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Banking Sector Reform in India

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Banking Sector Reform in India

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Introduction

It is widely believed1 that the reforms of 1991, both in the industrial sector and the financial sector, released a variety of forces that propelled India into a new growth trajectory.2 In this paper, we are going to assess the role that the banks played in making this growth happen and the impact that these reforms had on banks. We start with a brief history of banking regulation in India. We then move on to outline some of the principal reforms that were implemented in the 1990s and their impact on the banking sector. Although this section does present some data in support of its arguments, it is by no means a rigorous analysis of the issues at hand. It seeks instead to present ideas and hypotheses based principally on the insights gained by the authors through observing these developments as participants in the system. We suggest that this period created certain problems for the banking system, the sources of which remain largely unresolved. We propose that unless the unique set of circumstances3 that existed during the past decade manifest themselves in this decade, there is a possibility that the future could see the Indian banking system facing difficulties. We conclude by suggesting some reform strategies that could equip the financial sector to better address the challenges that lie ahead.

In the center of India’s flag sits a spinning wheel, a symbol used by Gandhi to protest English textile imports under colonial rule and to demonstrate the nobility of a society of small-scale agriculture and industry. For much of its independence, India’s economy was governed by the principle of the spinning wheel – with disastrous economic and social effects. Just as the United States, in industrializing, had to overcome the belief in the nobility of agriculture that shaped its founding fathers, India is still struggling to move beyond Gandhi-era economics and raise its standard of living.

India’s recent progress toward economic growth stems from...