Banking System in India: Developments, Structural Changes and Institutional Framework

This chapter provides a history of the Indian banking industry, and discusses the process of transformation of banking industry from a state of high degree of regulation to deregulation and liberalization. It has been noted that from the early 1970s through the late 1980s, the role of market forces in the Indian banking system was almost missing, and excess regulation in terms of high liquidity requirements and state interventions in allocating credit and determining the prices of financial products resulted in serious financial repression. Realizing the presence of the signs of financial repression and to seek an escape from any potential crisis in the banking sector, the Government of India embarked upon a comprehensive banking reforms plan in 1992 with the objective of creating a more diversified, profitable, efficient and resilient banking system. Subsequent to the implementation of the extensive financial liberalization programme implemented in 1992, the banking system of India witnessed visible structural changes and transformations during the past 20 years. Use of the state-of-the-art banking technology, increased availability of lendable resources, heightened competition, a trend towards the market-driven interest rate system, improvement in asset quality, imposition of capital market discipline, drive towards consolidation through mergers, greater exposures of non-traditional activities, etc. are the key structural changes and transformations that have taken place in Indian banking industry during the post-deregulation period. These structural changes transformed the Indian banking system from a weak and crisis prone system to a sound and efficient system, which is resilient to external shocks and able to play its vital role in the development of the economy.