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  • India’s financial system comprising its banks, equity markets, bond markets, and myriad other financial institutions is a crucial determinant of the country’s economic growth trajectory.
  • Financial sector reforms in India introduced as a part of the structural adjustment and economic reforms programme in the early 1990s have had a profound impact on the functioning of the financial institutions, especially banks.
  • The principal objective of financial sector reforms was to improve the allocative efficiency of resources, ensure financial stability and maintain confidence in the financial system by enhancing its soundness and efficiency.
  • In this section we will analyse the financial sector reforms in India, identify the emerging issues and explore the prospects for further reform.
  • The first part will present a brief background of financial sector reforms. The second part will focus on the institutional aspects of the reform. The third part relates to legal policy framework and focuses on monetary policy and credit delivery.

Result of Financial Sector Reforms

A competitive environment has put pressure on public sector banks to clean up their Balance Sheets and consolidate their operations.

New opportunities emerged in a big way in Para-banking activities such as merchant banking, housing finance, mutual funds, insurance and project finance.

  • In order to enhance competition, establishment of new banks in the private sector was allowed and foreign banks were also permitted more liberal entry.
  • Besides, Foreign Direct Investment in private sector banks up to 74 percent was allowed.
  • Number of Bank branches in rural areas increased from 1443 (17.6% to total) in December, 1969 to 30,572 (44.5% to total) in March, 2006. Total number of Bank Branches including Regional Rural Banks increased from 8187 in December, 1969 to 68,681 in March, 2006.  FINANCIAL SECTOR REFORMS IN INDIA
  • From a very insignificant level of credit to the agricultural sector during the years prior to Bank Nationalization, the credit share of the sector moved to nearly 11% in the mid-1970s and to about 18% at the end of the 1980s.
  • Share of agriculture in total bank credit stood at 10.8% by March, 2005. This may be seen against the relative decline in the share of agriculture in the country’s GDP.
  • The induction of technology has led to fast processing of transactions in banks. Transmission of funds to customers is faster now. ATMs provide easy access to cash to depositors. Prudential regulation and supervision of banks have improved.
  • The ratio of non-performing loans to total loans of commercial banks declined to 3.3 percent at end-March 2006 from the level of 15 7 per cent at end March, 1997.
  • The extent of penetration of the banking system in India as measured by the proportion of bank assets to GDP has increased from 50 per cent in the second half of 1990’s to over 80 percent a decade later.
  • The share of the public sector banks in total banking assets has come down from 90 percent in 1991 to around 75 percent in 2006.  FINANCIAL SECTOR REFORMS IN INDIA
  • Banking sector reforms have resulted in greater efficiency and productivity through increased competition.


Indian Economy

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