{"id":101095,"date":"2026-04-30T17:53:03","date_gmt":"2026-04-30T12:23:03","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=101095"},"modified":"2026-04-30T17:53:03","modified_gmt":"2026-04-30T12:23:03","slug":"banking-sector-reforms","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/banking-sector-reforms\/","title":{"rendered":"Banking Sector Reforms, Evolution, Phases, Reforms"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">A well-functioning banking system is essential for channelising savings into productive investment and supporting inclusive growth. In India, despite its developmental role, the sector has historically faced issues such as dominance of public sector banks, inefficiencies, rising non-performing assets, and governance gaps. These challenges have led to continuous reforms, especially since the economic reforms of 1991, to make the banking system more efficient, competitive, and resilient.<\/span><\/p>\n<h2><b>Evolution of Banking in India<\/b><\/h2>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Modern banking in India began during the colonial period with the establishment of <\/span><b>agency houses <\/b><span style=\"font-weight: 400;\">and <\/span><b>presidency banks<\/b><span style=\"font-weight: 400;\"> such as the <\/span><b>Bank of Bengal (1806), Bank of Bombay (1840), and Bank of Madras (1843).<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These institutions were later merged in 1921 to form the <\/span><b>Imperial Bank of India<\/b><span style=\"font-weight: 400;\">, which functioned both as a commercial bank and a quasi-central bank.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">After Independence, concerns emerged that the banking system was largely serving the interests of urban and industrial elites, while neglecting agriculture and rural sectors.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To address this imbalance, the <\/span><b>Imperial Bank was nationalised in 1955<\/b><span style=\"font-weight: 400;\"> and converted into the <\/span><b>State Bank of India, <\/b><span style=\"font-weight: 400;\">marking the beginning of state intervention in banking.<\/span><\/li>\n<\/ul>\n<h2><b>Pre-Reform Phase: Nationalisation and State-led Banking (1969-1991)<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The <\/span><b>period between 1969 and 1991 is known as the era of nationalisation and state-controlled banking in India. <\/b><span style=\"font-weight: 400;\">During this phase, the government took direct control of the banking system with the objective of using banks as instruments of social and economic development rather than purely profit-making institutions.<\/span><\/p>\n<p><b>Key Problems Before Nationalisation:\u00a0<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banking services were concentrated in urban areas only<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rural India had almost no access to banks<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Moneylenders dominated rural credit markets and charged very high interest rates<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Industrial loans were concentrated in a few big business groups<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Financial inequality was increasing.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">To solve these problems, government did Nationalisation of Banks, mainly in two phases:\u00a0<\/span><\/p>\n<p><b>First Phase (1969)<\/b><span style=\"font-weight: 400;\">: In 1969, the Government of India nationalised 14 major <a href=\"https:\/\/vajiramandravi.com\/current-affairs\/commercial-banks\/\" target=\"_blank\"><strong>commercial banks<\/strong><\/a>. These were banks with deposits above \u20b950 crore.<\/span><\/p>\n<p><b>Second Phase (1980)<\/b><span style=\"font-weight: 400;\">: In 1980, the government nationalised 6 more banks, expanding state control further.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">During this phase, several important policy measures were introduced:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Expansion of bank branches in rural and semi-urban areas to increase accessibility<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Implementation of priority sector lending to ensure credit flow to agriculture, small-scale industries, and weaker sections<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Regulation of interest rates by the government<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Directed credit programmes to support targeted sectors<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These measures succeeded in expanding the reach of banking services and improving access to credit. However, they also created several structural problems.\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The absence of competition, combined with excessive government control, led to inefficiencies in operations.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">\u00a0Political interference in lending decisions weakened credit discipline.\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">As a result, banks experienced declining profitability and a growing burden of non-performing assets.<\/span><\/li>\n<\/ul>\n<h2><b>Liberalisation Phase (1991-1998): Structural Reforms and Shift to Market-Oriented Banking<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The banking sector reforms in India began in the backdrop of the balance of payments crisis of 1991, which exposed deep structural weaknesses in the economy, including the financial system. At that time, the banking sector was highly controlled, inefficient, and burdened with poor-quality assets.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To address these issues, the government initiated reforms based on the recommendations of the <\/span><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/narasimham-committee\/\" target=\"_blank\"><b>Narasimham Committee<\/b><\/a><span style=\"font-weight: 400;\"> which was appointed in <\/span><b>1991.\u00a0<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The objective was to transform the banking system from a state-controlled, regulation-heavy structure into a more efficient, competitive, and market-driven system.<\/span><\/li>\n<\/ul>\n<h3><b>Reduction in Statutory Pre-emptions (1991-1997)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Before reforms, banks were required to keep a large portion of their deposits with the government:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Statutory Liquidity Ratio was as high as about 38.5 percent in 1991<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The <strong><a href=\"https:\/\/vajiramandravi.com\/current-affairs\/cash-reserve-ratio\/\" target=\"_blank\">Cash Reserve Ratio<\/a><\/strong> was around 15 percent<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This meant that nearly half of bank resources were locked and unavailable for lending. Reforms reduced these ratios gradually during the 1990s, which increased funds available for lending, improved profitability of banks and allowed more credit flow to the private sector.\u00a0<\/span><\/p>\n<h3><b>Deregulation of Interest Rates (1992-1997)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Earlier, interest rates on loans and deposits were fixed by the government, leaving little flexibility for banks.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Starting in 1992, interest rates were gradually deregulated<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">By the mid to late 1990s, most lending rates were market-determined<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This enabled banks to:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Price loans based on risk and market conditions<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Compete for customers<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Improve efficiency in resource allocation<\/span><\/li>\n<\/ul>\n<h3><b>Entry of Private Sector Banks (1993 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Based on the recommendations of the <\/span><b>Narasimham Committee<\/b><span style=\"font-weight: 400;\">, the Reserve Bank of India issued guidelines in January <\/span><b>1993<\/b><span style=\"font-weight: 400;\"> permitting the establishment of <\/span><b>new private sector banks<\/b><span style=\"font-weight: 400;\"> to introduce competition and improve efficiency.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Licences were granted in the mid-1990s, leading to the emergence of banks such as <\/span><b>HDFC Bank (1994) and ICICI Bank (1994)<\/b><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These banks brought technology-driven operations, improved risk management practices, and professional governance standards<\/span><\/li>\n<\/ul>\n<p><b>Impact:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Public sector banks were compelled to enhance efficiency, service quality, and innovation<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Competition increased across lending, deposits, and retail banking<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The banking system became more market-oriented and customer-focused<\/span><\/li>\n<\/ul>\n<h3><b>Introduction of Prudential Norms (1992 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Based on the recommendations of the <\/span><b>Narasimham Committee<\/b><span style=\"font-weight: 400;\">, <\/span><b>prudential norms were introduced from 1992 <\/b><span style=\"font-weight: 400;\">to improve the transparency and financial health of banks.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Before these reforms, banks often overstated profits and concealed bad loans, as there were no strict rules for identifying or reporting stressed assets. To address this, the following norms were introduced:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Income Recognition Norms<\/b><span style=\"font-weight: 400;\">: Banks could recognise income only when interest was actually received, and not on loans that had stopped performing<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Asset Classification Norms<\/b><span style=\"font-weight: 400;\">: Loans were classified into categories such as standard and non-performing based on repayment performance<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Provisioning Norms<\/b><span style=\"font-weight: 400;\">: Banks were required to set aside a portion of their profits to cover potential losses from bad loans<\/span><\/li>\n<\/ul>\n<p><b>Impact:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Bank balance sheets became more transparent and realistic<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The actual level of non-performing assets became visible<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Financial discipline and accountability in lending improved<\/span><\/li>\n<\/ul>\n<h3><b>Capital Adequacy Requirements (1992 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Based on the recommendations of the Narasimham Committee, India introduced capital adequacy norms from 1992 in line with international banking standards (Basel norms) to strengthen the financial stability of banks.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Before this reform, many banks operated with insufficient capital, making them vulnerable to losses and increasing the risk of failure.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks were required to maintain a minimum level of capital in proportion to their risk-weighted assets, meaning that riskier loans required higher capital backing<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">This requirement is known as the <\/span><b>Capital to Risk-Weighted Assets Ratio<\/b><span style=\"font-weight: 400;\">, which ensures that banks have enough own funds relative to the risks they take<\/span><\/li>\n<\/ul>\n<p><b>Impact:<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks gained a financial cushion to absorb losses, reducing the risk of collapse<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Lending became more prudent and risk-sensitive, as higher-risk loans required more capital<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Indian banking system became more aligned with global regulatory standards, improving credibility and stability<\/span><\/li>\n<\/ul>\n<h2><b>Second-Generation Banking Reforms (1998-2004)<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">The second phase of banking sector reforms was initiated following the recommendations of the <\/span><b>Narasimham Committee II, submitted in April 1998.\u00a0<\/b><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">These reforms were implemented broadly between 1998 and the early 2000s, with the objective of consolidating the gains of the first phase (1991 onwards) and strengthening the institutional foundations of the banking system.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">While the first phase focused on liberalisation, this phase emphasised prudential regulation, financial stability, and structural strengthening.<\/span><\/li>\n<\/ul>\n<p><b>Strengthening Asset Quality and Prudential Norms (1998\u20132002): <\/b><span style=\"font-weight: 400;\">During this period, significant reforms were undertaken to improve the transparency and reliability of bank balance sheets:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">By the late 1990s, stricter norms for income recognition, asset classification, and provisioning were enforced<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The definition of non-performing assets was progressively tightened, and by March 2004, the norm was aligned to 90 days overdue, in line with international standards<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Provisioning requirements were increased to ensure that banks maintained adequate buffers against bad loans<\/span><\/li>\n<\/ul>\n<p><b>Strengthening Regulation and Supervision (1998 onwards): <\/b><span style=\"font-weight: 400;\">Following 1998, the regulatory role of the central bank was significantly enhanced:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Introduction of <\/span><b>risk-based supervision<\/b><span style=\"font-weight: 400;\"> around 1999\u20132000, moving beyond traditional inspection methods<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Gradual implementation of <\/span><b>Basel Capital Adequacy norms<\/b><span style=\"font-weight: 400;\">, with India moving toward Basel One compliance by the early 2000s<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Strengthening of off-site monitoring systems for continuous supervision<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These measures ensured that banks maintained sufficient capital and followed sound risk management practices, thereby improving systemic stability.<\/span><\/p>\n<p><b>Banking Sector Consolidation and Structural Reorganisation (1998\u2013early 2000s): <\/b><span style=\"font-weight: 400;\">The Narasimham Committee in 1998 recommended a <\/span><b>three-tier banking structure<\/b><span style=\"font-weight: 400;\">, which influenced policy thinking in subsequent years:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Although large-scale mergers were not immediately executed, the period saw the beginning of voluntary consolidation efforts<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Policy emphasis was placed on creating strong, well-capitalised banks capable of competing in a liberalised environment<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This laid the groundwork for later consolidation phases, especially those undertaken after 2017.<\/span><\/p>\n<p><b>Enhancing Autonomy and Governance of Public Sector Banks (1998\u20132003):<\/b><span style=\"font-weight: 400;\">Reforms during this period sought to reduce excessive government control:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Recommendations in 1998 emphasised granting operational autonomy to public sector banks<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Steps were taken in the early 2000s to improve board-level professionalism and accountability<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Efforts were made to delink routine banking decisions from direct government intervention<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Although implementation remained partial, this phase marked the beginning of governance reforms in public sector banks.<\/span><\/p>\n<p><b>Technological Modernisation (Late 1990s\u2013Early 2000s): <\/b><span style=\"font-weight: 400;\">The period from 1999 to 2004 witnessed the early stages of banking technology adoption:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Introduction of core banking solutions in major banks<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Computerisation of branches accelerated after 1999<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Expansion of electronic payment systems such as Electronic Clearing Service<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These developments improved operational efficiency, reduced transaction time, and enhanced customer experience.<\/span><\/p>\n<p><b>Transparency and Market Discipline (1998 onwards): <\/b><span style=\"font-weight: 400;\">To improve accountability and public confidence<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Disclosure norms were strengthened in the late 1990s and early 2000s<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Banks were required to publish detailed financial statements, including asset quality indicators<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Greater emphasis was placed on market discipline, allowing stakeholders to assess bank performance<\/span><\/li>\n<\/ul>\n<h2><b>Phase of Addressing Financial Stress and Non-Performing Assets<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">In the years following the global financial crisis of 2008, the Indian banking sector experienced a significant increase in stressed assets, particularly due to excessive lending to infrastructure and corporate sectors. To address this issue, a number of corrective measures were introduced:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Reserve Bank of India conducted an Asset Quality Review to ensure transparent recognition of non-performing assets<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The government undertook large-scale recapitalisation of public sector banks to strengthen their balance sheets<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Institutional mechanisms were developed for the resolution of stressed assets<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">A major reform in this context was the enactment of the <\/span><b>Insolvency and Bankruptcy Code<\/b><span style=\"font-weight: 400;\">, which provided a time-bound process for resolving insolvency and improving recovery rates for creditors. This marked a significant step toward strengthening credit discipline and improving the overall health of the banking system.<\/span><\/p>\n<h2><b>Recent Banking Sector Reforms (2014 onwards)<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Since 2014, banking reforms in India have focused on bringing more people into the banking system, fixing bad loans, merging banks to make them stronger, improving how banks are run, and using technology to make services faster and easier.<\/span><\/p>\n<h3><b>Financial Inclusion<\/b><span style=\"font-weight: 400;\">\u00a0<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">A major breakthrough occurred with the launch of the <\/span><b>Pradhan Mantri Jan Dhan Yojana <\/b><span style=\"font-weight: 400;\">in August 2014, which aimed to provide universal access to banking services.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Millions of previously unbanked individuals were brought into the formal financial system through zero-balance accounts<\/span><\/li>\n<\/ul>\n<h3><b>Digital Payments Revolution and Technological Transformation (2016 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The period after 2016 witnessed an unprecedented expansion in digital financial infrastructure.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The launch of the <\/span><b><a href=\"https:\/\/vajiramandravi.com\/upsc-exam\/unified-payments-interface-upi\/\" target=\"_blank\">Unified Payments Interface<\/a> in 2016<\/b><span style=\"font-weight: 400;\"> created a real-time, interoperable payment system<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Rapid growth of <\/span><b>mobile-based payments <\/b><span style=\"font-weight: 400;\">transformed transaction behaviour, especially after the demonetisation exercise in November 2016<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Expansion of <\/span><b>Aadhaar-enabled payment systems<\/b><span style=\"font-weight: 400;\"> and <\/span><b>digital identity infrastructure <\/b><span style=\"font-weight: 400;\">strengthened authentication and reduced transaction costs<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">This phase positioned India as a global leader in digital payments, while also improving transparency and formalisation of the economy.<\/span><\/p>\n<h3><b>Resolution of Stressed Assets and Creation of Institutional Mechanisms (2016 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The persistence of non-performing assets, particularly after the credit boom of the previous decade, required systemic intervention.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The enactment of the <\/span><b>Insolvency and Bankruptcy Code in 2016<\/b><span style=\"font-weight: 400;\"> provided a time-bound framework for insolvency resolution<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">To complement this, the <\/span><b>National Asset Reconstruction Company Limited<\/b><span style=\"font-weight: 400;\"> was established in <\/span><b>2021<\/b><span style=\"font-weight: 400;\"> as a \u201cbad bank\u201d to aggregate and resolve stressed assets<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Reserve Bank of India introduced revised frameworks for stressed asset resolution in 2018 and subsequent years<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">These measures aimed to clean up bank balance sheets, improve credit discipline, and revive lending capacity.<\/span><\/p>\n<h3><b>Consolidation of Public Sector Banks (2017-2020)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Recognising the problem of fragmented and weak public sector banks, the government initiated a series of mergers:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The State Bank of India merged its associate banks in 2017, creating a larger and more efficient entity<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">In 2019\u20132020, a major consolidation exercise reduced the number of public sector banks significantly through mergers<\/span><\/li>\n<\/ul>\n<h3><b>Governance Reforms and Institutional Strengthening (2016 onwards)<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">Improving governance in public sector banks became a key priority:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Bank Boards Bureau was established in 2016 to professionalise appointments and improve governance practices<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The Prompt Corrective Action framework was strengthened to monitor weak banks and impose restrictions where necessary<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Efforts were made to introduce performance-based evaluation and accountability mechanisms<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Although progress has been gradual, these reforms represent an attempt to address structural governance weaknesses.<\/span><\/p>\n<h3><b>Recent Legislative Reform: Banking Laws (Amendment) Act, 2025<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">The Banking Laws (Amendment) Act, 2025 was enacted to update outdated provisions in banking laws, strengthen governance in public sector banks, and improve depositor convenience in a modern financial system. Key reforms include:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Enhanced nomination facility<\/b><span style=\"font-weight: 400;\">: Depositors can now appoint up to four nominees (simultaneously or successively), addressing earlier limitations that created legal and procedural difficulties in transferring funds after death<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Improved audit framework<\/b><span style=\"font-weight: 400;\">: Public sector banks are given greater flexibility in determining auditor-related matters, aiming to attract higher-quality auditors and improve scrutiny of financial statements<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>Co-operative bank reforms<\/b><span style=\"font-weight: 400;\">: Extension of director tenure and regulatory clarity aim to improve continuity, professionalism, and stability in co-operative banking institutions<\/span><\/li>\n<li><b>Investor protection<\/b><span style=\"font-weight: 400;\">: Unclaimed deposits, shares, and financial assets can be transferred to a central fund, reducing idle funds and aligning banking practices with broader corporate governance standards.<\/span><\/li>\n<li><b>Updated thresholds:<\/b><span style=\"font-weight: 400;\"> The Act increases the limit for defining \u201csubstantial interest\u201d (that is, the level of financial stake a director or their relative can hold in a company) from <\/span><b>\u20b95 lakh to \u20b92 crore<\/b><span style=\"font-weight: 400;\">. If this stake crosses a certain limit, it is treated as a <\/span><b>conflict of interest<\/b><span style=\"font-weight: 400;\">, and the bank is restricted from lending to that company. The earlier limit of \u20b95 lakh had become outdated over time due to inflation and economic growth, causing even small and routine investments by bank directors to be classified as \u201csubstantial interest,\u201d which in turn created unnecessary restrictions on lending despite the absence of any real conflict of interest.<\/span><\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>Banking sector reforms in India cover evolution from nationalisation to liberalisation, digital banking, and NPA resolution, improving efficiency, inclusion, and financial stability.<\/p>\n","protected":false},"author":11,"featured_media":100691,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[786],"tags":[7253],"class_list":{"0":"post-101095","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-general-studies","8":"tag-banking-sector-reforms","9":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101095","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=101095"}],"version-history":[{"count":1,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101095\/revisions"}],"predecessor-version":[{"id":101111,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/101095\/revisions\/101111"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/100691"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=101095"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=101095"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=101095"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}