The Indian banking sector has
witnessed phenomenal growth
over the last few decades, especially after the bank nationalization
in 1969. The branches/offices of Scheduled Commercial Banks (SCBs)
grew from a modest level of 8,262 in 1969 to 60,189 in 1991, and further to
74,326 in 2008. Within the SCBs' space, Public Sector Banks (PSBs) continue
to hold a dominant position. The PSBs' importance is discernible in terms
of their geographical spread and their participation in developmental
programs and national priorities. Despite intensified competition from
private and foreign banks, the PSBs accounted for about 87% of SCBs' branches
by March 2008, while their share in the aggregate deposits and advances
was 74% and 73% respectively.
The financial system in India during the pre-reform period was highly
regulated and financially repressed. The system was characterized by a
complex structure of administered interest rates, low efficiency in fund
utilization, high levels of statutory preemptions, directed lending, low organizational
efficiency and lack of competition. Consequently, these factors, together
with poor lending strategy and inadequate risk management practices,
impeded banking growth and affected the viability and profitability of the banks.
This was starkly reflected in the fact that the average return on assets in the
second half of the 1980s was only about 0.15%, while capital and reserves
averaged about 1.5% of assets. The rapid growth of Non-Banking Financial
Companies (NBFCs) since the early 1980s could be viewed as a direct offshoot of the
imperfections and inadequacies of the commercial banking system.
Pursuant to the Narasimham Committee recommendations
(1992 and 1998), a comprehensive set of reforms were put in place. These
reforms gradually led to an overall efficient and stable banking system. Some of
the major reforms included the dismantling of the interest rate
controls, sharp reduction in reserve requirements, introduction of
prudential norms relating to capital adequacy, accounting, income recognition,
provisioning and exposure norms, and tapping of capital market by the
PSBs with floor for government ownership up to 51%. Taking a step further
towards providing more operational autonomy to banks, the concept of Prime
Lending Rate (PLR) was introduced in April 1997. Prudential norms relating
to Basel II, securitization, debt restructuring mechanisms, and guidelines
on KYC/AML were gradually introduced to meet the international
standards. Banking reforms in India is a mix of the elements of continuity and
change implemented in line with global standards and norms.
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