Repression to liberation

FINANCIAL INSTITUTIONS

Notwithstanding a few scams, the Indian financial system was never more healthy.

A deposit base of Rs 11,827 crore, a non-food credit base of Rs 8,149 crore and a government securities portfolio of Rs 2,826 crore...

Perhaps a niche bank tucked away in some corner of the country considering a merger with some other, bigger bank to achieve economy of scale? Right? Hang on, dear reader. We are not talking of just one bank. This was the size of the Indian banking system in 1975, the year Business Standard was born. Eighty-three commercial banks had this base on a branch network of 18,730.

What's the scene today? Ninety scheduled commercial banks have 67,000-odd branches in every nook and cranny of the country. Want to know the vital statistics of the industry? Well, a deposit base of Rs 16,93,862 crore, a non-food credit portfolio of Rs 10,22,464 crore and a pile of government securities worth Rs 7,07,022 crore.

Want to know more about the banking system and how has it evolved over the last 30 years? Check another key parameter "" the foreign exchange reserves of the country.

In 1975, hold your breath, it was $1.4 billion. If one removes gold out of it, foreign currency assets were worth $782 million. Today, the foreign currency assets pile is $131.8 billion and total foreign exchange reserves including gold $137.6 billion.

Let's divert our attention for a moment and take a look at the stock market. In 1975, the Bombay Stock Exchange market capitalisation was Rs 2,805 crore. Today, it's about Rs 17,50,000 crore "" over 60 per cent of India's gross domestic product (GDP).

The number of listed companies during the three decades jumped from about 150 to 7,500. Finally, in 1975, Rs 68.3 crore was mopped up from the market through a clutch of equity issues. The comparable figure in 2003-04 is Rs 30,510 crore.

These statistics portray the transformation of the structure of the financial sector in India over the last three decades chronicled by the Business Standard.

At another level, the soul of the sector has also changed. The regulators no longer micro-manage the institutions, no longer handhold them on every step. They are grown up and started looking after themselves rather well. For the Indian financial system, it has been a fascinating journey from repression to liberation.

The road to Dalal Street was very different till about a decade ago. There was the Controller of Capital Issues (CCI), the last word on not only vetting of public issues but also their pricing.

There were at least three dozens stock exchanges in the country, running like a brokers' club. And, there were scams "" in various forms and dimensions. In 1992, big bull the late Harshad Mehta rocked the market with his ingenious use of bankers' receipts and used the banking system pump in money into the equity market.

The BSE Sensex, which was hovering around 1200 level in April 2001, soared to a dizzy height of 4467 on April 22 before crashing to 3897. The BSE was closed for six days to recover from the crash.

In 2001, another not so big bull Ketan Parekh used bank funds to play in the market but came crashing down burying Madhavpura Mercantile Cooperative Bank of Ahmedabad under his shadow. The mid-90s witnessed a different kind of scam when hundreds of corporations entered the market, raised money from the public, and vanished into the blue.

Things have changed for the better, and dramatically so. In 1994, the state-of-the-art National Stock Exchange appeared on the scene, making the dozens of regional exchanges irrelevant.

In 2001, badla was banished from the market and derivatives made a debut. The capital market watchdog Securities and Exchange Board of India (Sebi) is now planning to go for T+1 settlement system as the T+1 system has already stabilised. No wonder the foreign institutional investors (FII) have poured in over Rs 1,50,000 crore in Indian equity markets ever since they were allowed entry here (in December 1993).

On the banking turf, deregulation of interest rates played a key role in financial sector reforms. In the money and government securities markets, to a large extent market forces now determine interest rates.

In the banking system, except of savings bank deposit (now at 3.5 per cent) and non-resident deposits, all deposit rates are free. On the advances front, all loan rates are left to the banks except for a segment of export credit and small loans up to Rs 2 lakh which are administered.

After decades of administered regime, in April 1992 banks were given freedom to fix interest rates on term deposits of 46 days to three years and over within the ceiling prescribed by the RBI. That was the beginning of the process.

On the credit front, not only were the rates determined but also the sectors to which the bank funds should go. There were six categories of lending rates "" five different slabs below Rs 2 lakh and a minimum lending rate for above Rs 2 lakh. In October 1994, the RBI stopped prescribing minimum lending rate and banks were free to fix the rates on all loans above Rs 2 lakh.

There was repression on reserve requirements also. In the early 1990s, the statutory liquidity ratio (SLR) of banks was 38.5 per cent and cash reserve ratio (CRR) 25 per cent.

In other words, for every Rs 100 worth of deposits, Rs 53.5 was absorbed by reserve requirements leaving only Rs 46.5 for lending to the industry out of which the lion's share was to be given to agriculture and other "priority" sectors.

Today, the SLR requirement is down to 25 per cent and CRR 4.75 per cent. Finance Minister P Chidambaram has promised to free even this level by amending the Banking Regulation Act and RBI Act.

We have also seen the death of scores of most of the non-banking finance companies (NBFCs) and a development finance institutions (DFIs) for different reasons. The NBFCs could not survive the pressure of competition while the DFIs outlived their utility in a market-driven economy.

A clutch of new generation private sector banks were born in mid-'90s and two more in the 21st century to lend new meaning to the business of banking. They have new products, are adept in technology and hungry for profits.

No wonder, they have helped the staid public sector banking industry change its mindset, increase efficiency and made them competitive. With the government holding coming down (from 100 per cent to 51 per cent in some cases), the CEOs of these banks work for creating shareholders' value.

This brings us to another paradigm shift in banking "" the repositioning of customers. Even less than a decade back, corporations used to be on their knees to borrow bank money. Now the boot is on the other foot.

With an increasing number of companies raising money from the market, the master-servant relationship has got inverted. Bankers are no longer obliging the customers, they are courting the customers.

There is another shift in the paradigm. The Inspector Raj was a nightmare of the past. Still, this does not ensure that financial sector players are breathing easy today. This is because there is a new Regulation Raj . The Sebi's insistence on Mepin is a case in point.

But that's another story. Given the stupendous progress in the financial sector over the last three decades, no one will complain about these minor irritants. Don't you think so?