Banking History | Private banks

Birth of RBI
By early 30s, there were >1200 banks in India! With Great depression of 1930s, Indian banks started to collapse - so British Indian Govt set-up RBI to supervise over banks in 1934.

Post Independence
Target of banks were merchants, upper middle class. They were not aiding Five-year plans of GOI (like cheaper loans to farmers). They were owned by industrialists & their policies were meant for their benefit. Hence GOI started nationalizaling banks.

Nationalisation: 1955 SBI, 1969- 14 banks, 1980 - 6 banks. Now govt majority share holder, GOI can pick board-of-directors, policy of its choice.

=>Now Banks were forced to give loans at very cheap rates, recovery became an issue (no quick legal recource available at that time), RBI kept CRR & SLR high (15, 40 % resp) all this means banks are left with little money to lend. No business expansion leads to decline in exports, in some ways it lead to BOP crises of 1991.

Narsimhan Committee I (by GOI in 1991)

Bank licences: 1st Round (1993):10 licences given, out of which 6 are running successfully viz. ICICI, HDFC, UTI (Axis bank in 2007), IDBI, Indus, DCB. Four banks failed at various stages.

Narsimhan Committee II (1998)
Introduce VRS. Legal reforms in loan Recovery => SARFAESI 2002.
Computerization, Electronic fund transfers (ECS, NEFT, RTGS). Allow more private & foreign players.

New Bank licences 2nd round (2001): Kotak Mahindra, Yes Bank.
New Bank licences 3rd Round (2013-14: Given to 2 out of 25: IDFC, Bandhan.

Pro & Against arguments for New Pvt Banks can be read here.

Few takeaways are:

-> As per census 2011:
Only 67% of Urban households & 54% of rural households are getting banking services.

-> Existing banks not sufficient for 100% financial inclusion.
only one in two Indians have bank account
Only one in seven Indians gets loan from banks (others have to rely on money lenders who charge 36% compound interest rate!)

-> "Inside RBI this is seen as an Experiment. RBI wants local/ niche banks". Bandhan is a micro-finance company based in WB. Giving license to it is RBI's push for Financial Inclusion, where "Lead banks/ mainstream banks" have failed.

Equipped with a licence Bandhan can now raise money from public @ 6-7 % & lend it at 10-15% as against ~20-24% it charges now. Read full ET article here. Now it needs to be seen how a NBFC makes transition to becoming a bank & how successful  it'll be for the rural poor.