Banking Sector Reforms in India, Policies and Impacts

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BANKING SECTOR REFORMS IN INDIA POLICIES AND IMPACTS The banking sector reforms in India were started as a follow up measures of the economic liberalization and financial sector reforms in the country. The banking sector being the life line of the economy was treated with utmost importance in the financial sector reforms. The reforms were aimed at to make the Indian banking industry more competitive, versatile, efficient, productive, to follow international accounting standard and to free from the government’s control. The reforms in the banking industry started in the early 1990s have been continued till now. The paper makes an effort to first gather the major reforms measures and policies regarding the banking industry by the govt. of India and the Central Bank of India (i.e. Reserve Bank of India) during the last fifteen years. Secondly, the paper will try to study the major impacts of those reforms upon the banking industry. A positive responds is seen in the field of enhancing the role of market forces, regarding prudential regulations norms, introduction of CAMELS supervisory rating system, reduction of NPAs and regarding the up gradation of technology. But at the same time the reform has failed to bring up a banking system which is at par with the international level and still the Indian banking sector is mainly controlled by the govt. as public sector banks being the leader in all the spheres of the banking network in the country. The banking sector is also gearing up to embrace the Basel II regime, to benchmark with the global standards. Similarly, retail lending has emerged as another major opportunity for banks. All these factors are driving up competition, which in turn forcing banks to innovate. A slew of innovative products, which could not be imagined even a couple of years ago, are a reality now. Even mundane products like Saving Account, Personal Loans and Home Loans have become subjects of innovation.

The banking sector is the core segment of the Indian financial system which decides the progress of the country. Banks play an important role in the mobilization and allocation of resources in an economy. The sound financial position of a bank is the guarantee not only to its depositors but equally important for the whole economy of the nation. Several committees have emphasized the need to improve the performance of the commercial banks. In India, the priorities in banking operations underwent far reaching changes since the banking sector reforms have been set in motion. In this paper, an effort has been made to evaluate the operational performance of the commercial banks in India with especial reference to the Scheduled Commercial Banks since 2000. The study is diagnostic and exploratory in nature and makes use of secondary data. The study finds and concludes that the Scheduled Commercial Banks in India have significantly improved their operational performance. In order to increase its control over the banking sector, the govt. of India had nationalized 14 major private sector banks with deposits exceeding Rs.500 million in 1969. This had raised the number of scheduled bank branches under govt. control to 84 percent from 31 percent (Chakraborty, 2006). But the poor performance of the public sector banks was increasingly becoming an area of concern. The continuous rise of non-performing assets (NPAs) of banks posed a significant threat to the stability of the financial system. Hence, banking reforms were made an integral part of the liberalization process. The financial sector reforms started in 1991 had provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy enhancing productivity, efficiency and profitability (Talwar, 2005). While several committees have gone in to the problems of commercial banking in India, the two most...
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