Overview of..

Banking Sector in India

By-
Tushar
Gaikwad

Class: fy.bbi

Roll no. 08

 BEFORE NATIONALIZATION
 DURING NATIONALIZATION
 POST NATIONALIZATION
 CHANGES AFTER 1991 LPG
 FUTURE OF BANK AFTER
2010
INTRODUCTION
A bank is an institution that deals in money and its substitutes and provides other financial
services. Banks accept deposits and make loans or make an investment to derive a profit from the
difference in the interest rates paid and charged, respectively.

Banks play a very useful and dynamic role in the economic life of every modern state. A study of
the economic history of western country shows that without the evolution of commercial banks in the
18th and 19th centuries, the industrial revolution would not have taken place in Europe.

In India the banks are being segregated in different groups. Each group has their own benefits and
limitations in operating in India. Each has their own dedicated target market. Few of them only work in
rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are
of Indian origin and some are foreign players.

India’s economy has been one of the stars of global economics in recent years. It has grown by
more than 9% for three years running. The economy of India is as diverse as it is large, with a number
of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services.
Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its
livelihood from this area. Banking sector is considered as a booming sector in Indian economy recently.
Banking is a vital system for developing economy for the nation.

INDIAN BANKING SYSTEM

Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new challenges
posed by the technology and any other external and internal factors. For the past three decades India's
banking system has several outstanding achievements to its credit. The most striking is its extensive
reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the main reasons of India's
growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a
pizza. Money has become the order of the day.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned
below:

• Early phase from 1786 to 1969 of Indian Banks (PRE –NATIONALIZATION)

• Nationalization of Indian Banks (NATIONALIZATION)
• Up to 1991 prior to Indian banking sector Reforms. (POST – NATIONALIZATION )
• New phase of Indian Banking System with the advent of Indian
(REFORM-LIBERALIZATION, PRIVATIZATION, GLOBALIZATION)
• Financial & Banking Sector Reforms after 1991
(MODERN & FUTURE BANKING SECTOR)

INDIAN ECONOMY

The Indian Economy is consistently posting robust growth numbers in all sectors leading to
impressive growth in Indian GDP. The Indian economy has been stable and reliable in recent
times, while in the last few years it’s experienced a positive upward growth trend.
A consistent 8-9% growth rate has been supported by a number of favorable economic
indicators including a huge inflow of foreign funds, growing reserves in the foreign exchange
sector, both an IT and real estate boom, and a flourishing capital market. All of these positive
changes have resulted in establishing the Indian economy as one of the largest and fastest
growing in the world.
PRE –NATIONALIZATION
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840)
and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks
were amalgamated in 1920 and Imperial Bank of India was established which started as private
shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank
Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central
Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve
Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between
1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and
activities of commercial banks, the Government of India came up with The Banking Companies Act,
1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No.
23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in
India as the Central Banking Authority.

During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilization was
slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer.
Moreover, funds were largely given to traders.

The partition of India in 1947 had adversely impacted the economies of Punjab and West Bengal, and
banking activities had remained paralyzed for months. India's independence marked the end of a regime
of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in
different segments of the economy including banking and finance. The major steps to regulate banking
included: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it
became an institution owned by the Government of India. In 1949, the Banking Regulation Act was
enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks
in India." 
The Banking Regulation Act also provided that no new bank or branch of an existing bank may be
opened without a license from the RBI, and no two banks could have common directors. However,
despite these provisions, control and regulations, banks in India except the State Bank of India,
continued to be owned and operated by private persons. This changed with the nationalization of major
banks in India on 19th July, 1969.
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of
the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued
about the possibility to nationalize the banking industry. 

NATIONALIZATION & POST NATIONALIZATION

 Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual
conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank
Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and
sudden; Government took major steps in this Indian Banking Sector Reform after independence. In
1955, it nationalized Imperial Bank of India (currently- State Bank of India) with extensive banking
facilities on a large scale especially in rural and semi-urban areas. Before the steps of nationalization of
Indian banks, only State Bank of India (SBI) was nationalized. It took place in July 1955 under the SBI
Act of 1955.The State Bank of India is India’s largest commercial bank and is ranked one of the top
five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers
— either directly or through subsidiaries — a wide range of banking services. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union and State
Governments all over the country.

Nationalization of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960.Seven
banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major
process of nationalizations was carried out. 14 major commercial banks in the country were
nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven
more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the
Country:
• 1949: Enactment of Banking Regulation Act.
• 1955: nationalization of State Bank of India.
• 1959: nationalization of SBI subsidiaries.
• 1961: Insurance cover extended to deposits.
• 1969: Nationalizations of 14 major banks.
• 1971: Creation of credit guarantee corporation.
• 1975: Creation of regional rural banks.
• 1980: nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks, the branches of the public sector bank India rose to approximately
800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.

Subsequently, quantitative loan targets were imposed on these banks to expand their networks in rural
areas and they were directed to extend credit to priority sectors. These nationalized banks were then
increasingly used to finance fiscal deficits. Although non-nationalized private banks and foreign banks
were allowed to coexist with public-sector banks at that time, their activities were highly restricted
through entry regulations and strict branch licensing policies. Thus, their activities remained negligible.

In the period 1969-1991, the number of banks increased slightly, but savings were successfully
mobilized in part because relatively low inflation kept negative real interest rates at a mild level and in
part because the number of branches was encouraged to expand rapidly. Nevertheless, many banks
remained unprofitable, inefficient, and unsound owing to their poor lending strategy and lack of internal
risk management under government ownership. Joshi and Little (1996) have reported that the average
return on assets in the second half of the 1980s was only about 0.15 per cent, while capital and reserves
averaged about 1.5 per cent of assets. Given that global accounting standards were not applied, even
these indicators are likely to have exaggerated the banks’ true performance. Further, in 1992/93, non-
performing assets (NPAs) of 27 public-sector banks amounted to 24 per cent of total credit, only 15
public-sector banks achieved a net profit, and half of the public-sector banks faced negative net worth.
The major factors that contributed to deteriorating bank performance included too stringent regulatory
requirements (i.e., a cash reserve requirement and statutory liquidity requirement [SLR] that required
banks to hold a certain amount of government and eligible securities); (b) low interest rates charged on
government bonds (as compared with those on commercial advances); (c) directed and concessional
lending; (d) administered interest rates; and (e) lack of competition. These factors not only reduced
incentives to operate properly, but also undermined regulators’ incentives to prevent banks from taking
risks via incentive-compatible prudential regulations and protect depositors with a well-designed
deposit insurance system. While government involvement in the financial sector can be justified at the
initial stage of economic development, the prolonged presence of excessively large public-sector banks
often results in inefficient resource allocation and concentration of power in a few banks. Further, once
entry deregulation takes place, it will put newly established private banks as well as foreign banks in an
extremely disadvantageous position.

In the 1960s and 1970s, the CRR was 5 per cent, but then rose steadily to its legal upper limit of 15 per
cent in early 1991. The statutory liquidity requirement requires banks to hold a certain amount of
deposits in the form of government and other approved securities. It was 25 per cent in 1970 and then
increased to 38.5 per cent in 1991 – nearly to the level of its legal upper limit of 40 per cent. With
respect to direct lending, the priority sector target of 33 per cent of total advances was introduced in
1974, and the ratio was gradually raised to 40 per cent in 1985. There were sub-targets for agriculture,
small farmers, and disadvantaged sections.
Against this background, the first wave of financial liberalization took place in the second half of the
1980s, mainly taking the form of interest rate deregulation. Prior to this period, almost all interest rates
were administered and influenced by budgetary concerns and the degree of concessionality of directed
loans. To preserve some profitability, interest rate margins were kept sufficiently large by keeping
deposit rates low and non-concessional lending rates high. Based on the 1985 report of the Chakravarty
Committee, coupon rates on government bonds were gradually increased to reflect demand and supply
conditions.

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave
licenses to a small number of private banks, which came to be known as New Generation tech-savvy
banks, which included banks such as UTI Bank (the first of such new generation banks to be set
up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India,
kick started the banking sector in India, which has seen rapid growth with strong contribution from all
the three sectors of banks, namely, government banks, private banks and foreign banks.
Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People not just demanded more from their
banks but also received more.

REFORMS

This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name
which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking is introduced. The entire system
became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due
to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange exposure.

While India’s financial reforms have been comprehensive and in line with global trends, one unique
feature is that, unlike with other former planned economies such as Hungary and Poland, the Indian
Government did not engage in a drastic privatization of public-sector banks. Rather, it chose
gradual approach toward restructuring these banks by enhancing competition through entry
deregulation of foreign and domestic banks. This reflects the view of the Narasimham Committee that
ensuring the integrity and autonomy of public-sector banks is the more relevant issue and that they
could improve profitability and efficiency without changing their ownership if competition were
enhanced.

Since this approach was introduced, some criticisms have been expressed. First, public-sector banks
continue to be dominant thanks to their better branch coverage, customer base, and knowledge of the
market compared with newcomers. Second, public-sector banks would find it more difficult to reduce
personnel expenditure because of the strong trade unions. Third, the government would find it difficult
to accept genuine competition within public-sector banks. In response to these concerns, the
government decided to gradually expand private-sector equity holdings in public-sector banks, but still
avoided the transformation of their ownership. The 1994 amendment of the Banking Act allowed
banks to raise private equity up to 49 per cent of paid-up capital. Consequently, public-sector banks,
which used to be fully owned by the government prior to the reform, were now allowed to increase
nongovernment ownership. So far, only eight public-sector banks out of 27 have diversified ownership.

Meanwhile, a consensus is emerging that state ownership of banks is bad for financial sector
development and growth (World Bank 2001). Based on data from the 10 largest commercial and
development banks in 92 countries for 1970-1995, La Porta and others (2000) have found that greater
state ownership of banks in 1970 was associated with less financial sector development, lower growth,
lower productivity, and that these effects were greater at lower levels of income. Barth and others
(2001a, 2001b) have shown that greater state ownership of banks tends to be associated with higher
interest rate spreads, less private credit, less activity on the stock exchange, and less non-bank credit,
even after taking into account other factors that could influence financial development. This suggests
that greater state ownership tends to be anti-competitive, reducing competition from both banks and
non-banks.

In the last several years’, banking sector in India have shifted from domestic banking to global banking.
Some banks, rather than taking deposits in one jurisdiction and lending in other, have pursued the
strategy of taking deposits and offering consumer loans, mortgages and corporate loans within a variety
of national markets through a local presence. Other banks have pursued a capital market strategy,
seeking to fund their portfolios of local securities locally as well. Whether adopting a globe consumer
earlobe wholesale model, banks are increasingly looking to serve customers through a local presence
funded locally.

Liberalization has at times been precipitated by financial crisis. Bank with global ambitions have found
it attractive to buy local banks put up for sale following crisis related nationalizations owing to loan
losses. In addition after, the weakness of local banks after a crisis offer competitive opportunities of
multinational banks to expand their extent operations. In countries with state dominated financial
system, liberalization and the aftermath of crisis were often accompanied by privatization, in which
foreign banks could participate.

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave
licenses to a small number of private banks, which came to be known as New Generation tech-savvy
banks, which included banks such as UTI Bank (the first of such new generation banks to be set
up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India,
kicks In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and
gave licenses to a small number of private banks, which came to be known as New Generation tech-
savvy banks, which included banks such as UTI Bank (the first of such new generation banks to be set
up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India,
kick started the banking sector in India, which has seen rapid growth with strong contribution from all
the three sectors of banks, namely, government banks, private banks and foreign banks.
Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People not just demanded more from their
banks but also received more started the banking sector in India, which has seen rapid growth with
strong contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.

CHANGES AFTER REFORM

Diversification of banking activities

The second unique feature of India’s banking sector is that the Reserve Bank of India has permitted
commercial banks to engage in diverse activities such as securities related transactions (for example,
underwriting, dealing and brokerage), foreign exchange transactions and leasing activities. The 1991
reforms lowered the CRR and SLR, enabling banks to diversify their activities. Diversification of
banks’ activities can be justified for at least five reasons. First, entry deregulation and the resulting
intensified competition may leave banks with no choice but to engage in risk-taking activities in the
fight for their market share or profit margins. As a result, risk-taking would reduce the value of banks’
future earnings and associated incentives to avoid bankruptcy (Allen and Gale 2000). Second, banks
need to obtain implicit rents in order to provide discretionary, repetitive and flexible loans.6 In
addition; banks attempt to reduce the extent of information asymmetry by processing inside information
on their clients and monitoring their performance.

Appraisal of The performance of the banking sector

India’s financial market has been gradually developing, but still remains bank-dominated in the reform
period. The extent of financial deepening measured by total deposits in GDP has risen only modestly
from 30 per cent in 1991 to 38 percent in 1999. Capital market development has also been quite
sluggish. Outstanding government and corporate bonds as a share of GDP raised from 14 per cent in
1991 to 18 per cent in 1999 and from only 0.7 per cent in 1996 to 2 per cent in 1998, respectively,
while equity market capitalization dropped from 37 per cent in 1995 to 28 per cent in 1999.
Nevertheless, the government’s commitment on restructuring the highly regulated banking sector
appears strong. Since financial reforms were launched in 1991 and particularly when the entry of new
banks was permitted in 1993, public-sector banks appear to have become more conscious of the need
for greater profitability and efficiency, suggesting that the reform has had a favorable impact on India’s
financial market. According to an analysis of the overall performance of state-owned, domestic and
foreign banks based on trend patterns in 1993-2000, the overall performance of public sector banks
appears comparable with foreign and private domestic banks (table 1).In general, foreign banks
performed better than domestic banks (public-sector and private domestic banks) in terms of cost,
earnings efficiency and soundness. However, domestic banks overtook foreign banks in terms of
profitability in 1999-2000. Moreover, all banks are comparable in terms of the scale of medium- to
long-term credit and liquidity. The results are summarized below.

Profitability

Foreign banks’ profitability (defined as the ratio of profits after tax to average assets [ROAA])
exceeded that of private domestic and public-sector banks in 1993-1997, despite a declining trend.11
However, private domestic banks have become more profitable than foreign banks in 1999-2000. IMF
(2001) has also reported that foreign and new private domestic banks maintained higher profitability
(about 1-2 per cent) than public-sector and old private domestic banks (0.6-0.8 per cent) during the
period 1995/96-1999/2000. Profits from securities and foreign transactions, and brokerage/commission
services have also increasingly contributed to profitability for all banks, suggesting that the
diversification effect is positive.

Modern & Future banking sector

Current situation

Today, the banking sector in India is fairly mature in terms of supply, product range and reach. As far
as private sector and foreign banks are concerned, the reach in rural India still remains a challenge. In
terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets relative to other banks in comparable economies in its region. The Reserve
Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of
the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate. Till now,
there is hardy any deviation seen from this stated goal which is again very encouraging.

With passing time, Indian economy is further expected to grow and be strong for quite some time-
especially in its services sector. The demand for banking services, especially retail banking, mortgages
and investment services are expected to grow stronger. Therefore, it is not hard to forecast few M&As,
takeovers, and asset sales in the sector. Consolidation is going to be another order of the day.

The significant change in the policy and attitude that is currently being seen is encouraging for the
banking sector growth. In March 2006, the Reserve Bank of India allowed Warburg Pincus, a private
foreign investor, to increase its stake in Kotak Mahindra Bank to 10%. Notably, this is the first time
that a foreign individual investor has been allowed to hold more than 5% in a private sector bank since
2000. Earlier, The RBI in 2005 announced that any stake exceeding 5% by foreign individual investors
in the private sector banks would need to be vetted by them.

Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks(that is with the
Government of India holding a stake), 29 private banks (these do not have government stake; they may
be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network
of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency,
the public sector banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.

The processes of liberalization noted above fundamentally alter the terrain of operation of the banks.
Their immediate impact is a visible shift in the focus of bank activities away from facilitating
commodity production and investment to lubricating trade and promoting personal consumption.
Interest rates in these areas are much higher than that which could be charged to investments in
commodity production. According to a study (Consumer Outlook 2004), conducted by market research
firm KSA Techno-park, Indian consumers are increasingly financing purchases of their dream products
with credit that is now on offer, even without collateral. "Personal credit off take has increased from
about Rs 50,000 crore in 2000 to Rs 1,60,000 crore in 2003, giving an unprecedented boom to high-
ticket item purchases such as housing and automobiles," the study reportedly found. But there are
changes also in the areas of operation of the banks, with banking entities not only creating or linking up
with insurance companies, say, but also entering into other ''sensitive'' markets like the stock and real
estate markets. It should be expected that this growing exposure to non-collateralized personal debt and
entry into sensitive sectors would increase bank vulnerability to default or failure. The effects on bank
fragility became clear after the stock scam of the late 1990s. The RBI's Monetary and Credit Policy
Statement for the year 2001-2002 had noted that: ''The recent experience in equity markets, and its
aftermath, have thrown up new challenges for the regulatory system as well as for the conduct of
monetary policy. It has become evident that certain banks in the cooperative sector did not adhere to
their prudential norms nor to the well-defined regulatory guidelines for asset-liability management nor
even to the requirement of meeting their inter-bank payment obligations. Even though such behavior
was confined to a few relatively small banks by national standards, in two or three locations, it caused
losses to some correspondent banks in addition to severe problems for depositors.'' Interestingly, this
increase in financial fragility has been accompanied by the emergence of new instruments in the
banking sector. Derivatives of different kinds are now traded in the Indian financial system, including
crucially, credit derivatives. Most derivatives, financial instruments whose value is based on or derived
from the value of something else, are linked to interest rates or currencies. Credit derivatives are based
on the value of loans, bonds or other lending instruments. The traditional image of the great banks with
armored vaults has little to do with the banks of today. The latter appear to make loans and then pass
them on as quickly as possible, pocketing the margin. That allows them to take bigger risks in trading
securities, derivatives, and foreign exchange
Today, banks have diversified their activities and are getting into new products and services that
include opportunities in credit cards, consumer finance, wealth management, life and general insurance,
investment banking, mutual funds, pension fund regulation, stock broking services, custodian services,
private equity, etc. Further, most of the leading Indian banks are going global, setting up offices in
foreign countries, by themselves or through their subsidiaries. Today, we are having a fairly well
developed banking system with different classes of banks – public sector banks, foreign banks, private
sector banks – both old and new generation, regional rural banks and co-operative banks with the
Reserve Bank of India as the fountain Head of the system.

In the banking field, there has been an unprecedented growth and diversification of banking industry
has been so stupendous that it has no parallel in the annals of banking anywhere in the world.

During the last 41 years since 1969, tremendous changes have taken place in the banking industry. The
banks have shed their traditional functions and have been innovating, improving and coming out with
new types of the services to cater to the emerging needs of their customers.

Massive branch expansion in the rural and underdeveloped areas, mobilisation of savings and
diversification of credit facilities to the either to neglected areas like small scale industrial sector,
agricultural and other preferred areas like export sector etc. have resulted in the widening and
deepening of the financial infrastructure and transferred the fundamental character of class banking into
mass banking.

There has been considerable innovation and diversification in the business of major commercial banks.
Some of them have engaged in the areas of consumer credit, credit cards, merchant banking, leasing,
mutual funds etc. A few banks have already set up subsidiaries for merchant banking, leasing and
mutual funds and many more are in the process of doing so. Some banks have commenced factoring
business.

The major challenges faced by banks today are as to how to cope with competitive forces and
strengthen their balance sheet. Today, banks are groaning with burden of NPA’s. It is rightly felt that
these contaminated debts, if not recovered, will eat into the very vitals of the banks. Another major
anxiety before the banking industry is the high transaction cost of carrying Non Performing Assets in
their books. The resolution of the NPA problem requires greater accountability on the part of the
corporate, greater disclosure in the case of defaults, an efficient credit information sharing system and
an appropriate legal framework pertaining to the banking system so that court procedures can be
streamlined and actual recoveries made within an acceptable time frame. The banking industry cannot
afford to sustain itself with such high levels of NPA’s thus, “lend, but lent for a purpose and with a
purpose ought to be the slogan for salvation.”
The Indian banks are subject to tremendous pressures to perform as otherwise their very survival would
be at stake. Information technology (IT) plays an important role in the banking sector as it would not
only ensure smooth passage of interrelated transactions over the electric medium but will also facilitate
complex financial product innovation and product development. The application of IT and e-banking is
becoming the order of the day with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern of World Wide Web
(WWW) can be visualised. That means all banks would be interlinked and individual bank identity, as
far as the customer is concerned, does not exist. There is no need to have large number of physical bank
branches, extension counters. There is no need of person-to-person physical interaction or dealings.
Customers would be able to do all their banking operations sitting in their offices or homes and
operating through internet. This would be the case of banking reaching the customers.

Banking landscape is changing very fast. Many new players with different muscle powers will enter the
market. The Reserve Bank in its bid to move towards the best international banking practices will
further sharpen the prudential norms and strengthen its supervisor mechanism. There will be more
transparency and disclosures.

In the days to come, banks are expected to play a very useful role in the economic development and the
emerging market will provide ample business opportunities to harness. Human Resources Management
is assuming to be of greater importance. As banking in India will become more and more knowledge
supported, human capital will emerge as the finest assets of the banking system. Ultimately banking is
people and not just figures.
 CONCLUSIONs

Since the financial reforms of 1991, there have been significant favorable changes in India’s
highly regulated banking sector. This chapter has assessed the impact of the reforms by examining
seven hypotheses. It concludes that the financial reforms have had a moderately positive impact on
reducing the concentration of the banking sector (at the lower end) and improving performance.

Moreover, allowing banks to engage in non-traditional activities has contributed to improved

profitability and cost and earnings efficiency of the whole banking sector, including public-sector
banks. By contrast, investment in government securities has lowered the profitability and cost
efficiency of the whole banking sector, including public-sector banks. Lending to priority sectors and
the public-sector has not had a negative effect on profitability and cost efficiency, contrary to our
expectations. Further, foreign banks (and private domestic banks in some cases) have generally
performed better than other banks in terms of profitability and income efficiency. This suggests that
ownership matters and foreign entry has a positive impact on banking sector restructuring

The current policy of restructuring the banking sector through encouraging the entry of new banks has
so far produced some positive results. However, the fact that competition has occurred only at the
lower end suggests that bank regulators should conduct a more thorough restructuring of public-sector
banks. Given that public-sector banks have scale advantages, the current approach of improving their
performance without rationalizing them may not produce further benefits for India’s banking sector.
As 10 years have passed since the reforms were initiated and public-sector banks have been exposed to
the new regulatory environment, it may be time for the government to take a further step by promoting
mergers and acquisitions and closing unviable banks. A further reduction of SLR and more
encouragement for non-traditional activities (under the bank subsidiary form) may also make the
banking sector more resilient to various adverse shocks.

Thank you