The Global ANALYST, October 2015

An edited, improved version of the following article has been published in The Global ANALYST, October, 2015:

Back to Multi-Agency System, With a Difference

M G Warrier

The current decade is going to see a churning of sorts in the Indian banking system, perhaps unparalleled in the history of the country’s financial intermediation. Post-independence, simultaneously with the consolidation of hundreds of small territories governed by the British and local Maharajas, several financial institutions which called themselves banks also were merged and amalgamated to form new entities capable of meeting the emerging challenges, under the visionary leadership of RBI.

In 1991, the Committee on Financial Sector Reforms (Narasimham Committee)visualised a structure for Indian banking system with “three or four large banks that could become international in character, eight to ten banks with a network of branches throughout the country engaged in ‘universal banking’, local banks whose operations would be generally confined to a specific region and rural banks (including Regional Rural Banks-RRBs) whose operations would be confined to the rural areas and whose business would be predominantly engaged in financing of agriculture and allied activities”. It was not the  Committee’s mandate to  make a comprehensive review of the revamp of the Indian financial sector institutional system which included, besides commercial banks, cooperatives- a three-tier system comprising state cooperative banks, district level central cooperative banks and primary agricultural credit societies-about a lakh of them, of various sizes and varying levels of financial health- and a multitude of entities which were engaged in mobilisation of financial resources and were engaged in promoting savings, engaged in investment and providing credit, many of which came to be known as Non-Banking Finance Companies and Microfinance Institutions.   These were in addition to institutional financial intermediaries like post offices, insurance companies and government owned corporations in the business of resources mobilisation and investment in different ways. In India, there is no institution other than RBI which can have a ‘holistic’ approach to savings and credit.

Reserve Bank of India, with the active support of GOI, has been playing a significant role, without many parallels in the central banking history, in institution-building in the financial sector. Whatever be the assessment by the international rating agencies or spokespersons of private sector, during the three decades that followed independence, the support given to the public sector organisations in the core sector by GOI and the part played by RBI in reorganisation and effective supervision of banks in India have prepared the ground for the post-1990 reforms and the present optimism about India Growth Story which is being marketed with ease by us.

The period 1950 to 1990 saw in-depth studies like All India Rural Credit Survey, All India Rural Credit Review, Committee to Review the Arrangements for Institutional Credit for Agriculture and Rural development (CRAFICARD) and the study by the Agricultural Credit review Committee. Institutions like SBI, IDBI, NABARD and UTI at national level came into being with active participation and support from RBI and GOI during this period. The reorganisation of cooperative credit system and setting up of 196 Regional Rural banks and massive branch expansion of commercial banks helped banking penetrate to semi-urban and rural areas in India. Recalled all these, to emphasise the importance of preserving and improving the existing outlets of financial intermediation while giving birth to new institutions in the financial sector. The country with 1.25 billion people, with majority of its population still fighting hunger and unemployment, can accommodate any number of new institutions, if they will cater to the real needs of the people. India can accommodate several Singapores and Hong Kongs and compete with not just China, but with US also, once the country decides to use its resources properly.

In the chapter “Governor’ Overview” in RBI’s Annual Report 2014-15, Dr Raghuram Rajan made the following points:

“In the financial sector, we need to increase efficiency through greater entry and competition. The most appropriate institutions will prevail when the competitive arena is level, so we have to remove regulatory privileges as well as impediments wherever possible, especially those that are biased towards some form of ownership or some particular institutional form. We need more participation in our financial markets to increase their size, depth, and liquidity. Participation is best enhanced not through subventions and subsidies but by creating supporting frameworks that improve transparency, contract enforcement, and protections for market participants against abusive practices.”

Quoted here to draw attention to the RBI’s vision about the institutional framework for banking in India that will evolve during the current decade. RBI’s clarity of purpose is evident from the way in which the central bank is moving forward in defining the role of financial institutions in economic development. The signals can be seen in the following decisions, which I interpret here from a layman’s point of view:
i)                   The caution with which RBI approached licensing of new private sector banks and the selection of two applicants for giving licences. The ‘voluntary conversion’ of Bandhan from a Microfinance Institution to a bank, hopefully, will pave the way for several so-called NBFCs to join the mainstream banking institutions by conversion, merger or amalgamation sooner than later. On August 23, 2015 Bandhan Bank started with 501 branches in 22 states, 50 ATMs, 1.43 crore accounts and a loan book of Rs10,000 crore brought forward from its MFI days.
ii)                 RBI was more liberal in giving licences to payment banks. But the selection of candidates in this case is indicative of the central bank’s concern to bring all those who are actually in the business of banking (this include post offices) in different ways into the banking discipline. Discipline and law enforcement are not a bad words as is being made out by some quarters.
iii)               This article is being written just before the announcement about small banks. I am optimistic about new entrants into this sector fulfilling their role expectations in the short and medium term and some of them growing to compete with their big brothers now worrying about ‘poaching’ and ‘cannibalisation’ when talking about new entrants to banking sector.

Challenges before RBI

RBI’s role in the economic growth of the country and in financial inclusion keeps growing. It has to preserve the strength of the existing institutional system comprising public sector banks, old and new private sector banks, RRBs, cooperative banks including over 1000 urban cooperative banks(some of which want to migrate to the commercial banking sector) and NBFCs while allowing entry and growth of a new set of entities. Any laxity in management of NPAs or inadequate credit flow to priority sector or the neglect of deposit insurance responsibilities (the one lakh limit per account for deposit insurance coverage was decided ages ago and in the present scenario of many private sector players and euthanasia being given to banks in the cooperative sector the raising of this limit should receive immediate attention) is seen as inefficient supervision by RBI.

Perhaps, the overburdening of RBI with expanding responsibilities is putting strain on the central bank which is struggling with finance ministry continuously breathing over its shoulders. The RBI Annual Report 2014-15 carries much evidence to prove this and I quote a couple of paragraphs on HR issues contained in the Governor’s Overview(I invite readers to access the full report at
46. RBI is an efficient organisation, which has steadily reduced its employee count from 35,500 in 1981 to 16,700 today, even while performing ever increasing quantities of work. The surplus it generated from its activities this year is `659 billion, which has been paid out entirely to the Government. There is, of course, always scope for improvement. For example, to ensure that we meet our commitment to the public, we have put out on our website timelines within which the public can expect responses to applications made to RBI. We will monitor those timelines to ensure our staff delivers as promised.
47. A key factor in RBI’s success has been a satisfied staff. In the past, RBI used to have no problem attracting junior officers, losing only an occasional officer who was successful in the IAS exam. Today, we lose more than we should be comfortable with. This is why a revamp of the professional challenges we offer our staff is very much needed, and we hope the changes outlined earlier will help us become a more attractive employer. In this regard, our review of compensation, as well as the long-pending improvement in pensions for our retirees also.

I would like to conclude this article drawing attention to a couple of paragraphs in the recent RBI report on Trend and Progress of Banking (Chapter on Banking and Other Financial Institutions) which I quote:
14. RBI has also stepped away from micromanaging the functioning of the PSB Boards through regulations, allowing Boards to determine how they will carry out their responsibilities for strategic planning, risk management, accounting, etc. RBI has also liberalised the compensation of private bank Board members, while maintaining some checks, to ensure Board members are properly incentivised.
15. Because PSBs compete in the same market place for talent as do private sector banks and foreign banks, and because skill gaps are increasing middle management levels because of past hiring freezes, they will be unnecessarily hampered if they are unable to pay appropriate compensation to middle and senior managers, as well as Board members. Of course, higher pay should come with better accountability for performance. Given that many PSBs have higher overall costs than private sector banks performing similar activities, there is some scope for cost rationalisation even while improving the pattern of compensation. At the same time, we should recognise that PSBs undertake public interest activities (like the rollout of accounts under the Pradhan Mantri Jan Dhan Yojana) that are not always fully compensated. Government should endeavour to keep the competitive playing field level by fully compensating banks for activities it wants undertaken in the public interest.


Interesting times are ahead for the banking sector in India. It has to change a lot in terms of skill, efficiency and penetration if it has to maintain at least the level of efficiency the sector displayed during the Lead Bank Scheme days when there was massive branch expansion to meet the rural and semi-urban credit needs. Today, the difference is, unlike the money lenders of those days, there is a network of efficient players in the financial market who are willing to enter the mainstream banking network, provided banks will accept them with honour.
(M G Warrier is Ex-General Manager, RBI and author of the 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century India”)


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