Asof date in India, there are 4 financial institutions (FIs) which are under thefull fledged directives of the Reserve Bank of India (RBI).
These are financialinstitutions Export Import Bank of India (EXIM Bank), National Bank forAgriculture and Rural Development (NABARD), National Housing Bank (NHB), and SmallIndustries Development Bank of India (SIDBI). From a regulated banking systemwith social and national objectives integrated into operations, banking sectormoved to a deregulated regime with increased competitive pressure. As observedby Hanson (2005)i1, India began to reverse its long standing policies of financial repressionand banking sector intervention in favour of policies supporting a greater rolefor the private sector in development, with more and better allocated credit.The radical shift was inevitable, to deal with the weakness of banking sectorduring pre-liberalization period and highlighted the condition of execution ofprudential norms and international best practices for encouraging the bankingsector. The regulatory authorities and various committees’ revealed theirconcern over the deteriorating asset quality and alarming level of NonPerforming Assets (NPAs) in bank’s balance sheet.
The health code system onassessment of loan during pre-liberalization period, to a greater extent, couldnot reveal the real quality of asset. This was also due to the accountingpractices that allowed banks to book interest on accrual basis, thus hiding aproper differentiation between quality assets and bad assets of banks. Toimprove the efficiency of banking sector and to enable it to competeeffectively in the world of globalization, liberalization and opening up ofmarket, banking across the world incorporated prudential norms for incomeassessment, income classification and provisioning. In Indian Banking sector,the reform measures initiated in the post-liberalization period were part ofbroader structural adjustments policies in response to worsening asset quality,inefficiencies in banking sector and focused mainly to develop a vibrant andefficient banking sector.
Financial institutions unlike other sector areconsidered as indispensable element for social and economic development ofIndia. The objective of financial institutions in over the period is mainlyfocused on supporting government to achieve the social and economic agenda. Indianfinancial system observed nationalization of banks in 1969 and synchronizedbanking environment, it was primarily focused to attain social and economic progressobjectives of government.
This was achieved through spreading bank branches,providing employment opportunities, directed lending, regulated interest, etc.Even though banking contributed significantly to support government inachieving its performance objectives, bank’s performance was not satisfactoryin terms of profitability and quality of assets.