25 years of reforms: Meet Indian banking sector’s poster boys of liberalisation

Before 1991, the Indian economy was under the control of the government; the banking industry was chained as well. If there was one segment that did not even have a shade of private entrepreneurship, it was banking. As then Finance Minister Manmohan Singh brought in economic reforms, there were actors in the regulator and industry who helped change the face of Indian banking. MC Govardhana Rangan profiles those early heroes:
C Rangarajan, RBI Governor 1992-1997He changed face of Indian banking

The state of Indian banking prior to 1991 was different from today. Banks made no mention of profits or losses; they did not fix deposit or lending rates. There were no capital adequacy norms, nor rules for bad loans. To open a branch in Gumidippoondi, near Chennai, or sanction a high-value loan, a bank had to wait for months for Reserve Bank of India’s permission.

A financial marketplace didn’t exist. RBI dictated the exchange rate, based on what the ruling class and bureaucrats felt it should be. They, and not bankers, also decided who got loans. Bankers did not do banking, others did. That is till C Rangarajan became the RBI governor. Indian public sector banks are still largely in bad shape, but there’s competition and consumers have been able to fund their dream homes and cars through loans. Also, individuals have made fortunes by buying bank stocks in two decades. All thanks to the banking reforms Rangarajan shepherded from 1992 to 1997.

“If you look at Indian reforms, it was all about enabling price discovery,” says Indira Rajaraman, a former member of RBI board. “The discovery of the external price of the rupee was necessary. Without that, you did not know the value of imports or exports. He (Rangarajan) partnered the reform effort to discover prices.”

Besides playing an active role in rupee devaluation as deputy governor, Rangarajan laid the foundation for modern Indian banking without having to turn the economy, markets and banks inside out. There was some resistance when he prescribed capital norms and he had to convince stakeholders that this was essential to make the system vibrant and viable.

“The argument that government banks do not have to follow prescribed capital adequacy ratios as (the) public are indifferent to the level of capitalisation in a public sector bank does not recognise the fact that banks are commercial entities and not departments of government,” Rangarajan said in a speech in 1997.

“He (Rangarajan) laid the foundation for a modern banking system as he recognised that a vibrant and competitive banking system was central to the reforms being undertaken,” says former RBI deputy governor Shyamala Gopinath. “The capital adequacy and prudential norms were phased in over a period with clarity on destination and timelines that made the process sustainable.”

Under Rangarajan, private banks came into being. He unleashed the competitive spirit in Indian banking, resulting in the HDFC Banks and ICICIs of today. He was instrumental in ending the government’s abuse of its position by monetising debt, which had made monetary policy ineffective and undermined RBI’s independence.

The inauguration of the HDFC Bank in Mumbai in 1994. Its first corporate office and full service branch at Sandoz House, Worli, was inaugurated by the then Union Finance Minister Manmohan Singh, the architect of India’s liberalisation.

“Rangarajan’s imprint was not only confined to monetary policy, it also extended to elimination of automatic monetisation and a shift in issuance of government bonds to market-based auction system that reduced fiscal dominance of monetary policy and led to the development of government debt markets,” says Gopinath.

The unfortunate part is his reforms were discontinued and the RBI became hesitant about moving ahead because of a deep-rooted suspicion of markets. “In financial markets, there are more disappointments,” says N Vaghul, former chairman of ICICI, who was called in to be a part of the deliberations of the Narasimham Committee on financial sector reforms within a week of undergoing heart surgery. “We thought we would create liberal financial markets. It is a disgrace.”

HDFC Bank’s Deepak Parekh, then RBI govenor C Rangarajan and FM Manmohan Singh at the inauguration.

(From left) A younger Aditya Puri and Deepak Parekh of HDFC Bank with then finance minister Manmohan Singh.

How HDFC and ICICI Bank chartered new paths

HDFC Bank

ICICI Bank

N Vaghul, former chairman, ICICI

He Ushered in new financial landscape

N Vaghul did not build the institution. But he knew who could. If ICICI Bank and its affiliates have thrived and its executives are dotting the Indian financial services landscape today, it is largely due to Vaghul the visionary. A commercial banker who started his career in State Bank of India, Vaghul became the youngest chairman of a state-run lender – Bank of India – at 44. He quit banking in disgust due to interference from bureaucrats.

But things changed when Rajiv Gandhi needed someone with financial acumen, and then RBI governor RN Malhotra called upon Vaghul to head ICICI. He turned a staid term-lending institution into a vibrant financial powerhouse with interests ranging from stock broking to lending to infrastructure, with insurance and advisory rolled into the mix.

“Term-lending was more like a venture capital dotted with failures but without an upside from success,” says Vaghul, who turned 80 on July 22. “I concluded we would not last long if we continued the way we were.”

Many financial supermarkets have come into being since liberalisation in 1991, but the thought leader for all of them was undeniably Vaghul. If IDBI, UTI and SBI all ventured into various wings of financial services, they all took a leaf out of ICICI’s strategy authored by Vaghul.

“Vaghul had big institutional dreams,” says Shikha Sharma, chief executive of Axis Bank, who was groomed by Vaghul and KV Kamath at ICICI. “Vaghul is a dreamer, teacher, parent.”

His ability to engage comfortably with people at various levels without being conscious of hierarchy made him an acceptable leader.

In pre-liberalisation days, when the public sector occupied the commanding heights of the economy, a job in SBI was considered a high achievement. Those who got such jobs stayed with the organisation till retirement. But Vaghul quit to take up teaching at the National Institute of Bank Management when a militant Shiv Sena union was poised to make trouble for him as HR head of SBI. The party at that time had an anti-south Indian platform.

He had an uncanny ability to spot talent, pushing hard to get Kamath back from Asian Development Bank to ICICI. “Mr Vaghul ensured the right succession,” says Sharma. “Even though Kamath had left ICICI, Vaghul got him back.”

What’s his talent-spotting secret? “There is no set formula,” says Vaghul. “It comes from experience. You look at the person’s sense of commitment, sense of loyalty.”

Kamath says Vaghul is a visionary. “Mr Vaghul has the ability to stay current in a rapidly evolving business and at the same time apply his vast compendium of knowledge gained over the years,” says Kamath, who would create one of India’s best financial supermarkets in ICICI Bank. “He is always willing to embrace change. Add to that the fact that he is a lateral thinker and probably one of the most brilliant minds that I have met anywhere.”

The Industrial Credit and Investment Corporation of India (ICICI), as it was known then, was no different from Industrial Development Bank of India (IDBI) or Industrial Finance Corporation of India (IFCI). If 25 years later ICICI is miles ahead, it is because Vaghul saw no future for the lender unless it was transformed. “He had the ability to understand seminal changes were underway with the revolution in technology, and had the willingness to accept them,” says Kamath.

ICICI Bank is today worth Rs 1.52 lakh crore; IDBI Bank, which had a bigger market share in 1980s, is at about a 10th of that, while IFCI has almost faded into irrelevance.

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