Impact of the reform in the banking sector may be discussed as follows:
1. Impact of Reforms on Performance of Banks:
It is important to evaluate the impact of reforms on comparative performance of Major Bank Groups. Thus impact can be studied under the following heads:
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(i) Impact on Structure of Banking Sector:
The structure of the Indian banking system has undergone significant changes in terms of private sector bank operations. Since the advent of reforms the number of domestic as well as foreign private sector banks have increased substantially.
(ii) Impact on Growth Rates (%) of Deposits and Advances:
The rate of growth of deposits for public sector banks in the Reforms period is slightly lower than those prevailing in the pre-reforms period. The deposit growth rates of foreign banks declined but of domestic private banks increased.
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One of the main reasons behind the overall sluggist growth rate of bank deposits in the Reforms period, is the growth of non-bank financial intermediaries including mutual funds, finance companies and stock market. The growth rate of advances of public sector banks declined but that of private sector banks increased.
The better performance of private sector banks in the advance market is linked to their ability to attract some of the corporate clients of the public sector banks by providing them better service and better packages.
(iii) Non-Interest Income of Banks:
Non Interest income of a bank comes from different service based activities such as credit card transactions, merchant banking, leasing etc. Before Reforms, Foreign Banks have the highest proportion of non-interest income to their total income.
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However since reforms the proportion of non-interest income out of the total income of the Public Sector banks and domestic banks has increased from 9 percent to 11 percent. On the other hand the share of non-interest income in the case of Foreign Banks has declined from 24 percent to 18 percent.
The trends in non-interest income indicate that the domestic banks are diversifying away from their core business and are providing increased competition to the foreign banks in the provision of fee based services.
(iv) Non-Performing Assets and Capital Adequacy:
Since Reforms, percentage of the non- performing assets as percentage of total loans is declining for all the bank groups. However in case of foreign banks it is the least of all other banking groups.
None of the new domestic banks showed any non performing assets as yet. In the post-reform period mostly the banks have attained the capital adequacy ratio of 8 percent. In case of public sector banks, the Government has infused new capital worth Rs. 20046 crore to enable them to attain the capital adequacy ratio.
(v) Profitability:
In the post reform period, all the banks showed a significant improvement in their profitability with certain exceptions. In 1995-96, the nationalised banks reported net losses. However in 1997-98 all the banking groups showed increase in profitability.
2. Availability of Credit:
Availability of credit to the private sector as a proportion of the total deposits of the banking sector is indicated by the credit-deposit ratio. Following the reforms the credit deposit ratio (CDR) of commercial banks as a whole declined substantially from 60.6 percent in 1991 -92 to 54.9 percent in 1997-98.
It is partly because of the recession over the period and partly because of the banks was learning to adjust to the new lending norms under the reforms. The decrease in CDR since the reforms has been accompanied by a corresponding increase in the proportion of risk-free Government securities in Bank’s major earning assets i.e. loans and advances and investments. In other words, during post reform period, the banks are investing more in Government securities compared to advancing in the form of loans.
There has been an appreciable reduction in the provision of bank are going to priority sector since the reforms. This has taken place inspite of the fact that the priority sector requirement for the foreign banks has been increased substantially since reforms of 1992.
3. Interest Rate Trends:
The structure of deposit rates in the Reforms period points to increasing attempt by RBI to liberalise the term deposit rate structure and boost the mobilization of both short term and long term deposits. Such attempts have been made with a view to augment the resources of the banking system to prevent a liquidity ‘crunch’ and a consequent upward pressure on nominal lending rates. While rates for smaller advances of less term Rs. 2 lakh continue to be fixed and subsidized by the RBI rates for advances over Rs. 2 lakh were deregulated.
4. Banks Vs. Non-Bank Intermediation:
Since the financial sector reforms started in India, commercial banks have been facing increasing competition from term lending institutions like Industrial Development Bank of India, ICICI, Mutual Funds, Chit Funds and the Capital market. Such competition was practically absent until recent years owing to various RBI and Government of India regulations which favoured banks in the mobilization of deposits by regulating private sector entry into financial services and due to an underdeveloped capital market.
With the financial sector reforms, non-bank financial intermediaries and the capital market have experienced impressive growth in recent years. Such growth greatly increased the confidence of the small investor in non bank deposits and investments. The share of non- bank deposits in household savings increased and of the banks decreased. The share of bank in project loans to private sector has also declined. This was primarily due to the growth of development banks and the capital market.
5. Competition:
The liberalised entry of private sector banks including foreign banks has an impact in the competition of the banking sector. Evidence of increased competition in the post reform era emerges from three indicators:
(i) There has been a change in the market share of public and private sector banks. It is a sign of increased competition since any changes in favour of private and foreign banks signal the extent to which these banks have been successful by offering lower prices and better services. The market share of public sector banks in both the deposits and advances have fallen while those of private banks have improved.
(ii) Another signal of growing competition between public sector and private sector banks is non – bank concentration ratio. This ratio gives the total market share of the largest banks in the industry. It is used to measure the extent of competition in a market. Trends in the estimates of four-bank concentration ratio reveal a decline in the post reforms period. It is due to the slower growth of the largest banks, all of which are in the public sector. It is also due to the increased competition from private sector banks.
(iii) The third indicator of competition is the quality and range of customer services. There are indications that the scope and intensity of such competition has certainly increased since the reforms. This is manifested in rapidly increasing use of computer and telecommunication technology by public sector bank in order to provide improved and faster banking services, similar to those provided by private sector and foreign banks.
Greater emphasis is also now being paid on value added services such as credit cards and merchant banking. As a manifestation of increased competition, a number of public and private banks have been setting up ATM’s introducing tele-banking, providing specialised services and introducing credit card operations. An additional indication of increased quality competition is in the attempt of banks to seek quality certification ISO 9000 from International Standards organisation.
6. Efficiency:
The following indicators are used to judge the extent of improvement in efficiency of the banks:
(i) The first efficiency indicator is the proportion of operating cost to working funds. It measures a bank’s ability to economies on total costs. With respect to this indicator while the domestic private banks have registered a significant improvement in lowering costs in the reforms period, the cost of both public sector banks and foreign banks have registered an increase.
(ii) The second efficiency indicator is the proportion of staff expenditure to working funds. With respect to this indicator the foreign banks have the lowest expenditure while the public sector banks have the highest expenditure. The domestic private sector banks have registered a significant reduction in such expenditure in the reforms period.
(iii) Another efficiency indicator is spread or Net Interest margin as percentage of working funds. Spread (Net Interest Margin) is the difference between interest income and interest expenditure by a bank. A higher spread may indicate the fact that a bank may be more capable of mobilizing deposits at low rate of interest or advancing credit at higher interest rates.
Foreign banks have the highest spread followed by domestic private banks and then by public sector banks. Such differences could signify dynamic efficiency differences. However the comparison is not entirely fair because the public sector banks carry a greater burden of lending to the priority sector at subsidised interest rates.