The stodgy old neighbourhood bank turned hip in the late 1990s. Its new tech-savvy, swish avatar is customer-friendly and convenient. Its products, basically either loans or deposits, have snazzy names and use catchy advertising to lure customers. No longer is a loan just a mundane, no-frills loan. It comes with customised toppings. Ditto for deposits. Flexi-schemes, variable interest rates, unfixed fixed deposits... you name it, they have it.

Increasing adoption of technology, whether it was for reaching out to the customer more efficiently through seamless virtual networks or for overhauling and modernising backroom operations in the underbelly of banks, was Indian banking's most visible development in the 1990s. It was a corollary, really, of competition.

For, two decades after an earlier avatar of the government (a socialist one, of course) had nationalised banks, it opened up the industry to new private sector entrants. If that was a spur to the start of new competition among Indian banks, there was more. From a centralised control over interest rates, the Reserve Bank of India (RBI) ushered in a regime where interest rates were more in line with market forces, allowing banks to offer flexible rates, depending on their risk perception of the borrowers.

As banking became less regulated, the customer benefited. But there was a less savoury flipside to it. For decades the public sector banks had played the main role in resource mobilisation and economic development, particularly in the rural and weaker sections of the economy. Banking did spread and in 1990, the share of banks in the total financial assets as an aggregate amounted to two-thirds. But the real problem was a regime of administered prices, scarce products and few players. The lack of competition inhibited innovation and state-ownership led to political meddling in their functioning. Governments used banks to carry out populist measures like large-scale loan melas and generous credit to the weaker sections. This and their obsession to grow led to serious crises. At the end of the 1990s, banks as well as several of the development financial institutions were saddled with non-performing assets (read bad and unrecoverable debt) that touched a massive Rs 75,000 crore. Few will be surprised if some of them go belly-up.

There were other, less unpleasant developments during the decade. By the mid-1990s, the near-monopoly of public sector banks started getting eroded by the more customer-focused private sector entrants. It was competition that helped force older banks to revitalise their operations.

The other benefit by default for banks was the migration of money from a scam-tainted stock market. Beginning 1992, larger proportions of household savings moved into the banking system. It was a windfall for banks, which recorded an annual growth of 20 per cent growth in deposits through the 1990s. To put it pithily, it was an era when Indian banking not only grew but also appeared to mature.

The Nationalisation Of Banks

1969 wasn't just the year man set foot on the moon or Woodstock happened; it was also the year Indira Gandhi nationalised 14 private sector banks. Prior to that most banks like Central Bank (owned by the Tatas), United Commercial Bank (Birlas) and Syndicate Bank (Pais) were owned and managed by businessmen. The only exception was the State Bank of India. Known as the Imperial Bank of India before 1955, this came under the purview of the Reserve Bank of India; it had been nationalised in July 1955 under the SBI Act of 1955. The businessmen who owned these banks channelised most deposits into their own companies, often ignoring the government's focus areas, agriculture and small-scale industries.

That neglect was one reason for the nationalisation of banks. Another was Gandhi's desire to spread the banking habit in rural and semi-urban areas, freeing farmers from the clutches of usurious money-lenders. And still another was the odd name like Nath Bank that went bust.

-Ashish Gupta

NATIONALISATINO: A CHRONOLOGY

Indira Gandhi: prime mover

1949: Enactment of Banking Regulation Act
1955: (Phase I): Nationalisation of State Bank of India
1959: (Phase II): Nationalisation of SBI subsidiaries
1961: Insurance cover extended to deposits
1969 (Phase III): Nationalisation of 14 major banks
1971: Creation of Credit Guarantee Corporation
1975: Creation of regional rural banks
1980 (Phase IV): Nationalisation of six banks with deposits over Rs 200 crore

The Emergence Of New Private Banks

Indira Gandhi: prime mover

The eight new private banks that have emerged on the Indian financial topography since 1994 are clear outperformers in an otherwise troubled sector. In seven years, these banks have grown to account for six per cent of the total assets and 10 per cent of the total profits of the banking industry (circa 2000-01).

It was the Narasimham committee report dated 1991 that envisaged a larger role for private sector banks. The Reserve Bank of India agreed, and in an effort to make the sector more efficient and competitive, it issued, in January 1993, the guidelines governing the entry of new private banks-a minimum paid-up capital of Rs 100 crore among others. This was the first time, following the nationalisation of banks in 1969, that the RBI was issuing fresh banking licences to the private sector.

The NPBs have grown not just organically, but also through mergers and acquisitions. HDFC Bank merged with Times Bank in an all-stock deal valued at Rs 200 crore in November 1999; ICICI Bank acquired Bank of Madura in a stock-swap deal in December 2000 to become the largest among the NPBs.

Today, both ICICI Bank and HDFC Bank are listed on NYSE, and show no signs of letting up on their retail offensive. As on March 2001, ICICI Bank had set up 510 ATMs (Automated Teller Machines); HDFC Bank, 350. In general, the new private banks have rapidly taken to technology. On most operating parameters the NPBs outscore their public sector brethren, but all is not well in the category. Lower interest rates are impacting bottomlines adversely, and asset quality has been hit by the economic downturn. The number of NPBs could shrink in the next few years: Centurion Bank, Bank of Punjab, Global Trust Bank, and Indus Ind in all probability will be acquired by another bank.

-Roshni Jayakar

The Emergence Of Universal Banks

Get ready to welcome the supermarkets of the banking business. They're called universal banks and they will provide a clutch of services from retail and corporate banking to ndustrial lending, investment banking to insurance. In April 2001, the RBI drafted a blueprint for financial institutions wishing to convert themselves into universal banks. In October, ICICI put in its application to become one by effecting a reverse merger with ICICI Bank; within a month, the RBI had cleared this in principle. IDBI has also made out a case for becoming a universal bank by merging into IDBI Bank or taking over a public sector bank and merging with it. While HDFC has ruled out the possibility of it merging with HDFC Bank, we certainly haven't seen the last of u-bank applicants. It does make sense for FIs to transform into u-banks: most were competing with banks in raising short-term funds; and they were often funding long-term projects leading to asset-liability mismatches. Put simply, the U-B route could indirectly address the issue of non performing assets that plagues FIs. Amen.

-Roshni Jayakar

Virtual Bank, Real Service

ATMs are fast-eroding the old branch networks' significance

In terms of technology, there is a great divide between the old public sector banks on on side and the new private banks and foreign banks on another. Even accepting the logic that it is easier for foreign banks, with their limited branch network to adopt technology, age and heredity seem to define the boundary between technologically advanced banks and their backward peers. Indeed, NPBs like HDFC Bank and ICICI Bank have managed to leverage technology to centralise their back-ends, reduce the number of people manning their front-end, and cut transaction costs. The ATM, phone, and the internet are rapidly eroding the significance of a branch-network. Some public sector banks, like SBI, Bank of Baroda, and Corporation Bank, have made some progress, but the road ahead is long. More than anything else, the growth of retail banking in the country has been facilitated by technology. Most customers of the NPBs and foreign banks conduct most transactions through ATM or telephone. Their ATM cards often double up as debit cards.

In retrospect, if there is one event that set banks down the tech-path, it must be Citibank's Millennium Banking project that resulted in the low-cost service branded Suvidha. By using technology and encouraging customers to conduct transactions by phone, over the net, or through ATMs, the bank managed to lower transaction costs enough to mass-base its offerings. Unfortunately, by the time Citibank was through with its pilot in Bangalore and ready to roll out its services in Mumbai and Delhi, HDFC Bank and ICICI Bank had caught on to the benefits of adopting technology. The rest of the story is there to see in your neighbourhood ATM outlet.

-Roshni Jayakar

The Problem Of NPAs

It is one problem that refuses to go away. From Rs 53,066 crore in March 2000, the Non Performing Assets (NPAs) of the 27 public sector banks shot up to Rs 56,608 crore in September 2001. This staggering number not only reduces the yield on advances but also has an adverse impact on the profitability of banks. The stratagem of using Debt Recovery Tribunals to recover dues has failed miserably. Unless something is done about the prevalent laws concerning bad debts, banks will have no option but to continue to carry the baggage of NPAs. ''The huge NPAs of the banks is mostly because of the debtor-friendly foreclosure and bankruptcy laws which allows customers to default with impunity,'' contends a banker.

-Ashish Gupta

Plastic Power

Has the plastic culture caught on in India? It would seem so. India has 5.3 million credit cards and 6.5 lakh debit cards. The average spend on a credit card, at Rs 22,000 a year, is high enough to bring a smile to the lips of the most phlegmatic of bankers. That number, says Pushpendara Mehta of the Credit Card management Consultancy, should go up by 30-35 per cent a year over the next two to three years. And debit cards, according to Venture Infotek, could see triple-digit growth this year with most banks converting their ATM cards to debit cards. The future, clearly, is in plastic.

-Roshni Jayakar