assistance to Public Sector Banks (PSBs) and averted the potential for any default on their side.

Major Initiatives:

In the last few years, the banking sector is going through a structural change, in the year 2014, on the initiative of the Prime Minister, about 52 crore people have opened their accounts under the Pradhan Mantri Jan Dhan Yojana. In 2018, the government set up the India Post Payments Bank with the aim of taking banking to every village using the post office network.

In the year 2020, the government has merged 10 government banks into big banks. The merger is providing Indian banks with the capital adequacy and size advantage that most foreign banks have. Major steps like Recapitalization and Reform and Insolvency and Bankruptcy Code have been taken for the banking sector. Prime Minister inaugurated 75 DBUs ('Digital Banking Units') in 75 districts to mark the completion of 75 years of India's independence. More than 35 crore post office deposit accounts are being linked to the core banking system.

In 2020, WhatsApp launched UPI payment service in India. Neo-Bank is now being touted as the future of banking. Banks are also realizing the importance of using Robotic Process Automation (RPA), Artificial Intelligence, Machine Learning. India has announced plans for a digital currency in the budget. HDFC Bank, after its merger with parent Housing Development Finance Corporation (HDFC), will become one of the top 10 most valuable banks in the world. HDFC Bank will also be the first Indian bank to make it to the world's top 10 club.

Profit at High level:

Gross NPA of banks reduced from 11.25 per cent in 2018 to 3 per cent in September 2023 and credit growth of banks is around 15 per cent. Banking sector profit increased by 39 per cent to Rs 3.1 lakh crore in FY24 Net profit of listed public and private sector banks rose 39 per cent to Rs 3.1 lakh crore in FY20 from Rs 2.2 lakh crore in FY20. While public sector banks made a record net profit of Rs 1.4 lakh crore during the year - a 34% increase compared to the year-ago period - private sector banks' net profit was Rs 1.7 lakh, up 42 per cent compared to Rs 1.2 lakh crore during the last year.

Income (NII), or broadly the difference between what a bank earns from its lending activities and the interest it pays for liabilities, including deposits, is driven by the growth in advances. It is widely known that the advance growth of the banking sector has been much higher than the deposit growth. In FY2014, deposit growth of all scheduled commercial banks was 13.8 per cent (vs 10.2 per cent in FY2013), while advances grew 19.9 per cent (vs 15.8 per cent).

RBI Dividend to GOI:

The Central Government was granted a dividend of Rs 2.11 lakh crore by the Reserve Bank of India (RBI) last week for the fiscal year 2023-24. This sum is more than double the quantity from one year ago. The Reserve Bank of India (RBI) transfers the surplus, which is the excess of income over expenditure, to the government in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934. According to Section 47 of the Act, the Central Government shall receive the remaining profit after accounting for poor debts, depreciation, and other expenses. This is the case in the majority of countries; the statutes of the US Federal Reserve, Bank of Japan, Bank of England, and German Bundesbank explicitly mandate that profits be transferred to the government or treasury. The economic capital framework (ECF) recommended by the Bimal Jalan Committee was the basis for the surplus and dividend calculations. The committee advised the RBI to maintain a contingent risk buffer (CRB) of 5.5 per cent to 6.5 per cent of its balance sheet.

The government received a dividend of Rs 87,416 crore from the Reserve Bank of India (RBI) during the fiscal year 2022-23. In 2018-19, the Reserve Bank distributed a dividend of Rs 1.76 lakh crore to the central government, the greatest level to date. From 2009 to 2014, the Reserve Bank of India distributed a dividend of approximately Rs. 1.07 lakh crore. On average, these distributions account for approximately 0.5 percent of GDP. This sum will assist the government in the reduction of its financial deficit and in the allocation of funds to new initiatives. The current financial year's objective of the central government is to restrict the disparity between revenue and fiscal deficit to Rs 17.34 lakh crore (5.1 per cent of GDP).

Major Challenges:

According to a study by Deloitte Research Agency, 110 crore people are currently using mobile phones in the country, in which 72 crore people are using smartphones and its number is expected to cross 100 crores by 2026. Yet, due to online frauds, only 40 million people currently use mobile banking. According to the data of 'A Booklet on Modus Operandi of Financial Fraud', in the last 3 years a total of Rs 473 crore online fraud has happened to people.

According to the RBI's "Report on Trends and Progress of Banking," which came out in December 2022, the number of non-performing assets, or NPAs, dropped from 7.3% of all loans in 2021 to 5% in September 2022. However, the reality is that it is a write-off. In five years, banks wrote off more than double the number of loans they recovered. Nonetheless, our NPA ratio is higher than that of comparable countries such as the United Kingdom (1.2%), Malaysia (1.6%), China (1.8%), Indonesia (2.6%), and France (2.7%). NPAs are loans that are 90 days or more past due on the principal or interest.

Gross non-performing loans, which include defaults that were done on purpose, were 19.5% lower on December 31, 2022, at Rs 6.1 lakh crore, then they were a year earlier, when they were at Rs 7.5 lakh crore. But the number of willful defaults has gone up by 38.50%, or Rs 94,000 crore, in the last two years. As of December 2022, there were 15,778 willful default accounts with a total value of Rs 340,570 crore. In December 2021, there were 14,206 accounts with a value of Rs 285,583 crore, and in December 2020, there were 12,911 accounts with a value of Rs 245,888 crore.

In the same period, the country has also seen many bank scams, including Neeraj Singhal-Bhushan Steal (56,000 crore), DHFL (35,000), ABG Shipyard (23,000 crore), Nirav Modi and Mehul Choksi scam in PNB scam (11,400 crore), Liquor businessman Vijay Mallya (Rs 10,000 crore) banks, Andhra Bank Fraud (Rs 8,100 crore), PMC scam (Rs 4,355 crore), Rotomac Pen Scam (Rs 3,695 crore), Videocon Case (3,250 crore), Allahabad Bank Fraud (Rs 1,775 crore), Syndicate Bank Scam (Rs 1,000 crore), Bank of Maharashtra scam (Rs 836 crore), Kanishk Gold Bank Fraud (Rs 824 crore), IDBI Bank Fraud (Rs 600 crore), R.P. Info Systems Bank Scam (Rs. 515 crore) to name just a few. Even though the bankruptcy code has made it harder to keep a business going forever, the rate of recovery is still very low. According to a Rajya Sabha answer from March 28, 2023, the "recovery" of NPAs written was only 16.6% from FY18 to FY22.

Way forward:

Instead of continuing to write off large corporate bad loans, India needs to improve debt recovery processes. Government should not rush to privatize banks rather it should focus on comprehensive governance reform because if banking sector is run with independent board and dynamic way then public sector banks can also work like any other private bank. According to the survey of the international agency PwC, India can be the third largest banking hub in the world by the year 2040. Digital banking will lead the economy in the near future and fintech is the way forward for the Indian banking and payment system, all that is needed is to make it convenient and secure.

It is imperative that we fortify the banking system to cater to the most impoverished individuals in order to ensure that the economy's expansion benefits both the wealthy and the impoverished. It is imperative that banks conduct an analysis of the requirements of their customers, corporates, and MSMEs, and transcend their role as wealth creators to support the role of job creators. This will bolster the balance sheets of both the banks and the country.

(The author is Associate Professor, Atal School of Management (ABVSME) at Jawaharlal Nehru University (JNU), New Delhi. He has authored the book “Changing Scenario of Indian Banking”. His Social Medi handle is @bkt_brajesh)

Disclaimer: Views expressed the author’s own and do not reflect the official position or policy of the Outlook Media Group or its employees.

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