Evolution of banking in India Traditionally banking operations in the country have been overwhelmingly dominat ed by scheduled commercial banks.

The activities of these banks are regulated by RBI. In 1955 GOI in accordance with recommendation of AIRCSC took over Imperial bank of India and reconstituted it as SBI. In 1969 nationalization act was pass ed under which 14 banks were nationalized each with a minimum of 50 crore deposi ts. The main objectives for nationalization were to mobilize savings and canaliz e them for productive purposes. By 1980, six more banks were nationalized each w ith at least 200 crore deposits. But the situation by early 1990s, many public sector banks turned unprofitable a nd under- capitalized due to accumulation of non performing assets and earning l ow rates of return and capital inadequacy. Role of banks in Shaping India:The "privileged role" of the banks is a result of their unique features. For a financial system to mobilize and allocate saving o f the country successfully and productively, and to facilitate day to day transa ctions there must be class of financial institutions apparently banks provide al l these facilities through their large branch network spread all over the countr y. The economies of scope between deposit taking and lending give banks an infor mation advantage over finance companies and others. The structure and working of the banking system are integral to country's financial stability and economic g rowth. Liabilities and assets of bank:Deposits constitute the major source of funds for banks which constitute up to75%-80% of total bank liabilities in India along wi th borrowings from other banks and RBI. Assets of banks include cash in hand and balance with the RBI assets with the banking system investments in government a nd other approved securities and bank credit. Banking sector reforms : In 1991, Narasimham Committee setup by GOI recommended structural reforms and liberalization programme in the banking sector among them the following have bee n implemented by the GOVT. Deregulation of entry of new private sector banks both domestic as well as forei gn to increase the allocation efficiency of the system.Liberalization of branch licensing policy allowing banks more freedom to plan branch expansion in respons e to market needs for increasing competition among public sector banks. Phase wi se deregulation of interest rates both on deposits and advances under which bank s were freed to set interest rates on all term deposits up to 1year and on all a dvances greater than 2lakhs.Introduction of capital adequacy norm capital to ris ky asset ratio of not less than 8%inline with the norms set by Bank for Internat ional Settlement (BIS).Institution of transparent prudential and income recognit ion norms to obtain true picture of financial situation of banks. Allowing publi c sector banks to access capital market to raise equity to meet the additional c apital needs. Gradual reduction of CRR and SLR to increase profitability of this sector. Impacts of banking reforms Reforms have encompassed banks, stock markets, GOVT securities, institutional de velopment. The period of reforms has witnessed the emergence of universal bankin g. Reforms have had a positive impact on the working of commercial banks as reflect ed in their cleaner balance sheets, reduction in NPA, and increase in operating profit. The real interest rates increased with banks investing more in GOVT unde r prudential norms there by increasing the demand for bank credit. CDR decreased from 60.6%in 1991-92 to 52.2%in 1993-94 but it recovered after that to 58.6%in 1995-96. The total commercial lend to private sector has been increased from 40%

in 1999 to 43%in 2004 and the total commercial credit increased from 122$billon sin 1999to 211$billions in 2004. Indian banks lend a small portion of deposits to borrowers which is 61$billions in 204 which is very low compared to other countries with china 130 and US 93$bi llionsin 2004. India's government and state owned companies consume 70%of surplu s savings with public sector borrowings contributing to 7%of total GDP where as private corporate borrowing contributed only 3.2% on an average from 1994 to 200 4. Private sector banks Prior to reforms the private sector banking was substantial when compared to pub lic sector with the policies of GOVT and other risk aspects. Liberalization and deregulation of banking system opened the gates for new private firms to enter a nd old ones to rebuild. Private sector banks have been showing positive profits on an average even thoug h they have not received any incentives as the public sector banks gained from G OVT. The growth rate in deposits in private sector banks has surpassed public se ctor banks inspite of this public sector banks still possess more than 90%of tot al deposits in this sector.Similarly in accumulation of NPA and overall profitab ility private sector has been performing well than public sector. In 2005 privat e sector banks managed to provide 7%of total credit lended to industrial sector from a minimum contribution of about 3%in 1996. With the increasing profitabilit y and liberalization in the banking sector foreign private investors have been s howing keen interest in India. Sectorial distribution of commercial bank credit: The industrial sector received 52% in 1989-90 and 54% in1996-97. Within the industrial sector the share of med ium and large industries declined from 61% in 1968 and 33% in1986, however its s hare improved to 40% by 97.The share of SSI increased from 7-15% in 1968-1990 pe riod, it was 13.67% in 1996-97and went to 18%by 2004.However by 2004 total priva te corporate sector percentage increased to 43% including priority lending. Credit recourses to industrial sector: For a sustained growth rate in the develo pment of an economy the needs of productive sector should be met at an increasin g rate. Allocation credit recourses to industrial sector means a productive use of these resources which is a positive outcome in Indian context as the total am ount as well as percentage of credit allotted to this sector as a whole has been increasing in the period after reforms. Indian manufacturing firms generally de pend more heavily on external sources of finance than internal resources during 1990-2001. Among the former, loans from banks and financial institutions have be en important sources of finance. Old, large, profitable, low-risk firms (so-called "high- quality" firms) tend to be more internally financed than firms that are new, small, unprofitable, and o f high risk (so-called "low-quality" firms). Further, the dependence of the form er on CP and foreign borrowings is greater than that of the latter. On the other hand, the latter tend to borrow more heavily from domestic banks and financial institutions. Over all, equity finance has become one of the most important exte rnal financing sources during 1990-2001.New, high-risk firms have also increased equity financing during 1990-2001, although their share capital in terms of tot al liabilities has remained smaller than old, low-risk firms. This suggests that during the reform period, these low-quality firms have gained access to the equ ity market, helping them to diversify their financing sources.

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