How Indian banking has changed over the last decade 

Context: Over the last decade, the nature of commercial banking in India has changed a lot. This has taken new form in various ways. 

What changes have taken place in commercial banking in India? 

(1) Industry vs Retail lending: Commercial banks in India broadly carry out four different kinds of lending: agricultural, industrial, services and retail.  

Between 2007 and 2014, the banks gave more and more loans to industry as a proportion of non-food credit. From mid-2014 onwards, the industrial lending started to slow down and retail lending (housing loans, vehicle loans, personal loans, consumer durables loans, education loans, etc.) started to go up.  

(2) The private banks have become important lending players in addition to the public sector banks (PSBs). 

How did this happen? 

How did industrial loan increase between 2004 to 2013? At that time, the Indian economy was growing at a higher rate. India was deemed to be the next China. Therefore, corporates started investing in big infrastructure projects from power plants to steel plants. Therefore, the banks disbursed a lot of industrial loans as a proportion of non-food credit. 

How did industrial loan decline? The industrial loans were disbursed without due-diligence. Many projects faced delays due to a lack of environmental clearances, non-environmental clearances, land acquisition, roadblock on policy issues, etc. These projects did not take off. The corporates could not repay the loan. Therefore, more fresh loans were disbursed to prevent any default. These loans turned out to be bad loans.  

Since 2014, the industrial loans could not be extended because the banks were reluctant to lend more to industries, many companies were unable to borrow loans and the Reserve Bank of India (RBI) placed many public sector banks under the prompt corrective action (PCA) framework.  

How has the retail lending increased? The balance sheets of banks have gradually improved because the banks have written off the bad loans, the PSBs have been recapitalized, the recovery of a few bad loans took place, and the prompt corrective action (PCA) framework was imposed by the RBI. Therefore, the bank’s lending improved and the bank’s preferred retail lending to industrial lending. However, this rise was largely driven by the rise of housing loans as a proportion of non-food credit.  

How privatization of banking took place? PSBs could not lend, operate and compete well due to accumulated bad loans. Therefore, the new generation private sector banks found an opportunity to grow their share in the overall bank lending in India. They disbursed more loans than public sector banks (PSBs). The private banks have managed to lend around 85% of the deposits raised by the. Whereas, the public sector banks managed to lend around 64% of the deposits raised by them. This means the PSBs have been losing market share and privatization by stealth is quietly on. 

How does the future look?

More chances of decline in Industrial lending? In 2021-22, new projects worth ₹14.3 trillion were announced. This is around 40% lower than new projects announced in 2014-15 and 47% lower than new projects announced in 2008-09. This fall has been on account of the weak capacity utilization of the existing infrastructure to make things. In this scenario, banks will get fewer opportunities to give out industrial loans. In fact, now, corporates have more ways to finance their projects.  

New areas of lending: There have been a rise of intangible intensive firms. Earlier, Banks could lend against the tangible physical assets (like machines, buildings, vehicles, computers etc.) which could be sold in case of default. But now, demands are for intangible assets like research and development, branding, organisational development, and software etc.  

Rise of Fintech in banking: Many unicorns in India are in the fintech space. These firms are looking to break the conventional banking business model of having a physical presence through branches and personal visits to raise deposits, carry out lending and offer wealth management services. 

Source: The post is based on an article “How Indian Banking has changed over the last decade” published in the Live Mint on 09th May 2022.