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Banking Reforms


The history of both public and private banking in India is extensive. In the 18th century, the English Agency House was established in Calcutta and Bombay, marking the beginning of modern banking in India. In the early 19th century, three Presidency banks were established. After the implementation of limited liability in 1860, private banks and international banks joined the market.

At the beginning of the 20th century, joint stock banks were introduced. In 1935, the presidency banks were merged together to form the Imperial Bank of India, which was subsequently renamed the State Bank of India. In the same year, the Reserve Bank of India (RBI), India's central bank, commenced operations. Following India's independence, the RBI was granted considerable regulatory control over the country's commercial banks. The State Bank of India bought the banks of eight erstwhile princely kingdoms in 1959. As a result, by July 1969, around 31 percent of scheduled bank branches in India were under the jurisdiction of the government as part of the State Bank of India.

In many aspects, the post-war development plan was socialist, and the Indian government believed that private banks did not lend enough to people who needed it the most. In July 1969, the government nationalised all Indian banks with deposits above 500 million rupees, resulting in the nationalisation of 54% more Indian branches.

1991 reforms being the most major reforms that reshuffled the whole banking structure, it integrated India’s economy with that of world. Liberalisation, Privatisation and Globalisation- these were the forces that brought these changes. India’s banking structure has evolved and adapted following the ebb and flow of changes happening around.

Evolution of Indian Banking Industry

  • First Generation Banking: During the pre-Independence period (till 1947), the Swadeshi Movement was responsible for the establishment of several small and local banks. Due to internal scams, interconnected lending, and the consolidation of trade and banking books, the majority of them collapsed.

  • Second Generation Banking (1947-1967): Indian banks promoted the concentration of resources (mobilised via retail deposits) in a small number of corporate families or groups, neglecting credit flow to farmers. Banking activities were largely exclusive.

  • Third Generation Banking (1967-1991): It was realised that banking habits needed to be cultivated among larger population, rural population and poorer strata was left out and inclusion was to be prioritised. Through the nationalisation of 20 major private banks in two stages (1969 and 1980) and the introduction of priority sector financing, the government was successful in dissolving the link between industry and banks (1972). These activities led to the transition from "class banking" to "mass banking." In addition, it had a favourable influence on the construction of branch networks across (rural) India, the large mobilisation of public deposits, and the extension of lending to agricultural and associated industries.

  • Fourth Generation Banking (1991-2014): During this time, key changes were implemented, including as the issuance of new licences to private and international banks to increase competition, productivity, and effectiveness. This was accomplished through the utilisation of technology, the introduction of prudential standards, the provision of operational flexibility coupled with functional autonomy, the emphasis on the implementation of best corporate governance practises, and the strengthening of capital base in accordance with Basel norms.

  • Current Model: Since 2014, the banking industry has adopted the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity and issued licences to Payments Banks and Small Finance Banks (SFB) to ensure last-mile connection in the financial inclusion effort.

Reforms of the Fifth Generation: Promoting Niche/Differentiated Banking,

Niche Banking caters to the specific and diverse needs of various customers and borrowers. It is important in contemporary times, as today in the age of digitalisation and startups the demand for credit and in general market demand has undergone significant changes, which will be better catered by differentiated banking. Neo-banks may use technologies to boost (digital) financial inclusion, improve risk management, and promote the aspirational/new India's higher growth. In essence, these specialised banks will facilitate access to capital in sectors such as RAM (retail, agriculture, and micro, small, and medium-sized enterprises), infrastructure financing, wholesale banking (medium and large corporations), and investment banking (merchant banking and financial advisory services).

The proposed DFI/niche banks may be established as specialised banks to have access to low-cost public deposits and for better asset-liability management.

Additionally, the existing robust local area banks and urban cooperative banks may be turned into RAM banks and given greater autonomy.

Creation of a Bad Bank to address the problem of chronic non-performing assets (NPAs), and privatisation of public sector banks (PSBs) to ease its burden in terms of mobilising additional capital. The government is focusing on privatisation, various reports published have shown that private banks have outperformed public sector banks. Privatisation seems to be the new buzz word for India’s 21st century as it appears now.

To build long-term value for their stakeholders, they may also be urged to be listed on a recognised stock market and to conform to an ESG (Environment, Social Responsibility, and Governance) framework.

Government should create sector-specific regulators and provide them the authority to properly deal with willful defaulters.


In light of the present problems posed by a growing population, the ongoing Covid-19 pandemic, and the West's determination to shift its industrial base and supply/value chains from China to India and elsewhere, it is imperative to support fifth generation (2014 and beyond) banking reforms. This requires a paradigm change in the banking industry in order to increase its resilience and preserve financial stability.


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