Major Banking Reforms of 21st Century

India is one among the top 10 economies in the world. Banking sector in India is robust and forms the most dominant segment of the financial sector. The banking industry acts as a pivot in the economic development of the country. The face of the banking industry has been witnessing changes over the years. The main objective of the financial sector reforms in India initiated in the early 1990s was to create an efficient, competitive and stable financial sector that could then contribute in greater measure to stimulate growth. For instance, the last decade witnessed the embracement of ATM, internet and mobile banking.

Major Reforms of the Indian Banking Industry in 21st century

Following are the major financial sector reforms in the recent years in India. All of the reforms are aimed at creating efficient and stable financial sector which contributes in a major way to stimulate growth.

Major reforms are:

  • The passage of Banking Laws (Amendment) Bill, 2011 has paved way for the entry of more banks and foreign investments. The entry of new banks is expected to create competition which will enable banks to improve their operational efficiency.
  • FDI ceiling for the banking sector got increased from 49% to 74%.
  • Liberal branch licensing policy has been adopted.
  • RBI has issued guidelines for priority sector lending certificates (PSLCs) to meet the priority sector lending targets.
  • RBI has allowed the banks to hold additional reserves linked to property holdings, foreign currency translation reserves and deferred tax assets by up to 35,000 crore (state-run banks) and Rs 5,000 crore (privately owned banks) to increase their capital.
  • The scheduled commercial banks are permitted to grant non-fund based facilities including partial credit enhancement (PEC) for those customers who do not possess any fund based facility from any of the banks in India.
  • Ministry of Finance is planning to increase its capital support to the state-run banks by about Rs 80,000-100,000 crore to boost their capital.
  • Under the Pradhan Mantri Jan Dhan Yojna (PMJDY) over 31 crores of bank accounts have been opened by June 2018 as a part of financial inclusion campaign.
  • National Investment and Infrastructure Fund (NIIF) has been created in 2015 as a special fund to deal with stressed assets of banks.
Challenges Ahead

The most prominent aftermath of the reforms is the increase in competition and impact on profitability of banks. The challenge for banks now is to manage the narrowing down of the profit margins while at the same time improving the productivity. Other challenges includes reinforcing and adapting better technology to meet the customer needs, sharpening of management skills, greater customer orientation, sharpening of risk management skills etc. With ever increasing competition, banks have to address the above issues if they need to survive in the changing millennium.

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