Impact of Banking Reforms on The Profitability and Productivity of Banking in India : An Analysis

Since the nationalisation of the fourteen major commercial banks in India in 1969 and the direction of banking expansion and credit deployment policies in the country by the Government/ the Reserve Bank of India, the banking system of the country expanded rapidly, with emphasis on bringing about a balanced expansion of the banking system in the country and bringing about a balanced deployment of bank credit among the different sectors of the economy, through what is called the policy of credit direction, prescribing sectoral targets to be attained by the banks in the deployment of credit. The rates of interest on bank deposits, and credit to the different sectors of the economy were prescribed by the Govemment/the Reserve bank of India through an administered interest rate policy. The banking system expanded rapidly with emphasis on expanding banking facilities in the rural areas and in the underdeveloped regions of the country and on a balanced sectoral distribution of credit so as to promote the balanced development of the economy. Consequently, the commercial banking system of the country had become more balanced in terms of branch network and credit deployment in 1991 than in 1969.

However, the system suffered from certain shortcomings. Quality of banking service deteriorated. Asset quality of banks declined resulting in high levels of non-performing assets of the banks. Profitability of the banks declined. These short comings of nationalised banking in the country from 1969 to 1991 led to the initiation of banking sector reforms based on the recommendations of the Committee on the financial System under the chairmanship of Shri M.Narasimham, a former governor of the Reserve Bank of India, with a view to improving the quality of service of the banks, their efficiency, profitability and productivity.

This book, as its very title, "Impact of Banking Reforms on the Profitability and Productivity of Banking in India - An Analaysis", indicates, is an attempt at analysing the impact of ese reforms on the profitability and productivity of banking :ndia. Its approach is both descriptive and analytical. While it presents a descriptive account of the reforms, it uses analytical tools for assessing the impact of the reforms on the profitability and productivity of banking in the country. While the relationship between bank-size and bank-profit is analysed using data for individual banks, it adopts a macro methodology to assess the productivity of banking using a macro production function, considering sectoral use of bank credit as the explanatory variables and the resulting Gross Domestic Product (GDP) as the explained variable. The book is a slightly modified version of the Ph.D. thesis. with the same title, in Economics submitted by the author to Mangalore University and for which the University awarded the Degree of Doctor of Philosophy (Ph. D.) in May 2013.