Liberalisation in the 1990s

The liberalization of the Indian banking sector in the 1990s marked a significant shift in the country’s financial landscape. By allowing private and foreign banks to enter the market, the government introduced competition, technology, and innovation to the banking sector. These changes revitalized the sector, improved services, and contributed significantly to India’s broader economic growth. The introduction of new banking methods, a shift to retail banking, and the relaxation of FDI norms further opened up opportunities for foreign investment and global banking practices in India. The sector continues to evolve today, shaped by both traditional and modern banking practices.

Introduction to Liberalization

  • Liberalization Policy: In the early 1990s, the Indian government initiated a policy of liberalization, which aimed at opening up the economy and reducing restrictions on businesses and industries. One significant aspect of this was the liberalization of the banking sector, which had been traditionally dominated by government-owned banks.
  • Key Changes: The policy led to the introduction of private-sector banks, marking a major shift from the previously nationalized and government-controlled banking system. The goal was to modernize the banking sector, increase competition, and improve efficiency by allowing private and foreign banks to operate in India.

New Generation Tech-Savvy Banks

  • Private Sector Banks: Under the liberalization policy, the government issued licenses for a few private banks, often referred to as New Generation Banks. These banks were characterized by their tech-savviness, modern banking practices, and focus on customer service. The introduction of these banks revolutionized the sector and brought in innovative banking products and services.
  • Examples of New Generation Banks:
    • Global Trust Bank: This was the first of the new-generation banks, which later merged with Oriental Bank of Commerce.
    • IndusInd Bank: Another prominent private bank that emerged after liberalization.
    • UTI Bank (now Axis Bank): One of the leading private sector banks post-liberalization.
    • ICICI Bank: Initially an industrial finance corporation, ICICI transformed into a major private sector bank.
    • HDFC Bank: Another key player that became a leading private bank following liberalization.

These new-generation banks were technologically advanced and focused on providing superior customer service, leveraging digital banking methods, and introducing innovative financial products.

Growth of the Banking Sector

  • Rapid Growth: The liberalization policy, coupled with India’s economic boom during the 1990s, revitalized the entire banking sector. The banking industry saw rapid growth with contributions from all three categories of banks:
    1. Government Banks: Continued to play a dominant role in banking, although reforms were introduced.
    2. Private Banks: These banks brought innovation, technology, and competition into the sector.
    3. Foreign Banks: These banks also contributed to the development of India’s financial services industry, offering global banking services and practices.

The banking sector underwent a transformation, with modernized systems, better customer service, and a variety of new banking products and services being introduced.

Relaxation of Foreign Direct Investment (FDI) Norms

  • Increased FDI in Banks: The government proposed relaxing norms for Foreign Direct Investment (FDI) in Indian banks. Initially, foreign investors were restricted to owning a maximum of 10% voting rights in Indian banks. However, under the new policy, this limit was proposed to be increased, allowing greater foreign participation and investment in Indian banks.
  • Foreign Investment Limit: Over time, the limit for foreign investment in banks increased:
    • In 2019, Bandhan Bank raised the foreign investment percentage limit to 49%.
    • The foreign investment limit in banks was further increased to 74%, although some restrictions remained in place to ensure Indian control over the banking system.

Impact on Bank Operations

  • Change in Banking Practices: Before liberalization, Indian banks primarily followed the 4-6-4 method (borrow at 4%, lend at 6%, and end operations by 4 PM). This was a rather traditional and conservative way of banking. The liberalization of the banking sector introduced a more dynamic and competitive environment, which led to modern banking practices.
  • Tech-Savviness and Innovation: The introduction of private and foreign banks brought technological innovations into the sector, such as:
    • Computerization of banking services
    • Online banking and ATMs
    • Credit cards and debit cards
    • Introduction of 24/7 banking services.

Traditional public sector banks had to adapt to this changing environment by modernizing their operations, embracing technology, and offering new financial products to stay competitive.

Retail Banking Boom

  • Retail Banking Growth: One of the key results of liberalization was the retail banking boom in India. With the rise of private banks and foreign banks, customers began demanding more personalized and accessible banking services. The sector saw an increase in:
    • Personal loans
    • Home loans
    • Auto loans
    • Credit cards

These products became widely available to the growing middle class, and banks began to offer more competitive interest rates, services, and incentives to attract retail customers.

  • Customer Expectations: With more options available, customers began expecting better customer service, quicker processing, and more flexible banking products. This shift in demand forced banks to innovate further, creating a more customer-centric banking environment.