New Licenses in Banking Sector

7/25/2019 New Licenses in Banking Sector

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TERM PAPER

FOR CORPORATE FINANCE COURSE

PGPPM 2013-15

TITLE

NEW LINCENSES IN INDIAN BANKING SECTOR

BY

V SURENDRAN, PGPPM-1313020

G V RAMANA RAO, PGPPM-1313016


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New Licenses in Indian Banking Sector

1. Introduction

Indian economy has been witnessing impressive growth consistently

for past many years excluding the exceptions in the very recent past,

partly due to global economic meltdown. This growth can sustain only with

the eective and ecient support from a robust nance system. Finance

sector was also a part of the economic reforms initiated in early nineties

and it could contribute eectively to the overall growth of the economy.

Finance sector experienced a growth rate which is at par with growth in

!" during these years.

#owever, a comprehensive loo$ at the performance of ban$ing

sector will give better insights about the %uality of its performance and

how far it could meet the overall ob&ectives economic reforms expected

from this sector.

2. Post reform Performance of Banking sector

'hen Indian economy grew in value from (.)( trillion in )**) to +.)

trillion in -)), at a /01 of )2 3, aggregate deposits of 4/5s have grown

at a /01 of )+.*3. "erformance of the economy and its growth largely

depends on 5an$ lending. This has grown at a /01 of )*.3 during

)**)6 -)). 0nother measure of 5an$ing sector performance, ban$

credit7!" has grown from --.83 to (.*3 during the same period. /redit

to commercial sector increased from .3 of !" to (+.83. 9oreover

average population of commercial ban$s branch, which is an indicator of

Financial inclusion, improved from )-, to *,2 in :rban areas and

from )+,- to )(,* for semi urban and rural areas during -( to

-). The all India weighted average improved from )(,( to ),2

during the same period. 0ll these, shows signicant indirect contribution

of 5an$ing sector to the growth of the economic. !irect contribution of

ban$ing sector to !" is consistently more than (3.

;www.dnb.co.in7IndiaTop5an$s-))7Indian5an$ing4ector.asp


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0 further close loo$ at the performance of ban$ing sector with another set

of parameters will give a dierent story altogether. In the larger interest of

the economy, the performance of ban$ing sector is to seen with rest to its

eciency in terms of allocation of resources and operationaleectiveness. =perational eciency ensuresnancial services in a safe,

secure, speedy and cost eective manner. 'hereas, allocation eciency

ensures allocation of resources to most productive activities as per the

developmental needs of the society. It ensures that broader national

interest are met and interest of most vulnerable sections are protected.

4uccess of a nancial system is in ensuring the eciency in terms of both

of these factors. 5ut the statistics shows that the operational eciency

what we saw from the statistics seen earlier is at the cost of allocation

eciency.

4ome of the parameters which will give an idea about the allocation

eciency are as follows.

a< /omposition of number of rural branches in the total number of

branches in the country 6 The percentage of rural braches of the

total number of braches came down from (+.)8 in )**2 to +.)>

in-).b< rowth of deposit accounts in favour of customers from rural area in

comparison with their urban counter parts ? 'hen /01 of deposit

accounts in rural area during )**2 ? -)- was a meagre ).23 , the

increase in accounts from :rban area was).>83. 0lso the

proportion of deposits from rural areas came down from )(.-3 to

*.23.c< "roportion of credit availed by rural customers ? "roportion of credit

@owing to rural areas came down from )>3 to >3.d< 4ectoral !istribution ? 5an$ credit to 0gricultural and 44I units came

down from .3 to )+.*(3 during )**2 to -)-.e< /oncentration of deposits ?


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It can be seen from the above table that there a denite positive

shift towards bigger cities in terms of both deposits are credits.f< 4hift from individuals to others ? "ercentage of number of accounts

decreased from *8.(3 to >(.8) and in terms of amount it

decreased from ++.23 to (.823 during )**+ to -)-.

!etailed statistics are given at Annexure I. 0ll these statistics ;4peech

of !eputy overnor 15I at FI50/ -) ta$en from 15I website< clearly

indicates the attention of ban$s have been shifting steadily from rural to

urban, agricultural7 44I :nits to bigger corporate entities, individual

customers to business establishments. 0ll these wor$ against the

ob&ective of better allocational eciency.

0llocational ine%ualities are also evident from the fragmented

structure of ban$ing sector as can be seen from the chart given below.

1egional 1ural 5an$s and co6operative ban$s which forms more than 8(3

in number contributes only less than 83 in terms of business. This implies

the domination and pivotal role of 4cheduled /ommercial 5an$s excluding

115s in the Indian ban$ing sector.

.

; www.dnb.co.in7IndiaTop5an$s-))7Indian5an$ing4ector.asp


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0bove observations establishes the need for having some serious action

for improving the allocation eciency and ma$ing the sector more

inclusive in its growth.

3.Brief History of Banking Sector in India

0 brief loo$ at the evolution of present day ban$ing networ$ in India

will give better clarity about the course of action to be ta$en for coming

out of the current problem and ensuring better support of ban$ing system

to the growth of the economy. In pre independence era, initials ban$s

were set up as &oint venture for ta$ing care of the business interest of

5ritish Aast India company. 4ubse%uently many private ban$s came up atdierent parts of the country and they sated playing an important role in

the economic development of the country. 9oreover the ban$s became

one of biggest. To ensure that the ban$s are wor$ing in synchroniBation

with the development ob&ectives of the economy, )2 of these largest

ban$s were nationaliBed in )*8. Cext round of nationaliBation of 8 more

ban$s came in )*>. 'ith this ovt. of India ensured that more than *)3

of the ban$ing business is under its control and this situation continued till)**.; http77en.wi$ipedia.org7wi$i75an$ingDinDIndia

New Licenses in Banking Sector

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