How the year 2015 transformed the idea of ‘banking’ for you and me

The year 2015 was, arguably, the most critical year in a decade for India’s banking sector. Of the many changes the industry witnessed, the biggest one was the entry of a new set of tiny lenders — small finance banks and payments banks —into India’s banking landscape, which was till then familiar with a three tier-structure comprising of full service commercial banks, cooperative banks and Non-banking finance companies.
In August, the Reserve Bank of India (RBI) issued in-principle approvals for 11 entities to set up payments banks and followed this up with the issuance of ten more licences for small finance banks in September. The central bank, thus, kicked off the differentiated banking regime that was long awaited in Asia’s third largest economy. In simple words, differentiated banks are banks which mainly cater to a specific area of activity, unlike full service banks, which are engaged in all category of business.
The firms that received payments banking licences include leading corporations like Aditya Birla Nuvo Limited, Airtel M Commerce Services Limited, Cholamandalam Distribution Services Limited and Reliance Industries, besides the Department of Posts. Payments banks, as the name suggests, were designed to facilitate payment services and acceptance of small deposits, but not engage in lending operations.
On the other hand, the small banking licences were given mostly to microfinance institutions (MFIs) including Ujjivan Financial Services, Equitas and Janalakshmi, while surprisingly, the only listed microlender in the country, SKS Microfinance, was dropped from the list. Small finance banks are a miniature of full service commercial banks mandated to offer all banking services in a smaller scale. Both small finance and payments banks were asked to begin operations within 18 months of the grant of in-principle approval.
What is critical to note is that the scope of both these banks, by definition, is limited to small-ticket customers, hence, a major step to aid the progress of financial inclusion in a country, where 40 percent of the population is yet-to-be-banked. These new set of banks have the potential to change the way you and me bank with the use of technology and reach.
Two more full-service banks
The year 2015 also saw the entry of two more full-service commercial banks —IDFC and Bandhan – both of which started operations in 2015. This was the third set of private banks in the country after the RBI issued licences to Yes Bank and Kotak Mahindra Bank in 2003-2004. The first was in 1993-94, when RBI issued licences to 10 private banks. They were Global Trust Bank Ltd, ICICI Bank Ltd, HDFC Bank Ltd, Axis Bank Ltd, Bank of Punjab, IndusInd Bank Ltd, Centurion Bank Ltd, IDBI Bank Ltd, Times Bank and Development Credit Bank Ltd.
Bandhan, founded by Chandra Shekhar Ghosh, based in Kolkata has been operating as a MFI for 15 years to 6.7 million women borrowers with a network of 2,022 branches spread across 22 Indian states and Union territories and a loan book of around Rs 9,524 crore as on 31 March, 2015.
IDFC, which has been primarily in infrastructure lending, too converted itself into a bank in October, 2015. The central bank is currently working on a new bank licencing structure under which new bank permits will be issued on on-tap or continuous basis.
Jan Dhan gains ground
The year 2015 also witnessed massive bank account opening drive under Jan Dhan Yojana, the flagship financial inclusion programme launched in August, 2014. The government used the entire public sector banking infrastructure for the roll out of the scheme. Under this, over 19 crore bank accounts were opened so far with total deposits in these accounts amounting to Rs 27,000 crore. Beneficiaries were also promised free debit cards, accident, life insurances and loan overdraft facility under this scheme.
At the same time, there were criticism from experts about the rocket-speed implementation of the scheme. They cited that since banks were put at gun point to achieve the targets set, there can be issues of large scale duplication of such accounts. Also, it was not clear who will bear the cost-burden of inoperative accounts. Nevertheless, the roll out of Jan Dhan was arguably the biggest bank account opening drive India has ever seen. Expanding the reach of financial inclusion has always been a challenge for Indian banks even after 46 years of bank nationalization.
The Rajan factor
The Reserve Bank of India (RBI) embarked on a battle in year 2015 to prevent the practice of banks masquerading Non-performing assets (NPAs) in the banking system. Beginning April 1, 2015, the RBI withdrew special regulatory dispensation for restructured loans, thus, forcing banks to treat fresh restructured corporate loans at par with NPAs in the context of provisioning. Henceforth, banks are required to set aside 15 percent of the loan amount on every fresh restructured loans at par with bad loans. The RBI clamp down came after corporates began misusing the restructuring mechanism even in cases, which were not genuine.
Rajan warned banks against postponing the problem for tomorrow and making it worse. Instead, the former International Monetary Fund Economist asked banks to recognize the stress in the loans at earliest and address the problem. Banks’ fight against wilful defaulters yet again took the central stage in 2015. Wilful defaulters are those who have the capacity to pay back to banks but wouldn’t do so. Once banks classify a company as wilful defaulter, that party gets virtually ostracized from the banking system. One such instance is Vijay Mallya-promoted Kingfisher Airlines, which owe Rs 7,000 crore loans to some 17-banks. State Bank of India, the largest lender, in the consortium, classified Mallya a willful defaulter in November this year.
To sum up, the Indian banking system witnessed several big changes in 2015 both on the regulatory front and in the industry level. The proposed bankruptcy code, which was introduced in Parliament in the Winter session, offers hopes for the banking industry since the law can enable banks to recover at least part of their dues before the value of underlying assets gets completely lost in a troubled firm. The Bill is likely to passed in the budget session.