Let customers enjoy freedom from banks' tyranny

As we celebrate the 75th anniversary of Independence, let’s take a look at how the banking sector has evolved in India since 1947.

There were 97 scheduled commercial banks in 1947, collectively holding Rs 1,090 crore deposits; the advance portfolio was Rs 475 crore. Imperial Bank had little over one-fourth share of the deposits — Rs 287 crore. There were 551 non-scheduled banks.

Post-Independence, the biggest milestone for the banking industry was nationalisation. In 1969, 14 banks with deposits of at least Rs 50 crore each were nationalised on the midnight of July 19. A second round of nationalisation followed in 1980 — of six more banks with deposits of at least Rs 200 crore each.

Just ahead of the first phase of nationalisation in June 1969, there were 73 commercial banks with 8,262 branches.

Now, there are 100 banks — 12 public sector banks, 21 private banks, three local area banks, 12 small finance banks, six payments banks and 46 foreign banks. Besides, there are 43 regional rural banks. They too are scheduled commercial banks. Collectively, they have a 211,332-branch network (as of December 2021).

In June 1969, the deposit portfolio of banks was Rs 4,646 crore and the loan book Rs 3,599 crore. By end July 2022, the deposit portfolio had grown to over Rs 169.7 trillion and the loan book Rs 123.7 trillion.

Banking has been in practice in India for long. The Arthashastra of ancient Indian polymath Kautilya, dating back to the first millennium BC, referred to creditors, lenders and lending rates.

Depending on the definition, the world’s oldest bank is either Banca Monte dei Paschi di Siena (BMPS) of Italy or Berenberg Bank of Germany. BMPS, now in a bad shape, was founded in its present form in 1624, but it originated from a mount of piety, an institutional pawn broker, in 1472. Berenberg, founded in 1590, is the world’s oldest merchant bank.

Commercial banks appeared much later in India with the Bank of Bombay, in 1720. It lasted till 1770 when Bank of Hindostan made its appearance in Calcutta. The eastern city was also the birthplace of the first Presidency Bank — Bank of Bengal — set up in June 1806. It got the authority to issue currency notes in 1823. The Bank of Bombay, the second Presidency Bank, was set up in 1840, and the Bank of Madras, the third, came into the scene in July 1843.

Three banks were merged into one to form the Imperial Bank of India in 1921, which played the role of the central bank till the Reserve Bank of India was set up in 1935.

While the Britishers established these banks, the first Indian bank, Allahabad Bank, came into being in 1865. The Punjab National Bank followed in 1895 (in Lahore) and, 11 years later, Bank of India was set up in 1906.

Between 1906 and 1913 many more banks mushroomed, including the Central Bank of India, Bank of Baroda, Canara Bank and Indian Bank. By December 1913, there were 56 banks of different hues, including 12 exchange banks, engaged in foreign exchange business. By 1930, the number of commercial banks almost doubled to 107.

Both World War I (1914-1918) and the Great Depression (1929-1934) saw many banks biting the dust. By 1947, the entire banking industry was privately owned and six of them had at least Rs 100 crore deposit portfolio each.

Since then, we have come a long way. Still, only one Indian bank is among the top 50 banks globally by assets; credit-to-GDP ratio in India is far lower than most developed nations and even Bhutan; and India is among seven countries home to half the world’s 1.4 billion adults without access to formal banking, a recent World Bank report says. Going by the report, 130 million Indians don’t have access to formal banking. Among those who have access, many are being exploited by banks in a repressive financial system.

Why am I saying so? Read on.

Mr A kept a fixed deposit (FD) with a private bank. He was given a credit card and persuaded to open a savings bank account without drawing his attention to the fine print on keeping a minimum balance. After two years when the FD matured, instead of earning interest, Mr A’s FD actually shrank! Why? Since the savings account didn’t have the required minimum balance, money flowed from FD in the form of a penalty every quarter. Mr A was never informed of this.

Mr B had a two-decade relationship with a large public sector bank. He had his savings account, FDs and multiple accounts of his family members besides a locker with the bank. When 82-year-old Mr B shifted his house to another locality within the same city, all his accounts were shifted to the bank’s branch in that locality but not the locker. He would not get back his locker in the new branch unless he subscribes to a market-linked policy worth Rs 1 lakh a year.

The third incident is even more interesting. Here, the customer is an NRI, based in the USA. Ms C had an NRO account with a private bank branch in Mumbai. She was the sole beneficiary of the assets of her parents as per probate granted by Bombay High Court. Probate establishes the validity of a will.

Accordingly, all financial assets were liquidated and the money flowed to the estate account operated by the executors of the will. After paying tax, the money was to be transferred to the sole beneficiary. An estate account is a temporary bank account that holds the funds of an estate.

But the branch froze the account as it did not want an outflow of money before the financial year-end. Why? It would fall short of its target of deposit mobilisation! The money was released in the first week of April. The beneficiary had to wait for another accounting year to file taxes of the estate as the transaction was not done before March 31.

And here is the most bizarre case. Mr D, who died in September 2021, was sold nine insurance policies between 2019 and his death, by the relationship manager of a private bank whom he had trusted blindly. The manager was fully aware that all insured persons are citizens of the US! The smart banker arranged for an electronic clearing service (ECS) for the timely payment of premiums of the policies.

After his death when Mr C’s wife discovered this, the relationship manager assured that after paying the premiums for three years, the policies can be surrendered and the principal amount will be refunded. The insurer, meanwhile, has made it clear that in case any insured individual dies, the claim will be rejected because of the citizenship status of the insured persons. Yearly premium for the nine policies is around Rs 11,40,000.

I can cite hundreds of such cases. The branch managers have come out of their glass cabins and the sellers’ market has transformed into a buyers’ market but there is no end to the harassment of customers. The 75th year of Independence is an ideal occasion for the bankers to take a vow to free the customers from tyranny. Let’s do honest banking. Let the customers enjoy their freedom.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd

His latest book: Pandemonium: The Great Indian Banking Story

To read his previous columns, please log on to https://bankerstrust.in

Twitter: @TamalBandyo