Banking: Going beyond spirit of nationalization

Fourteen large banks were nationalized on July 19, 1969 Also, as the country continues to lag in financial deepening ratios, which have a positive link with growth, the Reserve Bank of India (RBI) might use new banks as an instrument to facilitate financial deepening Dr K Srinivasa Rao The initiative to nationalize all the 14 large banks on July 19, 1969, was historic to bring about socio-economic transformation in India. The second phase of nationalization of six more banks took place in 1980, thus bringing around 90 per cent of banking network that existed at that time under the fold of government ownership. Out of these 20 banks, New Bank of India was merged with Punjab National Bank, reducing the number to 19. Again, with the onset of private sector banks and foreign banks, such share has now come to 70 per cent. The financial intermediation of mobilizing surplus resources from the savers has been successfully channelized to the productive sectors of the economy by way of priority sector loans extended by nationalized banks. Thus, during the phase of nationalization, though laudable efforts were made to connect the masses with the formal banking network, the enormity of banking needs witnessed an exponential growth. Within the given resources and operating limitations, it was difficult to match the growth of banking infrastructure with the surging needs of the economy. The penetration of banks could not reach out to the hinterland at the desired pace to sub serve the masses. The entire architecture of banking dissemination was done through a well-designed Lead Bank Scheme (LBS). It was launched by the Reserve Bank of India in 1969 with a view to facilitating banks to mobilize deposits on a massive scale to disseminate credit to every sector of the economy, more particularly to unbanked parts. All districts, except Metropolitan districts, were allotted to different banks based on the existing regional orientation spread in clusters. Each bank was also allotted districts in more than one State. Similarly, each State is assigned to a bank identified as convener of State Level Bankers Committee (SLBC).The allotment of districts had a major role in the spread of banking to unbanked centers. This was the beginning of rapid growth of banking reach. Though banks have actively participated in priority sector lending, attention has increasingly been drawn to the fact that large sections of population remained outside formal banking structure. During the period, out of the 8262 bank branches, 1833 were in rural centers in 1969 which stands substantially at 36130 in FY12. The semi-urban centers were dotted with 3362 bank branches then and have 25931 now. It provides an insight into the pace of expansion of banking in hinterland but in a country with over 6, 00,000 villages, the reach is not enough. Despite continued thrust on expanding bank network under nationalization for over four decades, it was found that the banks still had to go a long way to penetrate to the desired extent. Statistics on people-bank connect evidently pointed to the large excluded segment posing tough challenge for banks to bridge the gaps. The global experience of advantages of more inclusive growth in some of Asian and African countries made the government relook at the structure and spread of banking in India. It was found that in a country with 1.2 billion people, the banking system had 660 million deposit accounts and about 110 million borrower accounts in March 2009. The banking inclusion of around 47 per cent is not considered sufficient to harness the potentiality of millions of potential entrepreneurs pan India. With intent to accelerate banking outreach, renewed thrust on bank's branch expansion, use of Information Communication and Technology (ICT) model to create more touch points in the hinterland has been envisaged. Government agencies, the Reserve Bank and even some large corporate sectors began to realize the urgency of inclusive growth and joined hands with banks to proliferate across the nation. In India, banks can reliably connect people with the mainstream economy but the coordination and cooperation of all agencies are needed to accomplish the task of connecting people with the formal banking system. The recent CRISIL Inclusix Index (CII) provided a deeper understanding of the progress of financial inclusion. The CII improved from 35.4 per cent in 2009 to 40.1 per cent in 2011. Credit penetration improved from 37.3 per cent to 41 per cent and deposit reach increased from 39.7 per cent to 48.3 per cent during the same period. Thus, so far, one in two Indians has a savings bank account and one in seven has a loan account. Though it has a long way to go, the progress in the last few years has been impressive. Hence, while nationalization of banks has been the springboard to connect more people with the formal banking system, the recent emphasis on financial inclusion with the active support of RBI and Government agencies has helped banks realize the goals of nationalization going much beyond its underlying spirit. The writer is General Manager, Strategic Management, Bank of Baroda, Mumbai