REFORMS IN THE INDIAN BANKING SECTOR

Abstract

This study assessed the achievements of gradualist reforms in the financial sector, particularly in the Indian banking sector, during the last fifteen years. It identifies its effectiveness and critical challenges. The Indian financial sector reforms of the 1990s show a gradual relaxation of government controls over the financial sector in the course of the decade. The study investigated ways in which the financial performance of the banks could be improved. Twenty-five representatives of key stakeholders in the Indian banking sector were interviewed as key-informants. Of those interviewed, five respondents were selected from each of the following pools: macroeconomics policy professionals; academics; and career bankers from the public, private and foreign banks in India. Pertinent official documents relating to the banking reforms were also analysed. The research focused particularly on the issue of government ownership of the banks. This is a critical area where India’s policy differs from the current international consensus. If privatization is not a practical option, it is necessary to explore steps to improve the functioning of public sector banks. The research discovered that several significant differences exist between independent external assessments of the reforms and the government version. The official version reflects a positive picture but independent research suggests otherwise. Finally, recommendations are made to help the Indian banking sector improve, for example, to lift its standards to internationally accepted standards of capital adequacy, prudential norms and risk management