Banking Industry: A Pillar of India’s Growth Story

General Studies Paper-3

Context

• Recently, the President of India underscored the transformative role of India’s banking sector in shaping the nation’s economic trajectory.

About the Banking Industry in India

• India’s banking sector is a financial intermediary, primary conduit for credit delivery, liquidity modulation, financial inclusion, and serves as the operational backbone of macroeconomic management.
• Cooperative and Local Area Banks: Serve niche markets and rural populations.
• Development Financial Institutions: Such as NABARD, SIDBI, and IDBI, cater to agriculture, small industries, and infrastructure.
• Non-Banking Financial Companies (NBFCs): Over 9,000 registered entities support credit delivery to underserved segments.

Role of the Banking Industry in India’s Nation Building

• Role in Monetary Management: RBI, as the monetary authority, uses banks to implement its policy stance:
• Interest Rate Transmission: Changes in the repo rate directly influence lending and deposit rates across banks.
• Liquidity Operations: Banks participate in RBI’s Variable Rate Repo (VRR) and Reverse Repo (VRRR) auctions to manage short-term liquidity.
• Credit Expansion: By personal loans, services, and agriculture, supporting monetary transmission and economic activity.
• Role in Fiscal Management:
  • Public Debt Management: Banks invest in government securities (G-Secs), helping finance fiscal deficits.
  • Subsidy Delivery: Through Direct Benefit Transfers (DBT), banks ensure efficient disbursal of welfare schemes like PM-KISAN and LPG subsidies.
  • Initiatives like the Pradhan Mantri Jan Dhan Yojana, which has enabled over 56 crore zero-balance bank accounts.
  • Digital tools such as UPI, mobile banking, and digital wallets have revolutionized access to financial services, especially in remote areas.
• Tax Collection and Refunds: Banks facilitate digital payments for income tax, GST, and customs duties, streamlining fiscal operations.
  • Economic Growth and Credit Expansion: According to the Ministry of Finance, the Indian banking system efficiently allocates resources from depositors to borrowers, thereby enhancing economic efficiency and growth.
  • Support for MSMEs: Banks provide tailored credit solutions to micro, small, and medium enterprises, which are key drivers of employment and innovation.
  • Infrastructure Financing: Long-term funding from banks supports roads, railways, ports, and digital infrastructure—essential for national development.
  • Supporting Agriculture & Boosting Rural Economies: Banks can make farming more sustainable and profitable, through financial literacy programs and agri-tech initiatives.
• Conversion of Kisan Credit Cards to RuPay cards enhances rural financial empowerment.

Concerns & Challenges in India’s Banking Industry

• Asset Quality and Non-Performing Assets (NPAs):
  • Hidden Stress: Loan recoveries have not kept pace with slippages, especially post-crisis restructuring.
  • Sectoral Vulnerabilities: MSMEs and agriculture continue to face credit access issues, increasing default risks.
• Capital Adequacy and Basel III Compliance:
  • Basel III Transition: While larger banks are adapting, smaller institutions may struggle to meet global standards.
  • Inter-bank Linkages: High interconnectedness increases systemic risk during financial shocks.
• Financial Inclusion vs. Profitability:
  • Rural Outreach: Banks are expanding into underserved areas, but digital literacy and infrastructure gaps persist.
  • Net Interest Margins: Indian banks maintain higher margins compared to global peers, raising questions about efficiency and competitiveness.
• Competition and Consolidation:
  • Reduced Competition: Mergers may lead to market concentration and reduced customer choice.
  • Risk-taking Behavior: Intense competition among private banks can lead to risky lending and investment strategies.
• Cybersecurity Threats:
  • Types of Threats: Phishing, ransomware, DDoS attacks, and fake apps pose serious risks to financial stability.
  • High Exposure: Banks account for nearly one-fifth of all reported cyber incidents in India.

Key Reforms in India’s Banking Industry

• Banking Laws (Amendment) Act, 2025: It introduced 19 amendments across five major banking laws:
• Governance Enhancements: Director tenures in cooperative banks aligned with the 97th Constitutional Amendment.
• Audit Reforms: Public Sector banks (PSBs) empowered to offer competitive remuneration to statutory auditors, improving audit quality.
• Investor Protection: PSBs can now transfer unclaimed shares and bond redemption amounts to the Investor Education and Protection Fund (IEPF).
• Substantial Interest Threshold: Revised from ₹5 lakh to ₹2 crore, modernizing outdated definitions.
• 4R Strategy for PSB Revival (2014): It includes:
  • Banks Board Bureau (BBB): Professional selection of bank leadership;
  • Strategic guidance for capital planning and governance;
• Decriminalisation and Ease of Compliance: The Jan Vishwas Bill 2.0, proposed in Union Budget 2025, aims to:
  • Decriminalize over 100 provisions across financial laws.
  • Simplify compliance for MSMEs and startups.
  • Promote a trust-based regulatory framework.