India's Banking Sector Reforms

The performance of the Indian banking sector is intimately correlated with the overall health of the economy, perhaps more so than any other sector. The sector is tasked with supporting other economic sectors like agriculture, small-scale businesses, exports, and banking activities in developed commercial areas and remote rural areas. The improvement of asset quality, application of rational risk management procedures, and capital adequacy are some of the main functions of the Indian banking system.

Banking sector reforms are implemented to improve the condition of the banking system. Multiple banking sector reforms have been introduced in India in the context of economic liberalisation and the growing trend toward globalisation. The main objective is to improve operational efficiency and promote banks' health and financial reliability, so that Indian banks can meet internationally recognised standards of performance.

Current Scenario
In 2021, the world suffered through multiple waves of the Covid-19 pandemic, bringing supply chain and logistics disruptions. In order to restore and sustain growth on a long-term basis while ensuring that inflation stays within the target range, India's monetary policy committee (MPC) decided to maintain the status quo on the policy repo rate. Additionally, the Reserve Bank of India (RBI) kept up its targeted efforts to address industry credit needs by:

• Providing unique refinancing facilities for all-India financial institutions (AIFIs)
• A term liquidity facility to finance the infrastructure and services for Covid-related healthcare
• Providing special long-term repo operations (SLTRO) for small finance banks (SFBs)

The overall banking sector in India has evolved significantly over the last decade, from being major lenders to the industry, to being the majority providers of personal loans, vehicle loans, credit cards, and housing loans. Private banks are gradually taking over from public sector banks as the main lenders in the country. Between the end of 2016-2021, the outstanding loans of public sector banks have gone up by Rs. 14.4 trillion (US$ 180.26 billion), whereas the outstanding loans of private banks have gone up by Rs. 22.8 trillion (US$ 285.41 billion), which is a difference of almost 60%.

Another recent change in the banking sector is the emergence of e-banking, which is crucial in offering better services to clients. Internet banking, e-wallets, and mobile banking are some of the new methods that have replaced the traditional methods of conducting transactions.

Banking Reforms
The reforms in the Indian banking sector have been introduced to increase the efficiency, stability, and effectiveness of banks. Some of these recent reforms are:

• National Asset Reconstruction Company Limited (NARCL): Setting up of the NARCL was announced in the Union Budget 2021-22. The objective was to construct a 'bad bank' which would house bad loans of Rs. 500 crore (US$ 62.63 million) and above.
  • There are already 28 existing asset reconstruction companies (ARCs) on the market. However, due to the sizeable and fragmented nature of the bad loan book held by different lenders, significant amounts of NPAs continue to appear on bank balance sheets. Thus, more choices and alternatives like the NARCL are required.
  • NARCL will have a dual structure – it will consist of an asset management company (AMC) and an asset reconstruction company (ARC) to recover and manage stressed assets. It is a collaboration between private and public sector banks (PSBs), but PSBs will maintain 51% ownership in NARCL.
  • NARCL will be capitalised through equity from banks and non-banking financial companies (NBFCs). If necessary, it will also issue new debt. The guarantee provided by the Government of India will lower the need for up-front capital. The NARCL will be assisted by the India Debt Resolution Company Ltd (IDRCL).
  • In August 2022, the NARCL offered to buy the distressed loan accounts of five companies, including Future Retail.

• India Debt Resolution Company Ltd. (IDRCL): The IDRCL is a service company/operational entity whose purpose is to manage the assets of the NARCL with the help of turnaround experts and market professionals. The NARCL will buy assets by presenting an offer to the lead bank; IDRCL will be included for management and value addition after NARCL's offer is accepted. Public FIs and PSBs will hold a 49% stake in IDRCL, and the rest will be with private banks.

• Digital Rupee: The central bank's digital currency (CBDC), the RBI's digital rupee, was announced in the Union Budget 2022-23, and is expected to be launched by the end of this financial year. India's digital economy is predicted to benefit greatly from the introduction of the digital rupee.
  • A CBDC is a digital representation or token of a nation's legal currency.
  • A CBDC can benefit customers with better liquidity, scalability, acceptance, convenience of transactions with anonymity, and quicker settlement.
  • Similar to how UPI made digital cash more user-friendly, this development will increase people's access to digital currencies.
  • Adopting the digital rupee is expected to help cross-border remittances and reduce the transaction cost for businesses and the government.
  • The digital rupee would reduce the settlement risk in the financial system.

• National Bank for Financing Infrastructure and Development (NaBFID): The NaBFID has been set up as a Development Financial Institution (DFI) to aid India in developing long-term infrastructure financing.
  • The NaBFID has both developmental and financial objectives.
  • Unlike banks, DFIs do not take deposits from the general public. Instead, they raise funds from the government, the market and multilateral institutions, and are often backed by the government's guarantee. The government initially holds 100% of the shares in the bank, which may subsequently be reduced to 26%.
  • The NaBFID was set up as a corporate body with an authorised share capital of Rs. 1 lakh crore (US$ 12.53 billion).
  • The NaBFID plans to finance multiple projects that are a part of India's Rs. 6 trillion (US$ 75.18 billion) National Monetisation Pipeline.

Road Ahead
India's financial regulators have helped craft one of the strongest banking and financial systems in the world. In order to provide better and more accessible banking experiences, the Indian government has implemented several reforms and policies, which help the country deal with any change in economic conditions and demographics.

Information technology and electronic money transfer systems have become the two cornerstones of modern banking development in the area of technology-based banking. Banks now offer a variety of products that go far beyond traditional banking, and these services are now available 24/7.

Consumers today are more demanding of virtual banking experiences due to the advancement of digital technologies. The pandemic has only increased the demand for stress-free access to financial products and services, and the necessity for quick and easy access to banking products, services, and information. After internet and mobile banking, payments banks will provide a third alternative channel, increasing efficiency and lowering expenses associated with serving customers in rural and semi-urban areas. Upcoming technical advancements, such as the digital rupee, will significantly impact India's banking sector as we move forward.