Banking System

(Part 2)


Shortcomings of commercial banking in India


a) Although the commercial banks have spread their wings to every corner of the country, but considering the huge population of India, their growth in numerical terms in insufficient. This is specially so with regard to rural areas who have about 50 per cent of the bank branches but where 75 per cent of the population of the country resides.

b) There are regional imbalances in the coverage of bank offices. Only few states have well developed banking facilities Assam, Bihar, Arunachal Pardesh and Madhya Pardesh, on an average have lesser number of banks compared to other states. Even from the states which are well banked like Maharashtra, West Bengal, and Tamil Nadu, if big metropolitan cities are excluded the population per bank office is larger than the average for these states.

c) As a result of increasing advances and loans to unemployed and weaker sections the commercial banks are facing the problem of bad debts, doubtful debts and over dues. As much as 50 per cent of loans advances by these banks have not been recovered. This seriously affects the process of recycling of funds by the commercial banks.

d) The quality of service rendered by commercial banks has deteriorated overtime. This has happened because of staff indiscipline and absence of the system of accountability. There is a problem of effective management and control especially over the branches which are located in remote areas. This has hampered the overall efficiency of the commercial banks

e) The absolute profits of the banks are rising but the profitability ratio (in terms of return on investment, return on equity) has been declining. Six factors have been

identified for declining trends in profitability. These are (i) lower interest on Government borrowings from banks (ii) subsidization of credit to priority sectors (iii) rapid branch expansion (iv) locking up of funds in low- term low yielding securities resulting from directed credit programmes of banks (v) lack of competition (vi) increasing expenditure resulting from over staffing and mushrooming of branches some of which are non-viable.




A bank has many functions to perform – receipt of money lending of money, collection and payment of bills, cheques etc. preparation of feasibility studies, project report, issue of letters of credit, traveler’s cheques and so on. Credit creation helps in improving money circulation without resorting to any increase or decrease in the quantity of currency or legal tender money.

After Independence most of the banks neglected the priority sectors (agriculture, small industries, export etc.) and mostly financed the industrial units. In order to have social control on banks, banks were nationalised in 1969 and 1980. After nationalisation, banks have spread their wings all over the country. They cater to the needs of all – agriculture, industry and commerce. However, they still have to go a long way for removing inter – regional, inter – sectoral imbalances.


Banking System