Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The pace of transformation has been more significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead.

The need for financial reforms had arisen because the financial institutions and markets were in a bad shape. The banking sector suffered from lack of competition, low capital base, low productivity and high intermediation costs. The role of technology was minimal, and the quality of services did not receive adequate attention. Proper risk management system was not followed and prudential norms were weak. All these resulted in poor asset quality. The banks were running either in losses or on very low profits and consequently were unable to provide adequately for loan defaults and build their capital. There had been organizational inadequacies, the weakening of management and control functions, the growth of restrictive practices, the erosion of work culture and flaws in credit management. The strain on the performance of the banks had emanated partly from the imposition of high Cash Reserve Ratio (CRR), and Statutory Liquidity Ratio (SLR), and directed credit programs for the priority sectors—all at below market or concessional or subsidized interest rates. Further, the functioning of the financial system and the credit delivery as well as recovery process had become politicized, damaging the quality of lending and culture of repaying loans. The widespread or across-the-board write-offs of the loans had seriously jeopardized the viability of banks. As closure of sick industrial units was discouraged by the government, banks had to continue to finance non-viable sick units, which further compromised their own viability. There was a lack of transparency in preparing statements of accounts by banks. So an alarming increase of sickness in the Indian financial system had required urgent remedial measures or reforms which were ultimately introduced in 1991.

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