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Characteristics of the Indian Banking
India has well developed, but not best run,
banking system. The banking system is:
- Indigenized - that
is, it is made up of mainly indigenous, local and national, banks
manned by local people.
- Nationalized - the
indigenous banks are mostly in public sector. New foreign and indigenous
banks are emerging in the private sector, which is more competitive. India's
banking is mixed economy.
- Diversified - the
system has many kinds of banks, such as commercial banks ( some of which
are foreign banks), specialized banks, rural banks. The diversity in
banking is because of the diversity in banking needs. The diversity is
the necessity. The diversity is a national solution. The presence of
rural banks indicates that banking in India is geographically widespread
and not concentrated in big cities. The diversity leads to expansion -
the country's banking system is expanding with the recurrent edition of
more banks, more bank branches. The Indian banking is essentially branch
banking The public sector banks have branches all over India. The branch
banking system suits the country most because of the system's inherent
advantages and the country's growing banking needs due to its vast
geography, vast demography, vast economy. The indigenous banking has
replaced the traditional moneylenders , who have worked only to
perpetuate debt and poverty in the weaker sections of the society. The
nationalization of banks has served to make finance accessible,
affordable and productive for the weaker sections.
- Unionized - the
banking staff matters are handled by unions and this more or less
affects customer service.,
- Centrally administered
- the country's central bank administers the banking sector of
the country's economy.
- Canalized- the nationalized
banks' resources in particular are canalized toward country's economic
development . They are invested in trade development, rural development,
agriculture development (called green revolution), and industrial
development. The nationalization paves the way for canalization. India's
mechanization of agriculture is the courtesy of the country's
nationalized banks. India's banking system is not the result but the
cause of the country's economic development.
- Deposit- focused - the indigenous
banks vie for deposits and this helps the country in capital
formation for economic development acceleration and the bank manager in
career development
- Collateral -oriented
- that is, the lending is heavily collateralized, in some cases
unnecessarily additionally collateralized.
- Bad debt ridden - the
loans in public sector banks made for development purposes, particularly
rural development, are mainly non-performing assets.
This is because verification of end use of
the loans is lacking. The political interference in poverty- alleviation banking
programs in particular has made the public sector banks poor. Poverty-alleviation
banking is political banking and political banking is not prudent
banking.
- Computerized - the
computer is ledger, teller, cashier but in urban teller banking. The
rural banking is more or entirely paper-based
A Reserve Bank
of India Office
Banking on Bank Financing
India's banking system is a
development mechanism. The federal government uses this mechanism for the
development purposes it conceives and plans . The government's development
strategy focuses on export maximization, import substitution or
minimization, import-for -export maximization. To use the banking system
as an effective development tool, the government has:
- Nationalized banks, to
uses its resources in accordance with its policies and strategies.
- Legislated Acts, to
control banking functions - for example, Foreign Exchange Management Act;
Banking Regulation Act.
- Enhanced the central
bank Reserve Bank's administration of banks - the central bank, RBI, as
called in the banking parlance - regulates, for example, export
financing function of the banks, including foreign banks operating in
India.
- Institutionalized
specialized banks such as Export-Import Bank ( EXIM Bank), Industrial
Development Bank (IDBI), Regional Rural Bank, National Bank for
Agriculture and Rural Development (NABARD) for promoting development in
various sectors of economy and sections of society - EXIM Bank for
export trade development. IDBI for industrial infrastructure development,
NABARD for agriculture development, Regional Rural Banks for rural
economic development - that is, for rural poverty alleviation.
- Institutionalized
trade risk management measures , such as formation of Export Credit and
Guarantee Corporation (ECGC) , to encourage banks for export financing.
Payment and Finance in
India's Foreign Trade
The main payment method that India uses in
its international trade is letter of credit (LC). LC is not only a payment
method but also a financing method, a cost control method. The banks
happily offer pre-shipment finance, called packing credit in India's
banking language, in Indian or foreign currency, against export LC as
collateral or against confirmed export order. They offer post-shipment
finance by negotiating - as defined in UCP - LC documents. The bill of
exchange (B/E) is a popular part of LC documentation. India has Negotiable
Instruments Act to govern B/E, among other negotiable instruments such as
check India has Contract Act to regulate the role of contract in banking
transactions. India welcomes, respects and uses international UCP that
governs UCP. The ECGC offers risk coverage in export financing, at low
cost with more coverage in LC-based trade (financing) transactions. In
Indian situation, LC offers two benefits to its beneficiary: it makes
finance and credit insurance 1) accessible and 2) affordable.
For recovery of export overdues, India's traders prefer credit
insurance claim to litigation. The RBI monitors export payments and
overdues. Export financing in India is regulated. It is not only a banking
function but also a political strategy for economic development.
In India's foreign trade the second popular
payment method is documentary collections In this method, DP (documents
against payment) is preferred to DA (documents against acceptance ) .
Post-shipment finance is available against documentary collections.
The RBI has permitted factoring and
forfaiting (see the author's article Letter of Credit vs. Forfaiting,
published in the UK-base monthly Trade and Forfaining Review, at
www.lcviews.com) , in its attempt to promote institutional financing
for accelerating economic development.
In international payment matters, India prefers
to accept payments in the foreign currency that has a great market
reputation, such US dollar, British pound sterling, EU currency.
India's banking system offers products that
cover foreign exchange risks. India's traders don't prefer to invoice in
the domestic currency because of its weak position.
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Ravi Mehta, Ph.D |
About the author:
He worked in India's banking system as a training manager in
international banking and trade finance.
His Ph.D. thesis is: "Impact
of Nationalized Banks on Rural Development: A Case Study of Three
Punjab Village".
He is Anthropologist/Sociologist
turned banker. |
[Also available
in LC VIEWS Newsletter no. 53 / July 2006]
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