Structural Changes in the Indian Banking

Priyanka Mehta

Research Scholar, Department of Economics, Punjabi University, Patiala, Punjab

*Corresponding Author E-mail: mehta.priyanka79@gmail.com

ABSTRACT:

Structural change in an economy takes place mainly along two dimensions: one along sectoral shares and another along work force shares engaged in these sectors. In addition to labour and capital, the technological changes play an important role in the structural change. The technological change brings about an increase in per capita income, either by reducing the amount of inputs per unit of output or by yielding more output for a given amount of input. Technological change in an economy refers to changes in the input output relations of production activities. In India, the share of tertiary sector in the gross domestic product has already crossed the fifty five percent marks. The excessive growth of tertiary sector and its effect on economic growth, employment and sustainability of the system has become a matter of concern. The main objective of the study is to analyze the nature, structure and growth of banking sector in India. Regard research methodology, secondary data will be used and the required secondary data has been obtained from financial statements of various banks, the reports of RBI, banking journals, Indian Banks Association publications, Centre for Monitoring Indian Economy database and other web portals. For analysis of the above data, tabular analysis has been supported. This research has significant policy implication for countries with a large services sector as well as for countries where the service sector is increasing rapidly.

KEY WORDS: Structure, productivity, banking sector, finance, profitability, banking, performance.

INTRODUCTION:

There is a common saying that, “finance is the life blood of a modern economy”. The banking sector is one of the biggest service sectors in India and these days attract the biggest market of Asia in investment. In the economic development of a nation, banks occupy an important place. Financial system is the most important institutional and functional vehicle for economic transformation of any country. Banking sector is the backbone of every country. Banking sector is reckoned as a hub and barometer of the financial system. Indian Banking system has played a crucial role in the socio-economic development of the country.

The system is expected to continue to be sensitive to the growth and development needs of all the segments of the society. As a pillar of the economy, this sector plays a predominant role in the economic development of the country. Banking as a part of the financial sector, is a life blood for the whole industry; it is necessary to survive. It plays a decisive role in accelerating the rate of economic growth in each economy. Banking institutions are critical financial intermediaries for economic growth.

Bank is a financial institution that acts as a payment agent for customers, borrows, and lends money. Since the process of liberalization and reform of the financial sectors were set in motion in 1991, banking has undergone significant changes. In the new policy regime competition is the buzzword. To compete, the system needs to be more productive, efficient and profitable. During the new reforms period, the banking system in India readjusted its capital, labor and organizational setup to improve its performance, productivity and profitability.

REVIEW OF LITERATURE:

Abhiman Das and Sangeeta Das (2007) have identified a multi-product Fourier flexible cost function specification to investigate scale economies, cost complementarities and technical progress of Indian banks during the post reform period 1992 to 2003. The empirical results indicate that there exist significant economies of scale for all size classes of banks and there is no evidence of diseconomies of scale, even for larger banks. The results reveal that increase in production of outputs can be done by either increasing the scale or merging with other banks to move right on the average cost curve. To conclude, it is evident that over the years, Indian banks have experienced increased cost reduction due to technological improvements. In the later period, the reduction in cost is as high as 5 percent. Irrespective of the size of the bank, better technology has uniformly helped in cost reduction.

Ibragimov and Julian (2008) analyze the trends of productivity paradox from 1995 to 2005, by using the statistical data from 21 developed countries and employing three level methodological approaches to assess the productivity. The first level analysis examines macroeconomic indicators (GDP Per Capita), and the second level considers the internal structure of information technology investments and third level analyses labour and multifactor productivity. Study suggests that there is high positive correlation of information technology investments and GDP growth. At the same time labour and multi factor productivity do not significantly correlate with technology investments.

Ipshita Bansal and Rinku Sharma (2008) have identified the efficiency of Indian banks along with the achievements. According to the study earlier banks were conservative in their approach but the liberalization of the banking sector has resulted in an improved efficiency as the demand for banking services has grown strong. The easier access to knowledge, increased and broad based use of technology and rapid introduction of innovative customized products to meet the customer demands are the key features of the changing banking scenario. The paper sheds light on the achievement of Indian banking services and at the same time highlights that there are many challenges ahead for the Indian Banking Services.

Ram Pratap Sinha (2008) examines that Reserve Bank of India adopted a system of Prompt Corrective Action with various trigger points and mandatory and discretionary responses by the supervising authority depending on the three major indicators of health of banking sector namely: (a) net non-performing asset; (b) capital-to-risk-weighted assets ratio; and (c) return on assets. Study of the technical efficiency scores across ownership groups reveals that the observed private sector banks have higher mean technical efficiency scores compared to their public sector counterparts.

Goh Chon-Haut (2012) examined the relationship between percentage of the national workforce in the services sector and the GDP Growth of various countries throughout the world. This study also examined the impact of the services sector on GDP of different countries of the world. The paper concludes that percentage share of services sector was negatively related to productivity growth and also describes the important policy implication for countries with a large services sector as well as for countries where the services sector in increasing rapidly.

Lee and W Mckinbbin (2014) examined the services sector productivity and economic growth. The study examined that in several Asian economies, the services sector has made a significant positive contribution to aggregate labour productivity growth both through own productivity growth and structural change efforts, exceeding the net contribution of the manufacturing sector. This study concludes that there was positive relation between the share of services in GDP and GDP per capita. The result of this study suggested that the simple aggregate model and the method of limited sectoral integration may miss an important dynamic story of productivity growth in the services sector and capital accumulation in on integrated global economy.

An elaborate review of literature on structure, performance and productivity has been done. Studies are indicative of the fact that the structural change is certainly there in the last two decades. The capital, labour, technology and organizational setup has readjusted to improve performance and thereby the productivity. Most of the structural change has been targeted on right sizing the labor and capital. Studies show that the technology, innovation and the intellectual capital has been the main focus of adjustment process. Financial austerity and efficiency has been another thrust area. . A less literature is there which covers structural change, measurement issues, productivity and efficiency dynamics.

OBJECTIVES OF THE STUDY:

1. To explore the structure and structural change in banking in India;

2. To suggest the policy prescription for better working of the system.

RESEARCH METHODOLOGY:

Secondary data will be used and the required secondary data has been obtained from financial statements of various banks, the reports of RBI, banking journals, Indian Banks Association publications, Centre for Monitoring Indian Economy database and other web portals. For analysis of the above data, tabular analysis has been supported.

ANALYSIS:

Structure of Banking Sector:

The Indian financial sector has a very comprehensive structure. It constitutes a variety of banks, financial institutions and capital market institutions. The banking system in India consists of the central bank, commercial banks, development banks, specialized banks and foreign banks. RBI is the supreme authority which uses monetary policy to maintain the financial stability in India. The commercial banks are known as profit-seeking business firms, dealing in money and credit. Its main business is deposit-taking and making loans. Commercial banks make their profits by taking small, short-term, relatively liquid deposits and transforming these into larger, longer maturity loans. Under the Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks (Chart 1.1). The scheduled commercial banks are entered in the second schedule of the ‘RBI Act, 1934’.

Chart 1.1: Structure of Indian Banking System

There were 272 banks (table 1.1) in the year 1990-91 but due to the process of amalgamation, mergers and consolidation of banks, the number of banks has declined drastically and came down to 152, in the year 2012-13. The total number of bank branches increased from 45421 in the year 1990-91 to 89103 in 2012-13. The impact of this phenomenal growth has been to bring down the population per branch from 14000 in the year 1990-91 to 12000 in 2012-13.

_{Table 1.1: Structure of
Commercial Banks in India}

Year	Total Commercial banks (No.)	Regional rural Banks (No.)	Non Scheduled Banks (No.)	Bank Branches (No.)	Population Per Branch (in thousands)
1990-91	272	196	4	45421	14
1996-97	297	196	2	49407	15
2001-02	294	196	4	51738	15
2011-12	169	82	4	81829	13
2012-13	152	64	4	89103	12

Source: Statistical Tables Relating to Banks in India, RBI

As per table 1.2, Indian banking industry is composed of 152 scheduled commercial banks in all. The number of regional rural banks has decreased from 196 to 64 during 1990-91 to 2012-13 due to amalgamation, merger and consolidation of banks. Also there are 88 commercial banks. Out of these 88 banks, public sector banks are 25 in numbers, private sector banks are 20 and foreign banks are 43 in number. In the public sector banks category, there are 19 nationalized banks and 6 banks belong to the State Bank of India and its Associates Banks category. There are two types of private banks existing in India: (a) private banks and (b) new private sector banks. Most of the foreign banks are just new entrants in India.

_{Table: 1.2: Ownership-wise
Number of Scheduled Commercial Banks in India}

Year	SBI and Associates	Nationalized Banks	Private Banks	Foreign banks	Regional rural Banks
1990-91	8	20	24	24	196
1996-97	8	19	35	39	196
2001-02	8	19	31	40	196
2011-12	6	19	21	41	82
2012-13	6	19	20	43	64

Source: Banking Statistics, Reserve Bank of India, various issues

Ownership-wise analysis of market share in various components of business is presented in table 1.3. It shows that the volume of business (sum total of deposits, advances and investments) done by Indian banking industry in the year 2012-13 is to the tune of Rs. 13,640 Th. crores. So, it is not a small sector of the Indian economy. In the Indian banking industry the components of business indicate the fact that 52.53 percent of the total business is in the hands of nationalized banks. Next 22.81 percent is with State Bank of India and its associates. So in all 75.34 percent of the total business is with the public sector banks. The share of private banks is 19.68 percent and that of foreign bank is 4.98 percent. Thus public sector banks still form a major portion of business in the Indian banking industry.

Table 1.3: Market Share in Total Business by Bank Groups in _2012-13

Bank groups	Total Business
Bank groups	Amount (Rs. Th.)	Percent
Nationalized Banks	7164	52.53
SBI and Associates	3112	22.81
Public Sector Banks	10276	75.34
Private Banks	2684	19.68
Foreign Banks	678	4.98
All Banks	13640	100.00

Source: Statistical Tables Relating to Banks in India, RBI

Policy Implication:

On the basis of detailed analysis and the conclusions arrived above, following are the policy implications:

a) Reforms process in the new policy regime has changed the structure of banking, generated competition and has made the banking sector to be efficient and productive. Hence, the process of reforms must continue.

b) Privatization and liberalization has created a compulsion for public sector to become more profitable and productive. New policy regime must continue and create competitive conditions in the market.

c) Competition necessitated improvement in branch efficiency. Branch efficiency means, organizational changes and business re-engineering should be there so that the processes of business become more productive.

d) Most of the public sector and old private sector banks were overstaffed. A little bit of downsizing and labour adjustment has lead to higher productivity gains. Hence not only downsizing but the rightsizing of the organizations should be done.

e) Productivity is the function of quality of labour input or the intellectual capital. Intellectual capital is composed of human capital, structural capital and relationship capital. Intellectual capital base of banking needs to be improved.

CONCLUSION:

Indian financial sector has a very comprehensive structure. It constitutes a variety of banks, financial institutions and capital market institutions. The banking system in India consists of the central bank, commercial banks, development banks, specialized banks and foreign banks. RBI is the supreme authority which uses monetary policy to maintain the financial stability in India. The commercial banks are known as profit-seeking business firms, dealing in money and credit. Its main business is deposit-taking and making loans. Commercial banks make their profits by taking small, short-term, relatively liquid deposits and transforming these into larger, longer maturity loans. Under the Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks. The scheduled commercial banks are entered in the second schedule of the ‘RBI Act, 1934’.There were 272 banks in the year 1990-91 but due to the process of amalgamation, mergers and consolidation of banks, the number of banks has declined drastically and came down to 152, in the year 2012-13. The total number of bank branches increased from 45421 in the year 1990-91 to 89103 in 2012-13. The impact of this phenomenal growth has been to bring down the population per branch from 14000 in the year 1990-91 to 12000 in 2012-13. Indian banking industry is composed of 152 scheduled commercial banks in all. The number of regional rural banks has decreased from 196 to 64 during 1990-91 to 2012-13 due to amalgamation, merger and consolidation of banks. Also there are 88 commercial banks. Out of these 88 banks, public sector banks are 25 in numbers, private sector banks are 20 and foreign banks are 43 in number. In the public sector banks category, there are 19 nationalized banks and 6 banks belong to the State Bank of India and its Associates Banks category.

There are two types of private banks existing in India: (a) private banks and (b) new private sector banks. Most of the foreign banks are just new entrants in India. Ownership-wise analysis of market share in various components of business shows that the volume of business (sum total of deposits, advances and investments) done by Indian banking industry in the year 2012-13 is to the tune of Rs. 13,640 Th. crores. So, it is not a small sector of the Indian economy. In the Indian banking industry the components of business indicate the fact that 52.53 percent of the total business is in the hands of nationalized banks. Next 22.81 percent is with State Bank of India and its associates. So in all 75.34 percent of the total business is with the public sector banks. The share of private banks is 19.68 percent and that of foreign bank is 4.98 percent. Thus public sector banks still form a major portion of business in the Indian banking industry.

REFERENCES:

1. Bansal I. et al. Indian Banking Series: Achievements and Challenges: The ICFAI University Journal of Services Marketing. Hyderabad. 2008; 6: 32-43.

2. Das A. et al. Scale Economics, Cost Complementariness and Technical Progress in Indian Banking Evidence from Fourier Flexible Function Form. Applied Economies. 2007. 39: 565-580.

3. Goh CH. Services Sector and Productivity. International Journal of Computer. The Internet and Management. 2012; 20(2): 6-9.

4. Ibragimov V. et al. An updated view of productivity paradox in the early 21^st century. ECIS 2008 proceeding, paper. 2008; 231.

5. Sinha RP. Profit Efficiency of Indian Commercial Bank: A Non Parametric Approach. The ICFAI Journal of Applied Finance. 2008; 14: 63-75.

6. Lee JW. et al. Services Sector Productivity and Economic Growth in Asia. ADBI Working Paper. 2014; 490.

Received on 29.06.2017 Modified on 06.07.2017

Asian J. Management; 2017; 8(4):1257-1260.

DOI: 10.5958/2321-5763.2017.00191.3