How money grew in India

The year was 1990. India was on the brink of bankruptcy. Despite a huge public outcry, the government was forced to mortgage its gold reserves to meet the country's payment commitments. The government under

Narasimha Rao with Manmohan Singh as its finance minister was forced to airlift 20 tonne of gold to the Union Bank of Switzerland and 47 tonne of gold to the Bank of England in a chartered flight to raise $800 million (nearly Rs 5322.2 crore). The forex reserves at the time were a paltry $1.2 billion (nearly Rs ​7,983.3 crore). The airlift of the gold in way ignited the need for urgent economic reforms.

"The controlled growth of the economic and the market operations of the country had taken a toll and it was time for the Indian markets to be aligned to global standards," said a former currency dealer with a large public sector bank. On July 1, 1991, Manmohan Singh announced measures which devalued the rupee in two stages -- one on July 1, by 9% and the other on July 3, by 11% as a step towards making it market-driven and a few years down the line opening up the banking sector for foreign investments.

Just when we thought that the balance of payment crisis was over came the East Asian currency crisis which was tackled by Bimal Jalan, the then RBI governor (2000-2004 ), who was barely four months into the job.

Jalan told dna, "We were able to manage the contagion of the crisis from spreading to the Indian markets with a flexible exchange rate. The government and the RBI worked in complete unison to prevent the crisis. The credit was controlled and we managed to keep speculation at bay."

Jalan said one of the important developments at that time was the intervention of the RBI was at unexpected intervals. "No one could predict when we would intervene, which kept speculation under check."

The foreign capital that was allowed to flow into the Indian shores also benefited the Indian banking system. In the Nineties, the government began to license new banks alongside the public sector banks.

"Banks began to have control over the loans, interest rates deposits as long as they followed the prudential guidelines of RBI," said Jalan.

H R Khan, former RBI deputy governor of RBI, who retired last month, said, "It was not just the rupee that was hostage to the closed economy. Our interest rates were freed and the prime lending rate was decided by the banks, interest rates on priority sector lending were lifted. Banks and ATMs could now be set up anywhere so the controlled growth of institutions in the financial sector was lifted."

Ashutosh Khajuria, executive director, Federal Bank, who was with SBI in the Nineties, said, "Strict controls on the money markets, credit growth and mandated interest rates made banking very difficult."

Liberalisation of banks began in the Nineties when the Narasimha Rao government began allowing private banks to function alongside public sector bank from the early Nineties when HDFC Bank, UTI Bank, now Axis Bank, and Hinduja-promoted IndusInd Bank came into operation in 1994, followed by ICICI Bank, which was a development finance institute that was reversed-merged with the bank in 1996, Kotak Mahindra Bank in 2003, YES Bank in 2005 and then, Bandhan Bank and IDFC Bank, being the latest two universal banks to get licences.

Keki Mistry, vice-chairman of HDFC and board member of HDFC Bank, told dna, "The liberalisation helped foreign investors to come into India and set up institutions in India. It benefited the setting up large private banks like HDFC Bank and ICICI Bank, which then revolutionised the face of banking in India with technological innovations."

The Nineties saw a proliferation of ATMs. If capital was a constraint to start a bank then dotting the landscape with ATMs became the norm for banks like ICICI Bank which adopted an aggressive growth strategy in the Nineties right up to 2007 under its then managing director and chief executive officer KV Kamath in 1996.

With mobile operators running mobile wallets, it is now possible to transact even without a bank account. The mobile operator helps in transferring cash, refilling the wallet, enabling payments, forcing the central bank to give out niche bank licences like the payments banks, enabling the mobile wallet to become a bank account. Big business houses like Reliance Industries which eyed a universal bank licence has a licence for payment bank in partnership with the State Bank of India.

Arundhati Bhattacharya, chairman of SBI, said, "Without doubt, India has done a great job in the area of financial inclusion. Very often at various international fora, we have received a lot praise for the way the government, the regulator and most all the banks have gone about propagating it."