EFFECT OF REFORMS ON BANKING SECTOR IN THE CONTEXT OF INDIA

Abstract

In the aftermath of the severe balance of payments crisis of 1991, India embarked on a policy of economic reforms. Reform was a key plank of the finance market and the banking sector, which was the cornerstone of financial intermediation. The aim of the banking reforms was to encourage a diversified, stable and sustainable financial structure with the ultimate goal of increasing capital productivity through providing organizational stability, enhancing financial profitability and strengthening the institution. Since 1992, Indian banks have been increasingly open to domestic and foreign rivalry. India has a somewhat different path to financial reforms than many other nations. Whilst public sector banks were not privatized, many public sector banks were listed on bonds in a partial disinvestment mechanism and became subject in this manner to market discipline and greater disclosure. In addition, entrance and expansion of newly opened private sector banks and other international banks led to greater competitiveness. As a result, the share of public sector banks in overall commercial banking assets decreased steadily and there was a downward trend in Herfindahl's concentration index. In the post-reformation period, there was also a steady reduction in intermediation costs (defined as "the ratio of operations expenses to total assets") between bank classes (excluding foreign banks) and declines in nonperforming lending. The improvement of the banking system's efficiency has been reflected in many indicators. As a consequence of these reforms, the Indian banking sector has improved all-round competitiveness. While Indian banks showed the declination trend in post-reform business per employee of Indian banks to three times the cost-income ratio (i.e. the ratio of operational expenses to overall income lower interest expenses) and net interest margin (i.e. the over interest income scaled to overall bank assets) At the same period profits per employee is multiplied by about five, with a rise of about 17 percent. Concurrent changes have also been observed for the industry.