Liberalization of banking services in India

Abstract

Liberalization of banking services in India has been a gradual process with the Reserve Bank of India (RBI) slowly but steadily coming up with different measures to this end. Liberalization goes hand in hand with regulatory enhancements – since unbridled liberalization can be hazardous. However, regulatory stifling due to over-caution can quash the very purpose of bringing in a liberalization measure. It is with this fundamental understanding that the study has been undertaken. Relevant observations and recommendations have been provided at the appropriate places. The effect of ownership structures on the Indian Banking System, especially the state ownership of banks, has been studied through a literature survey and then critiqued. Suggestions towards improving domestic and global competitiveness and soundness of the Indian Banking system have been put forth keeping in mind the need for better financial inclusion. Liberalization measures already undertaken in this direction and the associated regulatory reforms have been cited and analyzed. Following this, the role of foreign banks in India and foreign investment in Indian banks has been looked at. What it takes for the Indian Banking System to support Fuller Capital Account Convertibility (FCAC) and the regulatory enhancements required have been discussed through a gap analysis. To conclude, an international comparative study with emerging economies like Brazil has been undertaken which would give a clear picture as to where Indian Banking System stands vis-à-vis its peers and what would be the best way forward for it. Sources related to Indian Banking have been primarily obtained from discussion papers, reports and circulars issued by the Reserve Bank of India (RBI) from time to time. Data about the banking system of other economies has primarily been obtained from the International Monetary Fund (IMF’s) reports and reports issued by the corresponding Central Banks in the public domain. Various other sources used in the study have been mentioned without exclusion in the ‘References’ section.