Assessment of Indian Banking Sector Reforms from the Perspective of the Governance of the Banking System.
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- Published on Friday, 31 January 2014 12:03
- Written by Ramanpreet
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Banking Sector plays an important role for the economic growth through mobilization of financial savings putting them to productive use & transforming risk etc. A number of countries adopted a series of financial sector liberalization. The Asian financial crisis of 1997-1999 led to the importance of balancing financial liberalization with adequate & supervision prior to full capital account liberalization.
The Indian Banking Sector has majorly been attracting attention since 1991. It also dealt with the questions like-
In what way has the reform programme affected the behavior of public-sector banks?
To what extent have foreign and new domestic banks contributed to the performance of the whole banking sector?
Has India's gradual approach to the privatization of banks been successful?
What policy implications can we derive from India's experience?
Since 1991, India has been engaged in banking sector reforms. About 27 public sector banks controlled about 90% of all deposits, assets & credits . Prior to reforms, India's financial sector had long been characterized as highly regulated & financially repressed. After Independence, the government took the view that loans extended by colonial banks were biased towards working capital for trade & large firms.
All large private banks were nationalized in two stages viz., 1969 & 1980. In 1969- the number of banks increased slightly but savings were successfully mobilized in part because relatively low inflation kept negative real interest rates at mild level & because the number of branches was encouraged to expand rapidly. Further in 1992/93 NPAs of 27 public sector banks amounted to 24% of total credit, only 15 public sector banks achieved a net profit & half of the public sector banks faced negative net worth. The major contributing factors were CRR , SLR , Lower interest rates, concessional lending, lack of competition, etc. In other words it means that a major role was being played by the monetary tools for the resultant effects.
As the banking policies at that era were quite strict & were leading to big obstacles in the progress & growth of the Indian Society, therefore it became necessary to form up an official body which could have taken such initiatives, which lead to be beneficial in the overall development of the nation.
With this context, then the first wave of financial liberalization took place in the second half of 1980s . The Narasimham Committee which was being formed in year 1991 focused on the basis of Liberalization.
It majorly consisted of:-
shift of banking sector
reduction in CRR
interest rate & entry deregulation
Adoption of prudential norms.
Unlike other former planned economies, the Indian Government did not engage in a drastic privatization of public sector banks. Since this approach was introduced few criticisms have been expressed though. Diversification of banking activities was another unique feature. For eg- underwriting, dealing & brokerage, foreign exchange & leasing activities.
Appraisal of the Banking Sector;
The extent of financial deepening measured by total deposits in GDP has risen only modestly from 30% in 1991 to 38% in 1999 . This shows that there is not major change in the GDP in a decade as expected. This definitely had fallen down the morale of the policy makers. Outstanding government & corporate bonds as a share of GDP rose from 14 %( 1991) to 18 %(1999) . Again, it is not a vast increase.
According to analysis of the overall performance of state owned, domestic & foreign banks based on trend patterns in 1993-2000, the variations or growth are not remarkable. However domestic banks overtook foreign banks in terms of profitability. Foreign banks profitability exceeded that of private domestic & public sector banks in 1993-1997 . Private domestic banks have become more profitable than foreign banks in 1999-2000. This shows that in the later era, Private Banks improved their services in comparison to the foreign banks & thus took a lead over them. The ratio of operating expenditure to operating income in 2000 was 72% for foreign banks, 80 -85% for domestic banks & 84% for public sector. Foreign bank's income capacity generating capacity deteriorated somewhat from 14.5% to 12.5% while the other two banks maintained at about 11%.
From the above analysis regarding banking reforms, though one cannot give a clear cut view whether Liberalization, Banking Reforms were a success at its best or not, or was it the only way to bring economic growth in banking sector, but broadly it shows that an era of liberalization (1991) was a major phase which changed the banking structure to much extent & have showed progress & growth in the Indian Banking System, leading to the growth of people, growth of society & eventually growth of the whole nation.
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