Economic context of Banking Essay Example | Topics and Well Written Essays - 2000 words

Economic context of Banking - Essay Example There has been revolutionary structural reformation after financial liberalization in 1990s. The Reserve Bank of India (RBI) made its firm role as the administrative agency of supervision and banking. The structure of the banking sector has undergone a significant transformation wherein the public sector banks have been observed in losing their relative importance which resulted to have more domestic private banks and more foreign banks. Even if a number of measures have been taken by the government to ensure higher stability, competition and efficiency, there still exist some problems in with the banking system, for example profitability of public sector banks has not been increased, and foreign banks are not performing at their desired level and so on. The overall performance of the banking sector has improved over time, but desired level of performance has not been reached. Hence the paper also provides my opinions regarding some recommendations. Introduction In many countries gov ernment plays an important role in maintaining competition, efficiency and stability in the operation of banking system. However, it would be quite interesting to consider a particular country and examine to what extent government supports the banking system in enhancing competition, stability and efficiency. For this purpose, the banking system of India will be chosen in this paper as India has a very active and a very interesting banking sector where public, private and foreign banks have their own importance and operate simultaneously. This paper will first look at the banking system of India and the role that the Indian government does play in increasing competition, stability and efficiency in Indian banking sector. Thus it will go on analyzing the extent to which the governmental efforts have been able to enhance the performance of the banks. Finally, some recommendations would be forwarded on how to effectively increase competition, stability and efficiency of banking sector. Indian Banking sector and the role of government in increasing competition, stability and efficiency in Indian banking sector The Government of India when nationalizing all the popular Indian banks in 1969 sought that banking was "inspired by a larger social purpose" and should attend national importance and goals such as rapid development in agriculture, small scale industry and exports. Now a day a body of direct and indirect proof is there to show that credit markets in developing countries frequently fail to make credit where its social product might be the highest. (Agarwal, 2003) Nationalization of Indian banks has helped in meeting social needs of the country. Earlier, the banks only concentrated on lending their money to big industrial houses. But after nationalization, the banks extend their loans to small scale industrialists, peasants and other individuals also. Nationalization has also helped in expansion of banking network to the rural areas as well. Peasants and small scale industrialized are also getting loans at lower interest rates. All these have helped in the growth and development of relatively poor segment of the population. (Agarwal, 2003; Mohan, 2005) However, nationalization has put various regulations