New banks, bad loans, rate cuts in 2015: Will 2016 be equally eventful?

23 new banks; project Indradhanush (which means the rainbow); Jan Dhan and interest rate cuts on one hand. Rising levels of bad assets and a foreign exchange scam that rocked one of the country’s biggest lenders on the other. 2015 is the year of banking, one that has been a roller-coaster ride for the sector.

23 new banks; project Indradhanush (which means the rainbow); Jan Dhan and interest rate cuts on one hand. Rising levels of bad assets and a foreign exchange scam that rocked one of the country’s biggest lenders on the other. 2015 is the year of banking, one that has been a roller-coaster ride for the sector.

23 new banks; project Indradhanush (which means the rainbow); Jan Dhan and interest rate cuts on one hand. Rising levels of bad assets and a foreign exchange scam that rocked one of the country’s biggest lenders on the other. 2015 is the year of banking, one that has been a roller-coaster ride for the sector.(EPA Photo)

New banks

The RBI, on August 19, granted in-principle approval to 11 companies to form payments banks — banks which can accept deposits but cannot lend. Companies like RIL, Aditya Birla Nuvo, Vodafone and Airtel, among others, and India Post received approval.

A month later, the RBI gave in-principle approval to 10 other companies to set up small finance banks —which can perform all the operations of big commercial banks, but on a small scale.

Both payments and small banks are slated to begin operations within 18 months of receiving the in-principle approval.

And then there were also two more new, full-fledged lenders — IDFC Bank and Bandhan Bank — which kicked off operations.

Recapitalisation

In August, the government announced a seven-pronged revamp plan for public sector banks — Indradhanush — which included a scheme to deal with bad loans and a capital infusion plan of Rs 70,000 crore over four years. As part of the programme, the government has already appointed private bank executives as heads of state-owned Canara Bank and Bank of Baroda.

Financial Inclusion

The flagship financial inclusion programme launched in August, 2014, Pradhan Mantri Jan Dhan Yojana (PMJD), gained steam in 2015. It also marked the second coming for India’s own payment gateway system RuPay card, first conceptualised by the RBI in 2009. With about 166-million new cards issued under PMJDY, RuPay is giving tough competition to global peers MasterCard and Visa.

The MUDRA loan scheme to fund the unfunded and insurance programmes, including Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Suraksha Bima Yojana, Atal Pension Yojana, were all launched with the aim of financial inclusion.

Monetary policy

The RBI and the government for the first time signed a Monetary Policy Framework agreement with the view to maintaining price stability, while keeping in mind the objective of growth. The framework, which set the agenda of the central bank as inflation targeting (consumer price inflation of 4% with a band of +/-2% from the financial year ending in March 2017), came into place.

Interest rates

The RBI has cut its key lending rate by 125 basis points so far in 2015. To pass on higher rate cut benefits to consumers, effective from April 1 next year, banks will have to fix their “base rate,” the floor rate to which all lending rates are linked, on “marginal cost” or the interest rates banks offer to new deposits. This is different from the existing system where banks fix the base rate on the “average cost” that includes all existing borrowers.

Bank of Baroda

Then there is the Rs 6,000-crore foreign exchange scam at Bank of Baroda came as a shocker, revealing that several banks—public and private — need to put their house in order and deal with frauds even more sternly.