As the new millenium dawned banks in India find themselves grown in size, but totally exhausted in strength, inheriting several problems by way of a legacy of the past three decades starting from the Seventies. In a competitive business environment, where sellers and buyers participate at the global level, problems in business enterprises do suddenly assert and threaten their very survival. But these threats should be recognised as normal challenges faced by business & industry. Business is in fact a trade off between risk and reward. Most of the challenges are in the normal course externally originating, like changes in demand structure, or downturn in the overall economy, competition from more powerful rivals in business etc. The higher the risk accepted, the better that the rewards could be. Businessmen by experience and expertise have learnt risk-management to ward of all such foreseeable risks. Risk-management has therefore become an accepted study in business management.

But the difficulties and challenges that now surmount the Indian banking system are more complex. These are not merely due to risks exposed by market forces. The Indian Banking Industry started getting loaded with debacles and these were initially invisibly, but regularly accruing from the Seventies. The crippling effects of the reverses suffered came to be explicitly demonstrated in the early Nineties. The root cause of the ills affecting the banking industry was on account of misdirected business policies and practices that were internal in terms of their origin, as also due to the severe economic crisis that faced the Country in the contemporary period. Different elements forming the Indian economy are integrated and banking is one part of the financial sector. Problems faced by business and industry leading to accumulated losses by such units, result automatically in the banks getting loaded with sizeable sticky advances and bad debts. To understand the problems suffered by the Banking Industry of this category, it is necessary to start with a brief study of the miseries of Indian economy in the concurrent period that terminated in a severe economic and balance of payment crisis in the year 1991.

The Rupee was devalued in the Seventies, in the aftermath of a costly war that the Country was forced to wage with neighbouring Pakistan. The Government had to seek massive assistance from the IMF and World Bank and as per their prescription economic policies started progressively changing. Government controls were being withdrawn gradually. But inflation was running high in double digits. There was poor economic growth (below 3% per annum). Exports did not pick-up, while imports were surging up, leading to serious balance of payment problems. This culminated in the year 1990-91 in the balance of payments position of the country to became critical and foreign exchange reserves were depleted to dangerously low levels. Imports had to be severely curtailed in the course 1990-91 because of shortage of foreign exchange. This affected the availability of many essential items and also led to distinct slow down of industrial growth.

Like business and industry practising a well defined risk-management policy to ward off and pre-empt crisis before they occur, Government too in times of economic crisis use the tools of monetary and fiscal measures to retrieve the situation. But the economic crisis that beset the country was so steep that could not be solved by conventional remedial steps. To tackle the root causes of the problems, to provide a permanent solution for the ills of the economy, to reverse the trend and to provide for a vibrant growth, Government of India initiated a package of Economic Reforms in the year 1991 with the following objectives:

• To aim at quick revival of the momentum of exports

• To create strong incentives to economise on imports, without resorting to proliferation of licensing controls, which promote delay and inefficiency, generate arbitrariness and stifle enterprise.

• To create an environment free from bureaucratic controls in which our exporters will be able to respond with speed and flexibility to changing international conditions

• To recognise the change that is taking place in the world economy, where countries are shedding isolation and getting increasingly integrated, and to shape our economic policies as part of the prevailing global environment

Without elaborating further suffice it to say that the measures introduced to pursue market oriented reforms and link Indian economy with the global economy paid rich dividends and changed the total facet of the country. The country today is recognized as a great economic power and respected by all other countries. While the country was left with Forex reserves of less than US $ 50 million in 1991 barely sufficient to meet the import needs of critical items of the country for a week, we have today built Exchange Reserves of Sixty Billions Dollars and more.

Though crisis in the economy was successfully tided over, the impact it left on the banking sector with the inherited past burden of failed credits and sunset industries still remains a legacy baffling all efforts and defying an easy solution. We will study an overview of the problems that surfaced in the Indian Banking Industry over the last three decades, and analyse the genesis of each problem and how it crippled the banking industry in more detail.

The Reserved Bank of India regulates and controls banks in India. The major segment of Indian Banking, i.e. nearly 80% is State-owned, comprising the Nationalised Banks and the State Bank of India Group. This segment comes under direct control of the Finance Ministry. Following the staging of the Economic Reforms in the country as aforesaid from 1992, the Government also proceeded to reform the financial and the Banking sectors to bring a new wave of hope and strength to the banks. A Committee under a former Governor of Reserve Bank of India Mr.Narasimhan was appointed in 1992 and As per its recommendations several momentous steps towards strengthening the structure and functioning of the Banks were taken. The nationalised banks were significantly freed from directed and regulated controls of the Government and the RBI and allowed full freedom to decide independently their respective business policies. The Indian market was opened for the setting of new private banks, as also freedom for foreign banks to establish their branches here. Banks were made more accountable. Their published financial position was directed to be more transparent and revealing a true picture of the status of the bank concerned to the public. The Balance Sheet and Financial Statements are to contain more accurate and clear picture of their strengths and weaknesses. All these measures are intended to bring succor and strength to the Banks, and make them global players in the years to come. The net result of the banking and economic reforms introduced by the Government were to surge the Banking Industry forward to a bright future.

With the result the Banks find themselves in a new environment to which they have not been accustomed all along. It is a view of two extremes or contrasts, placed as they are between hopes of a bright future with emerging opportunities in the unfolding of the information age in a well-knit global economy, amidst deep current despair and threatening crisis of unprecedented magnitude. They are now to cross miles of the roughest sea, and cross the barrier to reach a new territory of prosperity and plenty. In other words the present prospects for Indian Banking represent a unique mixture of future hopes of unlimited opportunities amidst insurmountable challenges presently loaded on account of past sins and carried over legacy.

On the one hand we see the positive scenario represented by the rapid process of globalisation presently taking shape bringing the community of nations in the world together, transcending geographical boundaries, in the sphere of trade and commerce, and even employment opportunities of individuals. All these indicate newly emerging opportunities for Indian Banking. But on the darker side we see the accumulated morass, brought out by three decades of controlled and regimented management of the banks, a surfeit that has now turned into sickness. It has siphoned profitability of the Government owned banks, distressed with bloated Non Productive Assets (NPA), threatens the Capital Adequacy of the Banks and their very stability and sustainability. Nationalised banks are heavily over-staffed. When elsewhere in the world Banks were switching to application of advanced systems of information technology computerizing all repetitive operations completely dispensing with manual handling, Indian banking remained still up to the middle of the Nineties largely work-processing with the outmoded "pen & ink" or manual systems, employing a huge unproductive work force. Their recruitment, training, placement and promotion policies in vogue in the banks leave much to be desired. In the nutshell the problem is how to off-load the burden of the past and adapt to the demands and opportunities of the new age.

Why all these developments? Was Nationalisation of the major banks by the then Prime Minister of India in the year 1969 a totally mistaken step or wrong step? To highlight the correct contributory causes, an objective, but brief study of Indian Banking for the last four decades is needed. Such a study can be done under five major heads, which will lead to a broad glimpse of the current scenario of Indian Banks and the several directions in which efforts are being made to regenerate them.

1. Condition of Indian Banking Industry in pre-nationalisation
   period i.e. before 1970.

2. Justification for Nationalisation of the major banks and the benefits of Nationalisation.

3. Wrong management and administrative policies that resulted in the progressive decay of Indian Banking

4. Prevailing situation in the Banking Industry as at beginning of era of economic reforms.

5. The solutions attempted and future hopes of the Industry.

Before nationalisation banks were in the private sector. Indian banking developed from the early part of the 20th century mostly under ethnic and regional set-up. Every community and every section and every region started a bank to serve their needs. These banks came to serve sectarian interests, with out an All India or National outlook. The entire social set up was based on the joint Hindu Joint Family culture and the business looked to class banking for a select segment of society. Banking was not professionalised, as was major business and industry, which utilized bank finance. The trader in the Mandi, the rice, and oil miller or cotton ginning units do not believe that professional education as a necessary pre-requisite for the venture. In short banks followed thumb rules and lent money to conventional industries and wholesale traders in grains and other agricultural commodities. The average bank employee, including a part of the top executives did have no professional education or expertise in modern management techniques.

Banks had clusters of branches in big cities and Urban Mandis. Agricultural, small scale industries, small artisans, technically qualified entrepreneurs etc. were outside the gambit of credit delivery by the banks. The large number of rural and semi-urban centres in India were devoid of banking facility. The Banks in short did not function as engines of development in the country, but catered to specific private interests. What existed was class banking and not mass banking. It was commercial money lending and not developmental financing.

To illustrate in more concrete terms the commercial banks at the time of Nationalisation in 1969/70 had in the aggregate less than 5000 branches and had mobilized total deposits of Rs.5300 Crores for the entire banking system. Other than State Bank of India, there were only two all India banks having deposits more than Rs.100 Crores in the Fifties. Banks with deposits of Rs.50 Crores and above were then reckoned as large entities in the banking industry and these banks numbering 14 were chosen for nationalisation in the year 1969. After nationalisation the bank branches swelled over 50000 in the Nineties, and deposits crossed Five Lakh Crores and further doubled to Ten Lac Crores in the year 2000. Today it is common sight to come across individual bank branches in the metropolitan centres having deposits of Rs.50 Crores and above.