Banking Reforms & Its Economic Impact An Indian Outlook

Jyoti D. Gulwani
Assistant Professor in Management,
GIDC Rajju Shroff ROFEL Institute of Management Studies (GRIMS), BBA Programme, Vapi.
Address: GRIMS, Plot No: 14/5, Chharwada Road, GIDC, Vapi 396195, Gujarat.
E-mail: jyoti_gulwani@yahoo.com
Contact No: 9979410585

Viral P. Vora
Assistant Professor in Management,
GIDC Rajju Shroff ROFEL Institute of Management Studies (GRIMS), BBA Programme, Vapi.
Address: GRIMS, Plot No: 14/5, Chharwada Road, GIDC, Vapi 396195, Gujarat.
E-mail: viral_vr@yahoo.co.in
Contact No: 9374225898

Banking Reforms & Its Economic Impact An Indian Outlook

Abstract
Banks play a vital role in spearheading the economic development of the nation and are the main
stimulus of the economic progress. The highly regulated and directed banking system has
transformed itself into one characterized by openness, competition and prudence. This
development conforms to the liberalization and globalization needs of the Indian economy.
Reforms in banking sector are one of the major catalysts in strengthening the fundamentals of the
Indian economy. The reform measures have brought about sweeping changes in this critical
sector of the Indian's economy. An attempt has been made in this paper to provide a brief
overview banking sector reforms and its economic impact in India.

Keywords: Banking Reforms, GDP, Inflation, Deposit, Interest Rate, Indian Economy
Introduction to Banking Reforms:
Reforms in the financial sector, covering Banking, Insurance, Financial markets, Trade, taxation
etc. have been a major catalyst in strengthening the fundamentals of the Indian economy
(www.ifbi.com). The objective of reforms in general is to accelerate the growth momentum of the
economy. The broad objective of the financial sector reform has thus been to create a viable and
efficient banking system.
The most significant achievement of the financial sector reforms has been the marked
improvement in the financial strength of commercial banks in terms of capital adequacy,
profitability and asset quality as also greater attention to risk management. Further, deregulation
has opened up new opportunities for banks to increase revenues by diversifying into investment
banking, insurance, credit cards, depository services, mortgage financing, securitization, etc. At
the same time, liberalization has brought greater competition among banks, both domestic and
foreign, as well as competition from mutual funds, NBFCs (non-bank finance companies), post
office, etc. The reforms of banking sector are divided in 3 Phases:
Pre-1991, the early phase, started with nationalization of Indian banks up to 1991.
Post-1991 saw structural reforms in the financial sector (banking, capital markets and
development of finance institutions) based on the recommendations of the Narasimham
Committee report.
The third is an ongoing process.

Recent Banking Reforms:

After a gap for more than a decade, new bank licenses were awarded by the RBI to two
applicants, IDFC & Bandhan Financial Services in April, 2014.
CRR/SLR exemption announced for banks for funds raised via infra bonds in July, 2014.

Process for differentiated licenses initiated for 1 st time for Payment Banks and Small
Banks in July, 2014.

Pradhan Mantri Jan Dhan Yojana a scheme for accounts for all, launched by Prime
Minister Shri Narendra Modi as a part of financial inclusion in August, 2014.
Gyan Sangam a brain storming session for bankers was called by Govt. to plan the road
ahead for the banking sector in January, 2015.
RBI received 41 applications for payment bank & 72 for small finance bank till February,
2015.
Prime Minister Suraksha Bima Yojana (Premium Rs.12 per annum) and Prime Minister
Jeevan Jyoti Bima Yojana (Premium Rs. 330 per annum) launched by Prime Minister in
May, 2015.
Atal Pension Scheme, Kisan Vikas Patra, Sukanya Samriddhi Scheme & Health insurance
scheme launched by Prime Minister in May, 2015 at Kolkata.

Literature Review
1.

Srinivas B. G. & Shanabhogara Raghavendra (2014) conducted a study on Banking

sector reforms & development of banking industry in India. The study aimed at analyzing
critical review of the performance as well as impact of banking reforms in India. The study
also covered the role and measures initiated by RBI in order to implement the banking sector
reforms in India.

2.

Mrs. Azeez B. A. & Ojo Michel (Nigeria 2012) conducted a study on, A Time Series
Analysis on the Effect of Banking Reforms on Nigerias Economic Growth. The study is
aimed at examining the effect of banking reforms on the economic growth of Nigeria. The
result of test showed that all the stationarity of all the variables has been established which a
pre-requisite for the co-integration test is. The banking reforms indices in the study explain a
greater proportion in changes in economic growth.

3.

Rehman ur Wali (2011) conducted a study on Banking reforms and economic growth: A
case study of Pakistan. The study aimed at exploring impact of financial reforms on
economic growth of Pakistan. Study outcome reveals that financial reforms have a
significant impact on the banking sector and economic growth. Reforms overcome the
problems of overstaffing and poor customer service. Inflation significantly affects the
economic development. The mechanism for the economic growth from the financial sector
is; less inflation leads to more savings and high interest rate on deposits will leads to more
lending, higher the lending will results in more investment and more investment leads to
more economic growth.

4.

Vyas Parimal H. & Zaveri Bijal had conducted a study on Banking sectors reforms in
India: some reflections. The study was attempted to provide a brief overview on
performance of the Banking Sector in India. It also includes a critical review of the
performance as well as impact of Banking Sector Reforms in India. It has also covered the
role and measures initiated by RBI in order to implement the Banking Sector Reforms in
India. The study outcome reveals that because of growing competition and growing
expectations has lead to increase in awareness amongst banks on the role and importance of
technology in banking.

Research Methodology
Objective:
1. The objective of this paper is to find the impact of banking reforms on Indian economy.
Data Source:
Required information for paper is collected from secondary sources viz, websites, articles
and research papers etc.
Research Design:
Exploratory study is carried to complete the study.
Limitations of Study:
1. Only secondary data used to conclude the study.
2. The study is limited to Banking sector reforms only, while reforms had taken for whole
financial sector.

Impact of Banking Reforms on Indian Economy

In the pre-reforms era, the Indian banking industry had never experienced competition. But
with the removal of entry barriers, private and foreign banks emerged and there by inducing
competition in banking industry. This development has led to improving competitive strength
of financial sector, enable them to forge closer to global financial market and enhance Indias
ability to take competitive advantage of the increasing international opportunity for India.
Bank network has increased from 80 branches in 2008-09 to 89 banks in 2012-13, while
branch network has increased from 67562 branches in 2008-09 to 92114 branches in 201213.
Credit off-take has been surging ahead over the past decade, aided by strong economic
growth, rising disposable incomes, increasing consumerism and easier access to credit. Total
credit extended went up to US$ 1089 bn by FY15. Demand has grown for both corporate and
retail loans; particularly the services, real estate, consumer durables and agriculture allied
sectors have led the growth in credit.
Deposits have grown at a CAGR of 13.6% during FY0514 and reached 1.5 trillion in FY15.
Deposit growth has been mainly driven by strong growth in savings amid rising disposable
income levels. Under PMJDY, deposits have been increased. Till 29th July, 2015, US$
3448.48 mn has been deposited while 172.9 mn accounts are opened.
Inflation has greater influence over the economic growth. Higher inflation rate erode the real
income and create uncertainty in economy. Inflation becomes headache for the growing
economy like India. Inflation in 2008 was at 8.32% and rose till 2013 to 10.92% and in 2014
the inflation was at 6.34% showing declining trend.
Interest rates have high influence on both growth and inflation. Higher the interest rate,
higher is the cost of capital and contributes to slowdown investment in the economy. High
interest rates also impact FDI due to the uncertainty in the exchange rate as the market
expects interest rates to eventually fall. The recent rate cut by RBI leads to positive impact
on Indian economy as borrowings become cheap, it will boost growth in Infrastructure,
Housing, Auto, Industry etc.
India is 2nd fastest growing country in the world in terms of GDP growth. GDP represents the
economic health of country. It is also used as an indicator for most governments and
economic decision-makers for planning and policy formulation. It also helps the investors to
manage their portfolio by providing economic picture of country. GDP in India since last few
years shows impressive data. In the year 2008 GDP was low at 3.89% and recorded highest
double digit growth of 10.26% in the year 2010 while again showing downtrend till 2012 and
rose since 2013 to reach at 7.29% in the year 2014.
Total banking sector assets have increased at a CAGR of 9.4% to US$ 1.8 trillion during
FY1014. Corporate demand for bank loans have grown due to continued infrastructure

investments, and due to other policy decisions such as reducing oil subsidies, issuing of
telecom spectrum licenses and the proposed abolition of penalty on loan prepayment.
In the services sector, financial, real estate, and professional services as well as construction
were the primary drivers. On the other hand, the agriculture sector lost momentum, adversely
impacted by the deficient southwest monsoon (SWM) which affected kharif sowing and by
unseasonal rains and hailstorms at the time of Rabi harvesting.
The banking sector is considered as crucial for employment generation and development of
economy. Service sector contributes a major part in GDP of country. Banking sector is the
major contributor in service sector. Total employees in banks have been grown up from
9,54,684 in 2008-09 to 10,96,984 in 2012-13.

Conclusion:
The Indian economy is on the brink of a major transformation, with several policy
initiatives. Positive business sentiments, improved consumer confidence and more controlled
inflation are likely to prop-up the countrys the economic growth. Enhanced spending on
infrastructure, speedy implementation of projects and continuation of reforms are expected to
provide further impetus to growth. All these factors suggest that Indias banking sector is also
poised for robust growth as the rapidly growing business would turn to banks for their credit
needs. The banking sector is laying greater emphasis on providing improved services to their
clients and also upgrading their technology infrastructure, in order to enhance the customers
overall experience as well as give banks a competitive edge.

References:
1. Malviya M., Oct-Nov-Dec. 2012, Financial Development and Economic Growth: The Case of
Indian Banking Sector, Bookman International Journal of Accounts, Economics & Business
Management, Vol. 1 No: 2, Pg. No: 90-94.
2. Dr. Rao S. D., Jan-June 2007, Reforms in Indian Banking Sector An Evaluative Study of the
performance of Commercial Banks, Journal of Contemporary Research in Management, Vol.1, Pg.
No: 115-121.
3. Swamy V., Banking Sector Reforms 3.0 for India, at 14 th Thinkers & Writers Forum, Skoch
Development Foundation.
4. Singh P., Role of commercial Banks in Economic Development: Indian Perspective, Tactful
Management Research journal, Pg. No: 135-140.
5. Srinivas B. G. & Shanabhogara R., Sept. 2014, Banking Sector Reforms & Development of
Banking Industry in India, Asian Journal of Multidisciplinary Studies, Pg. No: 274-282.
6. Rehman ur Wali, 2011, Banking Reforms & Economic Growth: A Case Study of Pakistan,
International Conference on Financial Management and Economics, Vol. 11, Pg. No: 405-409.
7. Mrs. Azeez B. A. & Oke, Micheall Ojo, (2012), A Time Series Analysis on the effect of Banking
Reforms on Nigerias Economic growth, IJER, Vol. 3i4, Pg. No: 26-37.
8. Vyas Parimal H. & Zaveri Bijal, Banking Sector reforms in India: Some Reflections.
9. RBI Report2013, Banking Structure in India The Way Forward.
10. RBI Annual Report on Economic Review 2014-15

Websites:
1. http://www.business-standard.com/article/finance/2014-15-a-year-of-financial-sector-reforms115032601077_1.html
2. http://www.ibef.org/industry/banking-india.aspx
3. https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=A%20Profile%20of%20Banks
4. www.ibef.org
5. http://data.worldbank.org/country/india
6. http://www.inflation.eu/inflation-rates/india/historic-inflation/cpi-inflation-india.aspx