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From lazy banking to easy banking Emerging crisis Ferrying digital banking to Lakshadweep It’s a war on black money, support it. Small finance banks offer high interest rates Cautious and considerate Anytime banking to anywhere banking Perhaps small is more beautiful than big! Rationalised Banking on Risk Holy or unholy? Lacklustre credit expansion United India Insurance - Rs 110 crore losses have been claimed till now due to floods in Tamil Nadu Thirty more cities seek to become SMART Indian customers are tech savvy Drastic decline in asset quality All that glitters is not gold... A bank for women, by women Stage set for Indian ‘avatar’ of foreign banks Cradle of banks to a smart city... Bank deposits account for 46.3 per cent of household savings New capitals of Migrant banks Just 660 days! Target over-ambitious... Banking in Telangana Reaching out: is it slowing down? Insatiable appetite for credit The paradox: clamour for the Goliath and David Small is ‘more’ beautiful Merger mania haunts banks Growing volume of stressed assets… LVB- A supermarket of financial services Greet Lakshmi the banking robot A new development bank rising in the east… Banking overhauling or reorganisation? Two banks: their jubilees and performances Targets continue to be ad hoc Monetary policy continues to adopt dis-inflationary path Big bank merger, bigger expectations Financial inclusion vs unclaimed deposits Fund healthcare clinics in villages... Nothing much can happen…. Too big to fail and too small to sail Drop in SLR- sparing lendable resources New bank licences, at last... How okay are new banks? Growing gainfully Why any time money? One down in private sector Governance in Reverse Gear? Good, bad and ugly Bottomlines shrink, bad loans rise... The collaboration suite of cyber criminals Mega merger is on Needed a Banking Atlas Well-lived... Payment banks have arrived Cut in repo rate – lower than expected Capital base of regional rural banks raised A development bank for BRICS Another route for achieving financial inclusion How ‘secure’ are the secured loans? What is the priority – mergers or NPA reduction? Ernakulam excels... Hesitancy in announcing year-end results Reaching the Unreached… Grows Bigger Managing NPAs... Smart banking in smart cities Small finance payment banks... Aadhaar, niraadhaar and banking Who is the real beneficiary? Why priority status?
 
Too big to fail and too small to sail
Recently the Reserve Bank of India (RBI) has designated the State Bank of India and ICICI Bank Ltd as Systematically Important Banks, which are considered to be ‘too big to fail.' Fair enough.

Rampant bank failures are now a thing of the past. However, just as some of the features of Indian economy are a bundle of contradictions, the banking sector also is a mixture of heterogeneous groups of banks of different pedigrees, sizes, and ages.

While the biggest bank has 16,000 branches, the smallest is contended with 121 branches. There are a few century-old banks operating side by side with a couple of other banks in their infancy. Government-owned public sector banks compete with the newborn private ones. In addition to the 45 commercial banks operating at present, the Regulator has granted bank licenses to 21 new entrants, eleven payment banks and ten small finance banks. A few more in the category of small banks are supposed to be in the pipeline while there are a few, for whom the sailing is not smooth enough.

 

The changing number of banks

Historically, rapid expansion and sudden contraction in the number of banks has been a feature of the Indian banking sector. Until the implementation of the Indian Banking Companies Act of 1949, there was an unrestricted growth of the number of banking companies. In 1940, there were 45 scheduled banks and 660 non-scheduled banks.  The mortality rate of these banks was very high. By 1953, the regulatory stipulations of the Act reduced their number drastically. The crash of Palai Central Bank Ltd in 1961 prompted the RBI to enforce the merger of weaker banks with stronger ones. As many of the banks in the south took over the banks in distress, the number of banks declined in the sixties.

In 1975, regional rural banks were established with the capital support of Government of India, the state governments, and the public sector banks. The state governments took a fancy for this new and promoted them all over the country, except in the UTs. Consequently, as many as 197 gramin banks joined the banking sector. Many of them, confined to smaller areas of operation, like a single district, were in the red. In 2000, the Government of India initiated the process of their merger at the state level, bringing down the number to 56. This process of amalgamations incidentally was not done very systematically. One of the banks is so small in size having only 37 branches and its bottom line has not grown beyond Rs.3 crore.

 

Promoting the private sector

While the public sector banks were constantly directed to expand their branch network, under financial sector reforms, new banks were brought into the scene in the private sector during the 1990s. After due diligence, ten new banking licenses were given. The new banks came up with computerised banking, growing faster than some of the older banks. Adopting inorganic growth path, two of them took over four smaller banks, while at the same time, three of the new banks did not continue for long.

One of the attempts made in 1996 to create small banks in the private sector called local area banks was unsuccessful. Their limited operational area and the low capital base were among the factors, which have contributed to their poor performance. The process of due diligence for granting licenses for these banks took more time than the lifespan of the banks; while six banks were licensed, two disappeared very soon. One of the surviving banks out of the four has been given a license to become small finance bank in the recent dispensation.

Bharathiya Mahila Bank was promoted in 2013 as a wholly Government-owned bank. Two more banks in the private sector have already come up during the current year. Seven microfinance entities, which have built up micro-credit bases, would be now working as small finance banks. Eleven payment banks would be competing to mop up small savings. By and large, their operational areas are likely to be overlapping the areas where the old banks and gramin banks are already functioning.

It 's hard to visualise as to what impact these new banks could make on the working of the latters’ branches.

Author : Dr N K Thingalaya
Reported On : Nov 01,2015
Sector : Banking
Shoulder : Licenses
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