Time for 5th generation banking reforms

  • IASbaba
  • May 8, 2021
  • 0
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  • GS-3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. 
  • GS-2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation.

Time for 5th generation banking reforms

Context: The government recently announced new banking reforms, involving the establishment of a Development Finance Institution (DFI) for infrastructure, 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 Indian banking sector has been evolving on a continuous basis, 

Reforms Outcomes
First Generation During the pre-Independence period (till 1947), the Swadeshi Movement saw the birth of many small and local banks Most failed mainly due to internal frauds, interconnected lending, and the combining of trading and banking books.
Second generation (1947-1967) Indian banks facilitated resource mobilisation through retail deposits)  Banking sector got concentrated in a few business families or groups 

Neglected credit flow to agriculture.

Third generation (1967-1991) The government was successful in breaking the nexus between industry and banks through the nationalisation of 20 major private banks in two phases (1969 and 1980) and introduction of priority sector lending (1972).  These initiatives resulted in the shift from ‘class banking’ to ‘mass banking’ and had a positive impact on the expansion of branch network across (rural) India, massive mobilisation of public deposits and incremental credit flow to agriculture and allied sectors. 

However, the banking industry experienced a decline in asset quality, financial soundness, and efficiency during this period as a result of relaxation in credit standards to meet the priority sector targets.

Fourth generation (1991-2014) Indian banking saw landmark reforms such as 

  • Issue of fresh licences to private and foreign banks
  • Introduction of prudential norms
  • Providing operational flexibility coupled with functional autonomy
  • Focus on implementation of best corporate governance practices
  • Strengthening of capital base as per the Basel norms.
  • Since 2014, the banking sector has witnessed the adoption of the JAM (Jan-Dhan, Aadhaar, and Mobile) trinity, and issuance of licences to Payments Banks and Small Finance Banks (SFBs) 
Reforms infused competition, thereby enhancing productivity as well as efficiency by leveraging technology.

SFBs has helped to achieve last-mile connectivity in the financial inclusion drive. 

Fifth Generation Reforms – Promoting Niche/Differentiated Banking 

  • Niche Banking caters to the specific and varied requirements of different customers and borrowers. 
  • Essentially, these specialised banks would ease the access to finance in areas such as RAM (retail, agriculture, MSMEs), infrastructure financing, wholesale banking (mid and large corporates) 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. 
  • Further, the existing strong local area banks and urban cooperative banks may be converted into RAM banks and be freed from dual control.
  • They also may be encouraged to get listed on a recognised stock exchange and adhere to ESG (Environment, Social Responsibility, and Governance) framework to create value for their stakeholders in the long run.
  • Government should establish sector-wise regulators and bestow them with more powers to deal effectively with wilful defaulters.


Given the current challenges of a burgeoning population, the ongoing Covid-19 pandemic, and the West’s intention to shift its manufacturing base to India and elsewhere, it is essential to say ‘yes’ to fifth generation banking reforms.

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