Banking sector reforms refer to the continuous process of policy changes aimed at making the Indian banking system more efficient, competitive, and resilient. These reforms have transformed the sector from a heavily regulated and government-dominated industry into a more dynamic and modern system.
The most significant reforms began in the early 1990s, based on the recommendations of the Narasimham Committee.
Key Reforms of the 1990s (Post-1991)
This era marked a fundamental shift in Indian banking. The major reforms included:
1. Introduction of Prudential Norms
- What they are: These are rules and regulations aimed at ensuring the financial health and stability of banks.
- Key Norms Introduced:
- Income Recognition & Asset Classification (IRAC): A standardized system for banks to classify their loans (assets) as Standard, Sub-standard, Doubtful, or Loss assets, which helps in identifying Non-Performing Assets (NPAs).
- Capital Adequacy Ratio (CAR): Banks were required to maintain a minimum capital-to-risk-weighted-assets ratio (CRAR) as per international standards (Basel Accords) to ensure they have enough capital to absorb losses.
2. Deregulation of Interest Rates
- Before the reforms, the RBI used to dictate most of the interest rates.
- The reforms gave banks the freedom to determine their own interest rates on deposits and loans based on market conditions, which increased competition.
3. Entry of New Private Sector Banks
- The RBI began issuing licenses to new, technology-savvy private sector banks (like HDFC Bank, ICICI Bank, Axis Bank).
- This ended the dominance of public sector banks and brought in a new wave of competition, innovation, and better customer service.
Recent Developments and Reforms (Post-2010)
The reform process has continued with a focus on resolving the NPA problem, leveraging technology, and promoting financial inclusion.
1. Insolvency and Bankruptcy Code (IBC), 2016
- What it is: The IBC provides a time-bound process for resolving insolvency cases for companies and individuals.
- Impact on Banking: It has become the most effective tool for banks to recover their dues from corporate defaulters, fundamentally changing the credit culture in the country.
2. Consolidation of Public Sector Banks (PSBs)
- What it is: The government has been merging weaker public sector banks with stronger ones.
- Goal: To create a smaller number of large, well-capitalized, and efficient PSBs that can compete globally. For example, several banks were merged into the State Bank of India, and later, 10 PSBs were merged into 4.
3. Introduction of Differentiated Banks
- To further financial inclusion, the RBI introduced two new categories of banks:
- Payments Banks: To provide basic banking services like remittances and deposits, but without lending.
- Small Finance Banks: To provide full-fledged banking services to the unserved and underserved sections of the population.
4. Digital Banking Revolution
- Unified Payments Interface (UPI): This has revolutionized retail payments in India, making them instant, cheap, and seamless.
- 24×7 NEFT & RTGS: Making large-value fund transfers available around the clock has boosted business efficiency.
- Core Banking Solution (CBS): All bank branches are now connected through a central system, allowing customers to operate their accounts from any branch in the country.
In summary, the journey of banking reforms has been about moving from a rigid, controlled system to a flexible, competitive, and technologically driven one, aimed at supporting India’s growing economy.