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FINANCIAL LIBERALISATION AND BANKING SECTOR: A

CONCEPTUAL STUDY

Department of Commerce and Business Studies, Jamia Millia Islamia Central University, Delhi.

ABSTRACT

The financial sector is a category of stocks containing firms that provide financial services to

commercial and retail customers; this sector includes banks, investment funds, insurance companies

and real estate. It also includes the legal and regulatory framework that permits transactions to be

made through the extension of credit. Financial sector development in India and emerging markets is

part of the private sector development strategy to stimulate economic growth and reduce poverty.

Financial sector in India is changed drastically since late 1990s due to technological innovation,

financial liberalisation with entry of new private and foreign banks, and regulatory changes in the

corporate sector. The intense competition between these new entrances with the already existing

public sector banks to cater needs of same pie of consumers facilitated implementation of new ways

in reduce costs at the same time attracting customers/business. Further liberalisation of financial

sector facilitated development of capital markets; non-banking financial institutions that absorb

current and potential borrowers and bank depositor thereby banks may face competition both in

raising resources and in deploying them. In the current scenario, liberalisation and deregulation has to

go hand in hand with a greater emphasis on efficiency, consolidation, asset quality and profitability.

This paper evaluates the impact of financial liberalisation and reforms on the banking sector in India.

Keywords: Financial sector, Liberalisation, Economic growth, Banking sector, Competition.

Introduction

Liberalisation, literally, means the ―removal of controls.‖ When we talk about financial Liberalisation,

we refer to the removal of controls and restrictions placed on the financial sector by a governing

authority. Financial Liberalisation gained attention in the early 1970s due to the seminal work of

McKinnon (1973) and Shaw (1973) in which they argued that Liberalisation of the financial sector

will lead to increase in savings, encourage investments and induce economic growth. In the late 1970s

and early 1980s, most developing countries were in a crisis of economic policy. Due to unfavourable

circumstances and the deteriorating of economic and financial conditions, the financial system proved

to have many deficiencies and it was unable to generate economic growth. Based on financial aid

from the World Bank and International Monetary Fund, many India in Asia, Europe, Latin America

and Africa have undertaken economic reforms to create a sustainable investment environment and

develop the private sector through an economic system based on market mechanisms. Apparently the

result of these reforms was to transform many developing economies in emerging economies, where

strong economic growth is supported by private sector development and rapidly mature of stock

markets. Financial Liberalisation was an important component of the reforms mentioned above. This

is to give central banks more authority in the conduct of monetary policy, to privatize and restructure

the banking sector, Liberalisation of interest rates, abolition of the direct extension of credit and, more

generally, to develop and promote the role of financial markets in financing the economy. The main

objective is to enable emerging economies to emerge from recession, and later to develop rapidly.

In the majority of the countries, banks are the most important financial institutions, since they can

stimulate the economic growth. In order to ensure safe and sound banking system many authorities

INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEWISSN:2321-0354 - ONLINE ISSN:2347-1654 - PRINT - IMPACT FACTOR:4.236VOLUME 5, ISSUE 6, JUNE 2017UGC APPROVED JOURNAL - NEWLY ADDED JOURNAL S.NO:7095

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VIVEK

https://en.wikipedia.org/wiki/Financial_regulation

https://en.wikipedia.org/wiki/Financial_transaction

https://en.wikipedia.org/wiki/Emerging_markets

https://en.wikipedia.org/wiki/Private_sector_development

https://en.wikipedia.org/wiki/Economic_growth

have regulated and restricted banking operations during a long period of time. Banking restrictions

have taken diverse forms among which we mention the control of the capital flows, interest rate and

credit allocation. Over the last three decades, particularly during the 80s and 90s, several countries

have adopted financial reforms by moving towards less financial restrictions. The measures of

financial deregulation consisted in Liberalisation of the interest rates, abolishment of the credit

control, removal of the barriers on the capital flows, elimination of the obstacles on competition

among the financial institutions, privatization of the state-owned financial institutions and start up of

the capital market securities. The most important argument that supports financial Liberalisation is to

improve financial development and get higher economic growth. Beginning with the financial

Liberalisation and deregulation, banking systems have entered in a process of reform, consisting in

elimination of the control on interest rates and credit allocation, privatization of state-controlled

banks, stimulation the competition among banks and Liberalisation of capital flows. Financial

Liberalisation in banking sector aimed to increase the efficiency of the banks, improve the allocation

of credits, stimulate savings and, thus, attain a higher economic growth. Hence, many countries

especially India have embraced financial Liberalisation as the way forward for their economies.

Review of Literature

Shaw (1973) and McKinnon’s (1973) claim that distortions in interest and foreign exchange rates

could reduce the real size of the financial system and overall economic growth. The restrictive

financial policies are known to have contributed to the retardation of the economic development

process in many countries. Against this background and also in response to international political

pressures and the stride toward liberalisation of global economy, there has been a wave of financial

sector reforms, partly as a way to deepen financial markets and also to promote economic growth.

Johnston and Sundararajan (1999) viewed financial Liberalisation as a set of operational reforms

and policy measures designed to deregulate and transform the financial system and its structure with

the view to achieving a liberalized market-oriented system within an appropriate regulatory

framework.

Kaminsky and Schmukler (2003) opined that financial Liberalisation consists of the deregulation of

the foreign sector capital account, domestic financial sector, and the stock market sector viewed

separately from the domestic financial sector. From this definition, they put forward that full financial

Liberalisation occurs when at least two of the three sectors are fully liberalized and the third one is

partially liberalized.

Hermes and Nhunq (2008) analyzed the impact of financial Liberalisation on bank efficiency. They

use the bank data from ten emerging countries during 1991-2000, the Data Envelop Analysis to

calculate bank efficiency and the financial Liberalisation index developed by Laeven 2003. The

obtained results show that financial Liberalisation has a positive impact on bank efficiency.

Andries and Capraru (2011) revealed that countries with a higher level of openness and

Liberalisation can increase the cost efficiency and offer cheaper services to their clients. Also, the

level of bank reform, the score regarding soundness, the safety of banks and the interest rate

Liberalisation indicator have a positive impact on productivity growth of banks.

Gupta et al. (2011) analyzed the effects of financial Liberalisation on banking system from India

during 1991-2007. Their findings show that government ownership and high fiscal deficits can limit

the gains obtained from financial Liberalisation.



Andries et al., (2012) analysing the impact of the banking reform on the performance of the banks in

5 countries from Central and Eastern Europe for the period of 2001-2008. He concluded that the

indexes of the financial and banking reform have a positive effect on the bank performance index

measured in terms of the cost of intermediation, operational performance and return on assets.

Objectives of the Study

1. To understand the significance of banking industry in resorting economic growth in India.

2. To evaluate the impact of financial liberalisation on the banking sector in India.

3. To study the challenges and opportunities of banking sector in post-liberalisation.

Research Methodology

This paper is the outcome of a secondary data on banking sector with special reference to Indian

context. Being an conceptual study the data collected from journals, articles, newspapers and

magazines. Considering the objectives of the study descriptive type research design is adopted to have

more accuracy and rigorous analysis of research study. The accessible secondary data is intensively

used for research study.

Role of Banking Sector in India’s Economic Growth and Development

Banks play a very useful and crucial role in the economic life of every nation. They have control over

a large part of the supply of money in circulation, and they can influence the nature and character of

production in any country. In order to study the economic significance of banks, we have to review

the general and important functions of banks.

1. Removing the deficiency of capital formation

In any economy, economic development is not possible unless there is an adequate degree of capital

accumulation (or) formation. Deficiency of capital formation is the result of low saving made by the

community. The serious capital deficiency in developing economies is reflected in small amount of

capital equipment per worker and the limited knowledge, training and scientific advance. At this

juncture, banks play a useful role. Banks stimulate saving and investment to remove this deficiency. A

sound banking system mobilizes small savings of the community and makes them available for

investment in productive enterprises. The important implications of this activity include Banks

mobilise deposits by offering attractive rates of interest and thus convert savings into active capital.

Otherwise that amount would have remained idle. Banks distribute these savings through loans among

productive enterprises which are helpful in nation building. It facilitates the optimum utilization of the

financial resources of the community.

2. Provision of finance and credit

Banks are very important sources of finance and credit for industry and trade. It is observed that credit

is the lubricant of all commerce and trade. Hence, banks become nerve centres of all trade activities

and therefore commerce and trade could function in the presence of sound banking system. The banks

cover foreign trade transactions also. Big banks also undertake foreign exchange business. They help

in concluding deferred payments, arrangements between the domestic industrial undertakings and

foreign firms to enable the former import machinery and other essential equipment.

3. Extension of the size of the market

Commercial bankers help commerce and industry in yet another way. With the sound banking system,

it is possible for commerce and industry for extending their field of operation. Commercial banks act

as an intermediary between buyers and the sellers. Goods are supplied on bank guarantees, making it

viable for industry and commerce to cultivate and locate markets for their products. The risks are



undertaken by the bank. When the risks have been set free by the banks, the industry can look forward

to derive economies of the large size of the market.

4. Act as an engine of balanced regional development

Commercial banks help in proper allocation of funds among different regions of the economy. The

banks operate primarily for profits. When the banks lend their funds for more productive uses, their

profits will be maximized. Introduction of branch banking makes it possible to choose between

different regions. A region with growth potential attracts more bank funds. But in recent years, the

approach of banks towards regional growth has been undergoing a change. Banks help create

infrastructure essential for economic development. Thus banks are engines of balanced regional

development in the country.

5. Financing agriculture and allied activities

The commercial bank helps the farmers in extending credit for agricultural development. Farmers

require credit for various purposes like making their produce, for the modernization and

mechanization of their agriculture, for providing irrigation facilities and for developing land. The

banks also extend their financial assistance in the areas of animal husbanding, dairy farming, sheep

breeding, poultry farming and horticulture.

6. For improving the standard of living of the people

The standard of living of the people is estimated on the basis of the consumption pattern. The banks

advance loans to consumers for the purchase of consumer durables and other immovable property,

which will raise the standard of living of the people. Stimulating human capital formation, facilitating

monetary policy formulation and developing entrepreneurs are some of the other roles played by

commercial banks in the economic life of every nation.

Financial Liberalisation and Banking Sector Performance in India

Liberalisation refers to a relaxation of previous government restrictions, usually in areas of social or

economic policy. In some contexts this process or concept is often, but not always, referred to as

deregulation. In the arena of social policy it may refer to a relaxation of laws restricting. Most often,

the term is used to refer to economic Liberalisation, especially trade Liberalisation or capital market

liberalisation. Liberalisation in Indian banking sector was begun since 1992, following the

Narasimham Committee Report (December 1991). The 1991 report of the Narasimham Committee

served as the basis for the initial banking sector reforms .In the following years, reforms covered the

areas of interest rate deregulation, directed credit rules, statutory pre-emptions and entry deregulation

for both domestic and foreign banks. The objective of banking sector reforms was in line with the

overall goals of the 1991 economic reforms of opening the economy, giving a greater role to markets

in setting prices and allocating resources, and increasing the role of the private sector. The Narsimhan

Committee was first set up in 1991 under the chairmanship of Mr. M. Narasimham who was 13th

governor of RBI. Only a few of its recommendations became banking reforms of India and others

were not at all considered. Because of this a second committee was again set up in 1998.As far as

recommendations regarding bank restructuring, management freedom, strengthening the regulation

are concerned, the RBI has to play a major role. If the major recommendations of this committee are

accepted, it will prove to be fruitful in making Indian banks more profitable and efficient. Problems

identified by The Narasimham Committee are:

1. Directed Investment Program: The committee objected to the system of maintaining high liquid

assets by commercial banks in the form of cash, gold and unencumbered government securities. It is

also known as the Statutory Liquidity Ratio (SLR). In those days, in India, the SLR was as high as



38.5 percent. According to the M. Narasimham's Committee it was one of the reasons for the poor

profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was as high as 15 percent. Taken

together, banks needed to maintain 53.5% of their resources idle with the RBI.

2. Directed Credit Program: Since nationalization the government has encouraged the lending to

agriculture and small-scale industries at a confessional rate of interest. It is known as the directed

credit programme. The committee opined that these sectors have matured and thus do not need such

financial support. This directed credit programme was successful from the government's point of view

but it affected commercial banks in a bad manner. Basically it deteriorated the quality of loan,

resulted in a shift from the security oriented loan to purpose oriented. Banks were given a huge target

of priority sector lending, etc. ultimately leading to profit erosion of banks.

3. Interest Rate Structure: The committee found that the interest rate structure and rate of interest in

India are highly regulated and controlled by the government. They also found that government used

bank funds at a cheap rate under the SLR. At the same time the government advocated the philosophy

of subsidized lending to certain sectors. The committee felt that there was no need for interest

subsidy. It made banks handicapped in terms of building main strength and expanding credit supply.

4. Additional Suggestions: Committee also suggested that the determination of interest rate should

be on grounds of market forces. It further suggested minimizing the slabs of interest.

Narasimham Committee Report I- 1991.

The Narasimham Committee was set up in order to study the problems of the Indian financial system

and to suggest some recommendations for improvement in the efficiency and productivity of the

financial institution. The committee has given the following major recommendations:-

1. Reduction in the SLR (Statutory Liquidity Ratio) and CRR (Cash Reserve Ratio): The

committee recommended the reduction of the higher proportion of the Statutory Liquidity Ratio

(SLR) and the Cash Reserve Ratio (CRR). Both of these ratios were very high at that time. The SLR

then was 38.5% and CRR was 15%. This high amount of SLR and CRR meant locking the bank

resources for government uses. It was hindrance in the productivity of the bank thus the committee

recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and

CRR from 15% to 3 to 5%.

2. Phasing out Directed Credit Programme: In India, since nationalization, directed credit

programmes were adopted by the government. The committee recommended phasing out of this

programme. This programme compelled banks to earmark then financial resources for the needy and

poor sectors at confessional rates of interest. It was reducing the profitability of banks and thus the

committee recommended the stopping of this programme.

3. Interest Rate Determination: The committee felt that the interest rates in India are regulated and

controlled by the authorities. The determination of the interest rate should be on the grounds of market

forces such as the demand for and the supply of fund. Hence the committee recommended eliminating

government controls on interest rate and phasing out the concessional interest rates for the priority

sector.

4. Structural Reorganizations of the Banking sector: The committee recommended that the actual

numbers of public sector banks need to be reduced. Three to four big banks including SBI should be

developed as International banks. Eight to Ten Banks having nationwide presence should concentrate



on the national and universal banking services. Local banks should concentrate on region specific

banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on

agriculture and rural financing. They recommended that the government should assure that henceforth

there won't be any nationalization and private and foreign banks should be allowed liberal entry in

India.

5. Establishment of the ARF Tribunal: The proportion of bad debts and Non-performing asset

(NPA) of the public sector Banks and Development Financial Institute was very alarming in those

days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This

fund will take over the proportion of the bad and doubtful debts from the banks and financial

institutes. It would help banks to get rid of bad debts.

6. Removal of Dual control: Those day banks were under the dual control of the Reserve Bank of

India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The

committee recommended the stepping of this system. It considered and recommended that the RBI

should be the only main agency to regulate banking in India.

7. Banking Autonomy: The committee recommended that the public sector banks should be free and

autonomous. In order to pursue competitiveness and efficiency, banks must enjoy autonomy so that

they can reform the work culture and banking technology upgradation will thus be easy.

Some of these recommendations were later accepted by the Government of India and became banking

reforms.

Narasimham Committee Report II- 1998

In 1998 the government appointed yet another committee under the chairmanship of Mr. Narsimham.

It is better known as the Banking Sector Committee. It was told to review the banking reform progress

and design a programme for further strengthening the financial system of India. The committee

focused on various areas such as capital adequacy, bank mergers, bank legislation etc.

It submitted its report to the Government in April 1998 with the following recommendations.

1. Strengthening Banks in India: The committee considered the stronger banking system in the

context of the Current Account Convertibility (CAC). It thought that Indian banks must be capable of

handling problems regarding domestic liquidity and exchange rate management in the light of CAC.

Thus, it recommended the merger of strong banks which will have 'multiplier effect‘ on the industry.

2. Narrow Banking: Those days many public sector banks were facing a problem of the Non-

performing assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus

for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak

banks will be allowed to place their funds only in short term and risk free assets

3. Capital Adequacy Ratio: In order to improve the inherent strength of the Indian banking system

the committee recommended that the Government should raise the prescribed capital adequacy norms.

This will further improve their absorption capacity also. Currently the capital adequacy ratio for

Indian banks is at 9%.

4. Bank ownership: As it had earlier mentioned the freedom for banks in its working and bank

autonomy, it felt that the government control over the banks in the form of management and

ownership and bank autonomy does not go hand in hand and thus it recommended a review of



functions of boards and enabled them to adopt professional corporate strategy.

5. Review of banking laws: The committee considered that there was an urgent need for reviewing

and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act,

State Bank of India Act, Bank Nationalisation Act, etc. This upgradation will bring them in line with

the present needs of the banking sector in India.

Apart from these major recommendations, the committee has also recommended faster

computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in

banking, reviewing bank recruitment, etc.

Changes due to the recommendations made by the Narasimham committee are:-

1. Statutory pre-emptions: The degree of financial repression in the Indian banking sector was

significantly reduced with the lowering of the CRR and SLR, which were regarded as one of the main

causes of the low profitability and high interest rate spreads in the banking system. During the 1960s

and 1970s the CRR was around 5%, but until 1991 it increased to its maximum legal limit of 15%.The

reduction of the CRR and SLR resulted in increase flexibility for banks in determining both the

volume and terms of lending.

2. Priority sector lending: Besides the high level of statutory pre-emptions, the priority sector

advances were identified as one of the major reasons for the below average profitability of Indian

banks. The Narasimham Committee therefore recommended a reduction from 40% to 10%. However,

this recommendation has not been implemented and the targets of 40% of net bank credit for domestic

banks and 32% for foreign banks have remained the same.

3. Interest rate Liberalisation: Prior to the reforms, interest rates were a tool of cross-subsidization

between different sectors of the economy. To achieve this objective, the interest rate structure had

grown increasingly complex with both lending and deposit rates set by the RBI. The deregulation of

interest rates was a major component of the banking sector reforms that aimed at promoting financial

savings and growth of the organized financial system. The lending rate for loans in excess of Rs.

2,00,000 that account for over90% of total advances was abolished in October 1994. Banks were at

the same time required to announce a prime lending rate (PLR) which according to RBI guidelines

had to take the cost of funds and transaction costs into account.

4. Entry barriers: Before the start of the 1991 reforms, there was little effective competition in the

Indian banking system for at least two reasons. First, the detailed prescriptions of the RBI concerning

for example the setting of interest rates left the banks with limited degrees of freedom to differentiate

themselves in the marketplace. Second, India had strict entry restrictions for new banks, which

effectively shielded the incumbents from competition. Through the lowering of entry barriers,

competition has significantly increased since the beginning of the1990s. Seven new private banks

entered the market between 1994 and 2000. In addition, over 20 foreign banks started operations in

India since 1994. By March 2004, the new private sector banks and the foreign banks had a combined

share of almost 20% of total assets. Deregulating entry requirements and setting up new bank

operations has benefited the Indian banking system from improved technology, specialized skills,

better risk management practices and greater portfolio diversification.

5. Prudential norms: The report of the Narasimham Committee was the basis for the strengthening

of prudential norms and the supervisory framework. Starting with the guidelines on income



recognition, asset classification, provisioning and capital adequacy the RBI issued in 1992/93, there

have been continuous efforts to enhance the transparency and accountability of the banking sector.

The improvements of the prudential and supervisory framework were accompanied by a paradigm

shift from micro-regulation of the banking sector to a strategy of macro-management.

6. Public Sector Banks: At the end of the 1980s, operational and allocative inefficiencies caused by

the distorted market mechanism led to a deterioration of Public Sector Banks' profitability. Enhancing

the profitability of PSBs became necessary to ensure the stability of the financial system. The

restructuring measures for PSBs were threefold and included recapitalization, debt recovery and

partial privatization.

Despite the suggestion of the Narasimham Committee to rationalize PSBs, the Government of India

decided against liquidation, which would have involved significant losses accruing to either the

government or depositors. It opted instead to maintain and improve operations to allow banks to

create a good starting basis before a possible privatisation.

Banking Sector: Post-Liberalisation Challenges and Opportunities

The Indian banking sector continues to face some structural challenges. We have a relatively large

number of banks, some of which are sub-optimal in size and scale of operations. On the regulatory

front, alignment with global developments in banking supervision is a focus area for both regulators

and banks. The new international capital norms require a high level of sophistication in risk

management, information systems, and technology which would pose a challenge for many

participants in the Indian banking sector. The deep and often painful process of restructuring in the

Indian economy and Indian industry has resulted in asset quality issues for the banking sector; while

significant progress is being made in this area, a great deal of work towards resolution of these legacy

issues still needs to be done. The Indian banking sector is thus at an exciting point in its evolution.

The opportunities are immense – to enter new businesses and new markets, to develop new ways of

working, to improve efficiency, and to deliver higher levels of customer service. The process of

change and restructuring that must be undergone to capitalize on these opportunities poses a challenge

for many banks. The Indian banking sector is faced with multiple and concurrent challenges such as

increased competition, rising customer expectations, and diminishing customer loyalty. The banking

industry is also changing at a phenomenal speed. While at the one end, we have millions of savers and

investors who still do not use a bank, another segment continues to bank with a physical branch and at

the other end of the spectrum, the customers are becoming familiar with ATMs, e-banking, and

cashless economy. This shows the immense potential for market expansion. The exponential growth

for the industry comes from being able to handle as wide a range of this spectrum as possible. In this

complex and fast changing environment, the only sustainable competitive advantage is to give the

customer an optimum blend of technology and traditional service. As banks develop their strategies

for giving customers access to their accounts through various advanced services like e banking,

mobile banking and net banking, they should also regard this emerging platform as a potential catalyst

for generating operational efficiencies and as a vehicle for new revenue sources. Banking industry‗s

opportunities includes:

A growing economy

Banking deregulation

Increased client borrowing

An increase in the number of banks

An increase in the money supply

Low government-set credit rates, and



Larger customer checking account balances.

Developing countries like India, has a huge number of people who don‗t have access to banking

services due to scattered and fragmented locations. But if we talk about those people who are availing

banking services, their expectations are raising as the level of services are increasing due to the

emergence of Information Technology and immense competition between the services and products

provided by different banks. Since, foreign banks are playing in Indian market, the number of services

of offered has increased and banks have laid emphasis on meeting the customer expectations. India's

banking sector has made rapid strides in reforming and aligning itself to the new competitive business

environment. The major challenges faced by banks today are as to how to cope with competitive

forces and strengthen their balance sheet. Today, banks are groaning with burden of NPA‗s. It is

rightly felt that these contaminated debts, if not recovered, will eat into the very vitals of the banks.

The biggest opportunity for the Indian banking system during this post-liberalisation era is the Indian

consumer. Demographic shifts in terms of income levels and cultural shifts in terms of lifestyle

aspirations are changing the profile of the Indian consumer. This is and will be a key driver of

economic growth going forward. The Indian consumer now seeks to fulfil his lifestyle aspirations at a

younger age with an optimal combination of equity and debt to finance consumption and asset

creation. This is leading to a growing demand for competitive, sophisticated retail banking services.

The consumer represents a market for a wide range of products and services – he needs a mortgage to

finance his house; an auto loan for his car; a credit card for on-going purchases; a bank account; a

long-term investment plan to finance his child‗s higher education; a pension plan for his retirement; a

life insurance policy – the possibilities are endless. And, this consumer does not live just in India‗s top

ten cities. He is present across cities, towns, and villages as improving communications increases

awareness even in small towns and rural areas. Consumer goods companies are already tapping this

potential – it is for the banks to make the most of the opportunity to deliver solutions to this market.

Some other vital opportunities for the banking industry are:

Revolution of Information Technology

Industrial Development

Knowledge Society

Intense Competition

Employees‘ Retention

Financial Inclusion

Rural market

High Transaction Costs

Timely Technological Upgradation

Social and Ethical Aspects

Global Banking

Conclusion

The pre and post Liberalisation era has witnessed various environmental changes which directly

affects the aforesaid phenomena. It is evident that post Liberalisation era has spread new colours of

growth in India, but simultaneously it has also posed some challenges. The banking sector is still

struggling under the burden of considerable NPAs and the poor performance of public sector banks

continues to be a major issue. Liberalisation has, however, had a predictable effect in the distribution

of scheduled commercial banking in India. The reforms era growth in banking has focused on the

more profitable urban and metro areas of the country. Between 1969 and 1991 for instance, the share



of the rural branches increased from about 22% to over 58%. In 2004, the corresponding figure stood

at a much lower 46%. The number of rural bank branches actually declined from the 1991 figure of

over 35,000 branches by about 3000 branches. Between 1969 and 1991 the share of urban and metro

branches fell from over 37% to less than 23%. In the years since it has crawled back up to over 31%.

Since India has decided to move toward a more market-based system, it is now important for policy

makers to create the conditions for the well-functioning of a market based banking system. Among

the necessary tasks are the building and strengthening of the necessary institutions like oversight

bodies, accounting standards and regulations as well as the further restructuring and privatization of

PSBs. If India continues on its current path of banking sector Liberalisation, it should be in a position

to further strengthen its banking system, which will be vital to support its economic growth in the

years to come. Thus Financial Liberalisation has proved to be a great boon to the banking system as

the structural changes which have been implemented due to the liberalisation has transformed the

Indian banking system and moreover the recommendations of various committees has led to further

strengthening banking system. Thus liberalisation has made banking from class banking to mass

banking.

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