PSBs as the early birds in the banking industry enjoyed the first mover advantage for a painfully long time in India. They have set up shop in every nook and corner of the country with consistent support and continued blessings from the Governments. They have grown in stature and position through an extensive branch network. They had a pre-conceived basket of products and services made available to the general public. A product-centric approach with government sponsored social banking focus very little room for them to really care about the credit side of the ledger. Mass banking and social banking were the real growth drivers. A vast army of customers was always encouraged to wait at the doorsteps of a bank. The hapless customer was always taken for a joy ride. Every day was offering the same kind of services and products with very little differentiation. The lack of competition inhibited innovation and state ownership led to political meddling in their functioning. Governments used banks to carry out populist measures like large scale loan melas and generous credit to the weaker sections. This and their obsession to grow led to serious crisis. The crisis manifested itself in rising inflation, high level fiscal deficit, low growth and unsustainable current account deficit, and the Gulf war of 1990 precipitated the Balance of Payment crisis. At the end of the 1990s, banks as well as several of the development financial institutions were saddled with non-performing assets (read bad and unrecoverable debt) that touched a massive Rupees 75,000 crore.
The reforms process basically aimed at arresting the above alarming trends by turning the banking system from a highly regulated to a more market oriented system:
- Phased reduction of statutory liquidity ratio (SLR) and cash reserve ratio (CRR)
- The bank rate was activated as an effective signal and as a reference rate.
- There was also the deregulation of the administrated structure of interest rates. Various lending rates were rationalized and interest rates were made oriented for most of the transactions.
- Prudential norms were prescribed for capital adequacy, income recognition and provisioning for bad and doubtful debts.
- PSBs were allowed to raise additional equity from the capital market. The government also decided to partially disinvest its equity in these banks.
- In January 1993, RBI permitted the entry of new private sector bank (March, 1994), and foreign banks too were permitted to expand their branch network.
- FERA was amended and subsequently repealed and replaced by Foreign Exchange Regulation Act 1993.
- Development finance institutions and NBFCs were also brought into the regulatory orbit of RBI. Rupee was made fully convertible on the current account (Aug 1994).
- Mergers and acquisitions have been permitted and moves toward universal banking are encouraged. Banks are allowed to step into the insurance business as well.
- Banks are allowed to invest up to 5 per cent of their total outstanding domestic credit in capital market.
- In April 2001 the RBI came out with a blue print for institutions wishing to convert themselves into universal banks (these will offer a number of services from retail and corporate banking to industrial lending investment banking to insurance).
The foreign banks, right from inception, had to operate in a tightly controlled environment. This has naturally compelled them to focus on the key needs of high net-worth customers more closely. They had to create space for themselves by trying to meet the stated and concealed needs of customers through a proactive customer friendly approach. To this end, technology friendly channels were used in place of branch focused channels. Since the service quality was unmatched the customer was more than willing to pay the hidden costs that came with a smile.
The old private sector banks were, more or less, squeezed between the PSBs and foreign bank without any clear cut focus and differentiation strategy. They were religiously expanding their branch network with a view to increase their reach and accessibility. The service quality was somewhat better in that they were able to offer product and services matching the expectations of customers. Accountability to their own shareholders forced them to focus more on revenues and profits. This, partly explains why they were more focused and customer friendly than their rivals in the market place.
Liberalisation and interest rate deregulation have changed the rules of the game completely. This era saw the emergence of New Private Sector Banks. These banks are lean, technology friendly, and totally customer focused. They have deep pockets, they are innovative willing to experiment and take risks to stay ahead in the race. They come out with novel products displayed a highly aggressive business ace, followed the footprints of foreign banks and started making competitive offers in various segments of the banking business. They have also entered the non-fund based financial operations in a big way without relying on the traditional deposit –advance route. In recent times, these banks have invested heavily in technology and are displaying their skills in offering high-tech software solutions in respect of mergers, acquisitions, corporate advisory services, loans syndication portfolio investments, derivatives , custodial services etc. These innovations have naturally made them more competitive and customer friendly. The free market forces have enabled them to attract the best brains in the country and deliver satisfaction to both external as well as internal groups in an admirable way.