Towards the end of the last decade, we had seen 10 Public Sector Banks (PSB) being merged into four capital-rich big banks in a bid to make them comparable with their global peers and strengthen their ability to take risks and manage assets well. This was a push for the PSBs to have the capability to support the financial needs of larger enterprises which in turn would help provide impetus to the growing economy.

Unfortunately, before this major decision could yield positive results, the entire banking system needs to face the Covid-19 pandemic, something it was not prepared for. That has changed all calculations.

Tamal Bandyopadhyay, a consulting editor in Business Standard and Senior Advisor at Jana Small Finance Bank, shares insights about the Indian banking industry in this exclusive interview with CoFoundersTown.

Q. How much has the banking industry evolved in India in the 2010s?

Let’s look at some of the figures. At the end of the first decade, the banking system’s deposit portfolio was close to Rs48 trillion. In the last decade, it rose more than 200 per cent to almost Rs145 trillion.

Similarly, the credit portfolio has risen from Rs36.4 trillion to Rs105.5 trillion. During this time, the branch network has expanded from 92,335 to 1,58,292 and the number of ATMs has risen from around 65,000 to over 2,00,000.

We have also seen the birth of two new universal banks during this decade. Besides, there have been new sets of banks – small finance banks and payments banks. Even though we continue to have a repressive financial system, the coverage of banking has expanded substantially during the decade.

We have also made rapid strides on the financial inclusion front, thanks to the Pradhan Mantri Jan Dhan Yojana or PMJDY scheme – the world’s most ambitious financial inclusion drive, launched in August 2014.

Till mid-December 2020, close to 412 million accounts have been opened under this scheme and 306 million debit cards have been issued. These account holders have kept Rs1.35 trillion with the banking system as deposits.

Q. Which trends dominated the banking industry and what has been some major reasons for this growth?

While there has been tremendous progress on bringing in more people under the formal finance net, it has not been a great decade for the banking industry for many reasons. Many cooperative banks have failed and a couple of private banks – small and large – came to the brink of collapse.

There have been instances of large non-banking financial companies biting the dust. All these threatened financial sector stability and forced the regulators to assure people, repeatedly, that their money is safe with the banking system.

We have also seen a rise in bad loans. The government kept on pumping capital in the public sector banks but laden which bad loans, some of them are not in the best of health. The number of public sector banks has shrunk as the government is pushing for consolidation.

We are yet to see the results of this drive. Meanwhile, the public sector banks have been losing their market share fast and a few large private banks have been emerging as dominant players.

The rising pile of bad assets has forced many banks to shrink their balance sheets. They have also become risk-averse. As a result of this, bank credit has not been growing the way one would like to see this to fuel economic growth.

Q. How has Covid-19 affected the industry and what new trends are expected to be seen in this decade?

The Reserve Bank of India (RBI) forced the banking system to come out clean after it launched a first-of-its-kind asset quality review in 2015. That had led to a spurt in bad loans as the banks could not hide such loans under the carpet.

The banks needed to provide for such loans and, with a new insolvency law in place, they have also been aggressively pushing for recovery of these loans.

As we had approached the end of last financial year (2020), many of us believed that the phase of recognisation of bad loans was over and the phase of recovery would start in a big way.

Since the banks have already provided for a substantial portion of their bad loans, they would make money from the recovery (of bad loans) and become healthy.

But the Covid-19 pandemic has changed all calculations. First, there was a moratorium on loan repayment (which was initially for three months and later extended to six months) and subsequently, a window has been opened for the restructuring of loans that have turned bad because of the pandemic.

The bankers have been playing down the impact, saying the loan repayment collections have almost become normal and there aren’t too many cases of loan restructuring but it’s too early to celebrate. We need to wait and watch.

Q. How big a role has the government to play in the financial sector, both as a borrower (to fund its deficit) and as a “risk absorber” providing guarantees?

It’s time to take a close look at the role of the government as the owner of a large part of the banking system. Should it remain in the business of banking? As former RBI governor YV Reddy said, it’s not the ownership per se that’s important but how the owner behaves.

After five decades of bank nationalization, the government needs to ask itself whether it should remain the majority owner of these banks or look for privatization, at least for some of them, for efficiency. A few large ones can be kept as an insurance against market failures.

The choice before the government is fairly simple: Should the banks be used as a socio-political instrument for doing good to the public or a business enterprise?

Traditionally, the government is a large borrower (it raises money from the banks to bridge its fiscal deficit). During the current year, the centre and the state governments collectively have been raising around Rs21 trillion – the highest ever. This is a different story…

Q. How technology will change banking in this new decade?

In 2009, Paul Volcker, an American economist and former chairman of the US Federal Reserve, had said that the only relevant financial innovation in the previous two decades had been the ATM machine.

Since then, a lot has happened. In India, demonetisation in December 2016 gave a big boost to digitalisation but the momentum was lost after some time. The Covid pandemic has brought the digitalisation wave back to the finance shore, prompting Infosys Ltd Chairman Nandan Nilekani to say it has accelerated the digitalisation of the economy from years to weeks.

The bankers, so far, have not been afraid of losing relevance and becoming dinosaurs – something which Microsoft Corp Co-founder Bill Gates had warned in July 1994. In the new decade, the scene is set to change.

The banks till recently had been challenged by the fintechs but the techfins have now entered the arena. Fintech is a space where financial services (such as mobile banking) are delivered through a better-use experience, using cutting-edge technology, while techfin refers to technology solution firms -- such as Amazon, Google and Facebook, among others -- launching a new way to deliver financial services.

Unlike fintech, the techfins have their own customers and hence they do not need to ride on a bank’s network, customer base and merchant relationships. Simply put, those banks that remain complacent, bragging about their captive customer base, may turn dinosaurs this decade.

These days, many of us are carrying our banks in our pocket (mobile phone). Technology is also changing the way mutual funds, insurance and the business of non-banking financial companies are conducted.

Q. What are some major challenges faced by Indian banks and what needs to be done to overcome them?

The biggest challenge before the banking industry is the disruption, driven by technology. They need to disrupt themselves if they want to survive. Will they dare to do? If not, they will become irrelevant.

The customers are becoming too demanding and unless the banks change the way they have been functioning, they will lose customers.

While some of the large, agile and efficient private banks have been expanding their business in a big way, most public sector banks have been losing their market share.

Overall, their market share is around 65 per cent but for the incremental business, their share is just around 20 per cent -- both for deposits and loans. They must change if they want to remain in business. Otherwise, by the end of the decade, very few of them will remain relevant.

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‘The Reserve Bank of India would like to assure the General public that Indian Banking system is safe and stable.’ – RBI Statement, 1 October 2019

Why did India’s central Bank have to issue an unprecedented statement to that effect?

In Pandemonium: The Great Indian Banking Tragedy, bestselling author Tamal Bandyopadhyay takes you in search for the answer. Check it out HERE