Excessive regulation and the absence of incentives led to sloth. Says K. Raghuraman, executive director, Punjab National Bank: “Since interest rates and margins were fixed, there was no competition, which led to armchair banking and inefficiency.” While geographical reach increased, the sector was in shambles — the percentage of bad loans was huge, service was poor — and there was a glaring absence of a big picture.

The financial crisis India found itself in 1991 acted as a catalyst for economic change, an integral part of which was deregulating the banking sector. On the one hand, licences were given to private players. On the other, the painstaking task of strengthening existing banks was undertaken in four steps. First, deposit and lending rates were freed in phases, which let banks set rates based on commercial considerations. Second, banks were asked to account for bad loans within six months of a default in interest payment, not postpone it endlessly. Recounts Raghuraman: “All public sector banks went from being profit-making to loss-making.” Third, banks had to raise more capital so as to withstand shocks better. Four, they were given operational freedom.

Probably, for the first time, the focus of banks turned to profits — and the customer. From a seller’s market, it turned into a buyer’s market. The new private banks and foreign banks, both of which leaned heavily on technology, set the standard, and public sector banks were forced to follow. Service improved dramatically: banks became computerised, ATMs and plastic money became the norm in urban areas, Internet banking came in, cheque processing became faster… Interest rates fell, and retail lending took off. Today, for instance, retail assets comprise 65 per cent of ICICI Bank’s loan portfolio; even a public sector bank like PNB has 23 per cent in retail, compared to virtually nil a decade ago.

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