The Indian banking sector,
which was hitherto con-ventional in its operations, was assigned a catalytic role
for economic development, with the nationalization of 14 banks
in 1969 and six banks in 1980. During the post-nationalization
period, banks drew up multifaceted schemes and lined up
innovative deposit and credit products to cater to the
credit needs of the borrowers of various segments.
The change occurred in the priorities of banks which began
to focus more on mobilization of low cost funds, expanding their
network and credit exposure. Uncontrolled expansion of financial
services and directed lending practices in the name of reduction of
economic inequalities, inflated the price of funds
borrowed and this caused an unwanted pressure on the
`interest spreads'. The spreads, which are the difference
between the interest received and interest paid, have dwindled and hence
the profitability. Lavish political interference in credit dispensation,
and lack of adequate mechanism to check the accountability and
consistency, hindered the quality of loan portfolio management
that resulted in growth of Non-Performing Assets ( NPAs),
particularly in Public Sector Banks (PSBs). The performing
assets were under strenuous pressure and the operational profits of
the banks, on account of mounting bad debts, have been eroded
under the provisioning norms. In a bid to recapitalize in public
sector banks, the Government of India (GoI) released Rs. 52,000 cr as
one time assistance in 1991 which could help them cleanse their
balance sheets.
Nevertheless, the year 1993 will remain as a milestone on
the road map of the Indian banking system, when private players
were also permitted to deal with the banking business. With the
entry of private and new generation banks, the competitive
dynamics were widened and the banking system had to address many
challenges emanating from globalization. The liberalization
strategies unleashed in the subsequent years sharpened the `Risk and
Reward' consciousness in the banks and they are now forced to find
new sources of revenues, departing from their traditional
narrow banking base. At present, on the platform of the Indian banking,
27 banks in public sector, 26 banks in private sector, 29 banks in
foreign sector besides 96 regional rural banks and 222
cooperative banks are extending financial services, in conformity with the
demands of economic growth. But inefficient management of
backward and forward effects of credit portfolio has led to the
phenomenal rise of NPAs further. |
