What’s the impact of 1991 economic liberalization on the banking sector?
Let’s assess through figures.
In I991, there were 76 scheduled commercial banks, excluding regional rural banks. The comparable figure now are 94, including small finance banks and payments banks.
There were 60,220 bank branches then – 35,206 rural, 11,334 semi-urban, 8,046 urban and 5,624 metropolitan. The number has grown to 158,373. The rural branches have grown the least (to 52,773) but in other segments, the growth is substantial. In semi-urban areas, there are 43,683 branches now; in urban pockets, 30,638; and there are 31,279 metropolitan branches now.
One branch covers 9,500 people now against 14,000 in 1991.
In 1991, the banks had 38 trillion deposits and a Rs1.32 trillion credit portfolio. Three decades later, the deposit portfolio is over Rs155.7 trillion and credit portfolio, Rs108.8 trillion.
The cash reserve ratio or the portion of deposits that commercial banks keep with the central bank was 15% in 1991. Now, it is 4%. They needed to maintain a 38.5% statutory liquidity ratio, buying government bonds, in 1991. Now, this is 18%.
Both sucked out 53.5% of their deposits, leaving only Rs46.5 of every Rs100 deposits to lend. The comparable figure now is Rs78.
Since 40% of the loans must flow to the priority sector, only Rs26.5 could be lent to corporations (there was hardly any retail loan then) in 1991; Now they have more money to lend – Rs47.
The minimum loan rate was 16% in 1991 but the banks actually charged 20-24% as they had to compensate for the extremely low interest rate on “directed” lendings, part of the priority loans.
With more lendable resources in kitty, in a free market, the current floor rate for bank loans, ranges between 6.65% and 7.30% for State Bank of India, depending on the tenure of loans. By and large, this is the trend now.
Both the body and soul of banking has changed in three decades. Technology is at the driver’s seat but branches remain relevant, particularly for collecting deposits. More and more people are being served by the industry. In past seven years, the Pradhan Mantri Jan Dhan Yojana has brought 43.04 crore people in the banking fold.
Finally, a sellers’ market has been transformed into a buyers’ market.
The next few years will be more exciting. The number of nationalized banks has shrunk, through mergers. From over two dozens to 11. IDBI Bank is waiting to be privatized and two more from the pack of 11 will follow the path. Competition from the neo banks and fintechs is getting fiercer and consumers are turning more demanding.
