Topic:
- 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.
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
|
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
Conclusion
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.
