sunandaC

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The banking sector reforms undertaken in India from 1992 onwards were basically aimed at ensuring the safety and soundness of financial institutions and at the same time at making the banking system strong, efficient, functionally diverse and competitive.

The reforms included measures for arresting the decline in productivity, efficiency and profitability of the banking sector.

Furthermore, it was recognized that the Indian banking system should be in tune with international standards of capital adequacy, prudential regulations, and accounting and disclosure standards. Financial soundness and consistent supervisory practices, as evident in our level of compliance with the Basel Committee.s Core

Principles for Effective Banking Supervision, have made our banking system resilient to global shocks.

India has not faced any major economic/financial crises, though in 1990-91, there was some pressure on the external sector with the current account deficit and external debt servicing reaching large
proportions. However, due to prudent macroeconomic policies, it was possible to return the country to a sustainable growth path.

As well as the long history of regulation and supervision, Indian banks have limited exposure to sensitive sectors such as real estate, equity, etc, strict control over off-balance sheet activities, larger holdings of government bonds (which helps limit credit risk), relatively well- diversified credit portfolios, statutory restrictions on connected lending, adequate control over currency and maturity mismatches, etc, which has insulated them from the adverse impact of financial crisis and contagion. Banks in India have played a significant role in the development of the Indian economy.

However, with the structural reforms initiated in the real economy from the early 1990s, it was imperative that a vibrant and competitive financial system should be put in place to sustain the ongoing process of reforms in the real sector.

The financial sector reforms have provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability.

The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, introducing transparency in reporting procedures, restructuring and recapitalising banks and enhancing the competitive element in the market through the entry of new banks.

The ongoing revolution in information and communication technology has, however, largely bypassed the Indian banking system given the low initial level of automation.

The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology, albeit to a limited extent, to maintain their market share. Banks continue to be the major financial intermediaries with a share of 64% of total financial assets.

However, non-bank financial companies and development finance institutions are also emerging as alternative sources of funding.

In India, foreign banks account for only around 8% of the total assets of the banking system.

Further, domestic households are not allowed to place deposits abroad. Similarly, conditions for accessing overseas capital markets by domestic corporates have been stringent, in terms of size, maturity, pricing, etc.

The impact of the entry of foreign banks on domestic banks is likely to depend on various factors such as the structure, strength and competitiveness of domestic banks, the share of foreign banks, and the regulatory/supervisory framework. While the entry of foreign banks could definitely improve the competitive environment, they are not likely to weaken domestic banks.

With better technology and expertise in offering specialised banking products such as derivatives, advisory services, trade finance, etc, the entry of foreign banks can enhance healthy competition and has a positive spillover effect on the domestic banks.

The domestic banks would be under peer pressure to improve operational efficiency. It needs, however, to be recognised that the banking system in India is quite competitive with the presence of public, private and foreign banks.

Thus, the major forces for change in the Indian context have been the following:

- consistent and strong regulatory and supervisory framework;

- structural reforms in the real and financial sectors;

- commitment to adopt and refine regulatory and supervisory standards on a par with international best practices; and
-competition from foreign banks and new-generation private sector banks.

In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India.

Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players
 
The banking sector reforms undertaken in India from 1992 onwards were basically aimed at ensuring the safety and soundness of financial institutions and at the same time at making the banking system strong, efficient, functionally diverse and competitive.

The reforms included measures for arresting the decline in productivity, efficiency and profitability of the banking sector.

Furthermore, it was recognized that the Indian banking system should be in tune with international standards of capital adequacy, prudential regulations, and accounting and disclosure standards. Financial soundness and consistent supervisory practices, as evident in our level of compliance with the Basel Committee.s Core

Principles for Effective Banking Supervision, have made our banking system resilient to global shocks.

India has not faced any major economic/financial crises, though in 1990-91, there was some pressure on the external sector with the current account deficit and external debt servicing reaching large
proportions. However, due to prudent macroeconomic policies, it was possible to return the country to a sustainable growth path.

As well as the long history of regulation and supervision, Indian banks have limited exposure to sensitive sectors such as real estate, equity, etc, strict control over off-balance sheet activities, larger holdings of government bonds (which helps limit credit risk), relatively well- diversified credit portfolios, statutory restrictions on connected lending, adequate control over currency and maturity mismatches, etc, which has insulated them from the adverse impact of financial crisis and contagion. Banks in India have played a significant role in the development of the Indian economy.

However, with the structural reforms initiated in the real economy from the early 1990s, it was imperative that a vibrant and competitive financial system should be put in place to sustain the ongoing process of reforms in the real sector.

The financial sector reforms have provided the necessary platform for the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability.

The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, introducing transparency in reporting procedures, restructuring and recapitalising banks and enhancing the competitive element in the market through the entry of new banks.

The ongoing revolution in information and communication technology has, however, largely bypassed the Indian banking system given the low initial level of automation.

The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology, albeit to a limited extent, to maintain their market share. Banks continue to be the major financial intermediaries with a share of 64% of total financial assets.

However, non-bank financial companies and development finance institutions are also emerging as alternative sources of funding.

In India, foreign banks account for only around 8% of the total assets of the banking system.

Further, domestic households are not allowed to place deposits abroad. Similarly, conditions for accessing overseas capital markets by domestic corporates have been stringent, in terms of size, maturity, pricing, etc.

The impact of the entry of foreign banks on domestic banks is likely to depend on various factors such as the structure, strength and competitiveness of domestic banks, the share of foreign banks, and the regulatory/supervisory framework. While the entry of foreign banks could definitely improve the competitive environment, they are not likely to weaken domestic banks.

With better technology and expertise in offering specialised banking products such as derivatives, advisory services, trade finance, etc, the entry of foreign banks can enhance healthy competition and has a positive spillover effect on the domestic banks.

The domestic banks would be under peer pressure to improve operational efficiency. It needs, however, to be recognised that the banking system in India is quite competitive with the presence of public, private and foreign banks.

Thus, the major forces for change in the Indian context have been the following:

- consistent and strong regulatory and supervisory framework;

- structural reforms in the real and financial sectors;

- commitment to adopt and refine regulatory and supervisory standards on a par with international best practices; and
-competition from foreign banks and new-generation private sector banks.

In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India.

Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players

Hey sunanda, thanks for sharing this article on the banking reform and you explained the topic very nicely. Well, i must say it is great work and going to help many banking students and professionals. Well, i am also uploading a document and want you check it once.
 

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