Banking Sector Reforms

`Financial institutions in India need more freedom


From UPSC perspective, the following things are important :

Prelims level: Not much

Mains level: Paper 3- Challenges faced by lending financial institutions and the issue of stagnant credit growth in India

The article deals with the issue of credit and financial institutions in India. It also suggests the five changes needed in the lending financial institutions in India.

Financial institutions and credit in India

  •  India has labour and land but not enough capital.
  • The case for foreign financial institutions is also simple — their technology, processes, and experience raise everybody’s game.
  • India is open — foreigners own 25 per cent of public equity, 90 per cent of private equity, and Google and Walmart are UPI’s biggest volume contributors.
  • India’s challenge over the last 10 years has been bank credit.
  • Credit-to-GDP ratio is stuck at 50 per cent, banking concentration measured by flow has increased by 70 per cent, and bad loans exceed Rs 10 lakh crore.

Significance of  lending financial institutions

  • Foreign institutions are unlikely to lend when needed most and lend to small enterprise borrowers.
  • Bank numbers have practically remained unchanged since 1947 despite world-leading net interest margins.
  • Nationalised banks that have an eight-times higher chance of bad loan, would save Rs 35,000 crore annually with industry benchmarked productivity.
  • regulators prioritise domestic stakeholders.
  • The home bias for global bank lending is accelerating.
  • UPI crossing 2 billion monthly transactions demonstrates how mandated interoperability, local innovation, and enlightened regulation help insurgents take on incumbents.

5 Changes required in lending financial institutions

  • 1) The biggest impact lies in creating a nationalised bank holding company that replaces the Finance Ministry’s Department of Financial Services, has no access to government finances, and is governed by an independent board.
  • 2) We must licence 25 new full banks over 10 years.
  • 3) We must expect and empower the RBI to deal with bank challenges earlier, faster, and invasively, by reimagining post-mortems, granting listed bank capital induction flexibility and making regulation ownership agnostic.
  • 4) We must explore new eyes for banking supervision that include differential deposit insurance pricing.
  • 5) Finally, financial stability and innovation are not contradictory; let’s blunt regulatory barriers between banks, non-banks, and fintech.


The opportunities for India arising from the coming Asian century, China’s contradictions and China’s new inward focus strategy come not once in a decade but once in a generation. Let’s empower our financial services entrepreneurs to exploit this opportunity.

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