Essay on Banking Sector Reforms In India: A Pillar For India’s Growth

Banks are financial institutions which are licensed to take deposits from public and grant them loans. In that sense they differ from the traditional money lenders. The banking sector reforms in India are aimed at introduction of best international practices and technological changes for making the Indian banking sector competitive globally. The Indian banking system is more efficient and stable today. Consequently there has been a rapid increase in the number of banks in this country. The banking horizon is changing because of the increasing number of private banks and the foreign banks. Apparently there is a cut throat competition between the banks. Banks began to diversify their services as part of their corporate strategy to cater to various customer segments.

If we see the structure of banking in India, the Indian banking system is classified into scheduled and non-scheduled banks. The scheduled banks are then classified as state cooperative banks and commercial banks. The non-scheduled banks are classified as central cooperative banks and primary credit societies and the commercial banks. Scheduled banks are those which are included in the Second Schedule of Banking Regulation Act, 1956.

The origin of banks in India in modern sense dates back to 18th century, when the Bank of Hindustan was established. Banks in India have passed through different phases and have adopted itself to ever-changing economic conditions of the country. The largest and the oldest bank, State Bank of India (SBI) came into being in 1921 after the merger of bank of Madras and Bank of Bombay. SBI commands the largest number of banks in India along with a clutch of eight associated banks called its subsidiary banks or associated banks.

The Central Bank, known as the Reserve Bank of India was established in 1935. Under the Second Schedule of RBI Act, Indian Banks are classified as scheduled and non-scheduled banks. Scheduled banks find a mention in the RBI Act schedule. The scheduled banks are further classified as: Nationalised Banks, SBI and Associates, Private Sector Banks, Foreign Banks and Regional Rural Banks.

In the year 1969, government with Banking Companies (Acquisition and transfer of undertakings) Ordinance nationalised 14 banks. The second nationalisation process of commercial banks took place in 1980s. The nationalisation process transitioned them from class banking to mass banking. In this way, these banks were aligned with the fiscal policy of government. Another watershed reform in banking sector came in 1990s. In order to align with the new economic policy of government, the banking sector was liberalised. Licenses were given to private banks which changed the outlook of banking sector. Banks were now offering best practices available across the globe with the help of technology and management practices. ICICI, HDFC, Axis Banks were and still are pioneers of private sector banks.

Reserve Bank of India is the Central Bank which looks after the monetary policy. Monetary policy is the process wherein the concerned authority, RBI in India’s case, controls the supply of money in the economy. The major purpose of monetary policy is to check inflation and regulate interest rates with liquidity infusion or quantitative squeeze.RBI with its various policy measures like CRR (Cash Reserve Ratio-For banks to hold a certain form of deposits in cash), SLR (Statutory Liquidity Ratio-For banks to keep a portion of their demand and time liabilities in the form of government security); RR (Repo Rate-Rate at which RBI lends to scheduled commercial banks); RRR (Reverse Repo Rate-Rate at which RBI borrows from the banks) etc. controls the flow of money in market.

After the economic crisis of 1991 two committees under the chairmanship of M Narsimhan were formed. It recommended wide ranging reform measures for the banking sector. The Indian banking system has witnessed a substantial improvement in both stability and efficiency parameters such as capital position, asset quality and overall profitability after adopting reform measures.

Various committees were set up even after that as well like Damodaran Committee, Khandelwal Committee, Nachiket Mor Committee and Urjit Patel Committee to bring the best practices and changes in banking sector.

The most recent reform in the banking sector is Mission Indradhanush launched on 14th August, 2015. It is a 7-pronged plan to address the challenges faced by Public Sector Banks (PSBs). Many of the measures taken were suggested by PJ Nayak Committee on banking sector reforms. The 7 parts include appointments, Banks Board Bureau, capitalization, de-stressing, empowerment, framework of accountability and governance reforms.

The strategy, Indradhanush (Rainbow), focuses on systemic changes in state-run lenders, including a fresh look at hiring, a comprehensive plan to  de-stress bloated lenders, capital infusion, accountability, incentives with higher rewards including stock options and cleaning up governance. Bank Board Bureau is set up to advise the banks on how to raise funds and how to go ahead with mergers, acquisitions and ways to address bad loans.

Another area with a promising future is Micro Units Development and Refinance Agency (MUDRA) MUDRA Bank was unveiled by the new government to provide credit to Micro, Small and Medium Enterprise (MSME). A specialised bank for this sector will go a long way in ensuring smooth flow of credit.

Although, Small Industries Development Bank of India (SIDBI) has existed but the viability of MUDRA will depend on its range of customers and loan recovery. Small banks under differentiated license is expected to provide a whole suite of banking but in a limited area. The objective is to increase penetration of bank in the untouched areas. RBI has provided for CRR and SLR norms for these bank’s prudent operation.

Banking sector for the time being is stressed only due to its rising NPA, but with the introduction of BBB and the autonomy of RBI in monetary policy, the sector will sail through the storm and will become another brick in the wall of growth and development of India.

Financial sector is the mainstay of any economy and it contributes immensely in the mobilisation and distribution of resources. Financial sector reforms have long been viewed as significant part of the programme for policy reform in a nation. Major aims of the financial sector reforms are to allocate the resources proficiently, increasing the return on investment and hastened growth of the real sector in the economy. Financial experts suggest that effective reforms keep an economy competitive and attractive from investors across the world. Therefore, we can say that reforms are always good if they are taken with proper research and effectiveness to make an economy grow faster.