Banking sector played a major role in the socio-economic reforms of India.

From policies and regulations in the pre-independence stage to the current macro-environment, we have seen major changes in the Banking sector being undertaken with the purpose of bringing socioeconomic reforms for development of India. We will divide the reforms part in 4 major stages, starting from pre-independence stage and talk about all the major banking reforms that came into being till today, for the growth of India.

Pre-Independence (before 1947):

We have seen several banks like Union Bank, Bank of Upper India and various other banks were opened to finance exporters of goods, Industrialists, etc. but majority of these banks failed due to large exposure to speculative ventures or some crisis situation. Subsequently, banking sector remained an exclusive one for European banks until the beginning of 20th century. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around 20th century Indias social, Industrial and infrastructure sector has seen much needed growth which led to the revival of many Indian Banks. Many small banks were established which majorly served particular ethnic and religious communities. Swadeshi Movement between 1906 to 1911, many banks were established. The movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

Post-Independence era, before nationalisation (1947- 1967):

Partition severely impacted the economies of several states, Punjab and West Bengal in particular. The environment in banking sector where all the participants work free from any state intervention was over. The Government of India initiated measures for greater involvement in Banking and Finance. The major steps taken to regulate banking were:

The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948. In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Following independence, the RBI was given broad regulatory authority over commercial banks in India. In 1959, the State Bank of India acquired the state-owned banks of eight

former princely states. Thus, by July 1969, approximately 31 percent of scheduled bank branches throughout India were government controlled, as part of the State Bank of India.

Nationalisation (1967- 1991):

The post-war development strategy was in many ways a socialist one, and the Indian government felt that banks in private hands did not lend enough to those who needed it most. In July 1969, the government nationalized all banks whose nationwide deposits were greater than Rs. 500 million. Between 1969 and 1980, the number of private branches grew more quickly than public banks, and on April 1, 1980, they accounted for approximately 17.5 percent of bank branches in India. In April of 1980, the government undertook a second round of nationalization, placing under government control the six private banks whose nationwide deposits were above Rs. 2 billion, or a further 8 percent of bank branches, leaving approximately 10 percent of bank branches in private hands. The share of private bank branches stayed fairly constant between 1980 to 2000. Nationalisation gave major powers to the Government; various reforms like equitable credit flow to agriculture and small sectors, direct lending to private sector was introduced.

Liberalisation era (after 1991-92)

The first phase of current reform of financial sector was initiated in 1992, based on the recommendations of Committee on Financial System (CFS or Narasimham Committee). The process has been marked by gradualism with measures being undertaken after extensive consultations with experts and market participants. The then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. The Reserve Bank's approach to reform in financial sector could be summarised as pancha-sutra or five principles First, cautious and proper sequencing of various measures giving adequate time to the various agents to undertake the necessary norms; e.g., the gradual introduction of prudential norms. Second, mutually reinforcing measures, that as a package would be enabling reform but non-disruptive of the confidence in the system, e.g., combining reduction in refinance with reduction in the cash reserve ratio (CRR) which obviously improved bank profitability. Third, complementarities between reforms in banking sector and changes in fiscal, external and monetary policies, especially in terms of co-ordination with Government; e.g., recapitalisation of Government owned banks coupled with prudential regulation; abolition of ad hoc Treasury bills and its replacement with a system of Ways and Means Advances, coupled with reforms in debt markets.

Fourth, developing financial infrastructure in terms of supervisory body, audit standards, technology and legal framework; e.g., establishment of Board for Financial Supervision, setting up of the Institute for Development and Research in Banking Technology, legal amendment to the RBI Act on Non- Banking Financial Companies (NBFCs). Fifth, taking initiatives to nurture, develop and integrate money, debt and forex markets, in a way that all major banks have an opportunity to develop skills, participate and benefit; e.g., gradual reduction in the minimum period for maturity of term deposits and permitting banks to determine the penalty structure in respect of premature withdrawal, syndication in respect of loans, flexibility to invest in money and debt market instruments, greater freedom to banks to borrow from and invest abroad.

Moreover, banking reforms included the removal of controls on interest rates, reductions in reserve and liquidity ratios, entry deregulation, relaxation of credit controls, and the introduction of an inter-bank money market as well as auction-based repos and reverse repos. The Narasimhan committee, in its second report on banking sector reforms, submitted in April 1998, made a series of sweeping recommendations ranging from bank mergers and creation of globalized banks to bank closures, recasting bank boards and revamping banking legislations. Concept of Narrow Banking was introduced to rehabilitate weak banks, recommendations to have minimum CAR of 10% by 2002 were made, public sector banks were recommended to speed up computerization and focus on relationship banking; even two or three large Indian banks should be given International character. As shown in figure, due to the entry of new banks, the number of private sector banks first increased in the mid-1990s, but since then the number has declined due to mergers or closures. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made significant attempts to improve regulation, besides framing policies that are conducive to the growth of the sector. The growth in the sector is specifically being driven by rising Source: RBIs database "Statistical Tables Relating to Banks in aspirations of corporate India , strong India" and "Basic Statistical Returns". IMF Working Paper regulatory thrust, technological breakthrough, innovations, rising productivities and economies of scale.
Number of Banks

References: IMF Working Paper, http://www.imf.org/external/pubs/ft/wp/2011/wp1150.pdf Y V Reddy: Banking sector reforms in India, http://www.bis.org/review/r050519b.pdf http://en.wikipedia.org/wiki/Banking_in_India http://www.rbi.org.in/scripts/FAQView.aspx?Id=51