Banking

It is in the interest of banks to expand the supply of credit, and most banking regulations are designed to limit this tendency. It is in the interest of private bank managers to give in to this tendency (in self-interest) and provide credit indiscriminately, irrespective of macroeconomic considerations, as the 2007 crisis has shown. Perhaps we could all learn from India’s risk-averse public sector banks, which are stressed from time to time, but have never seen multiple bank failures. 

This paper examines some of the consequences of the banking sector reforms in India which were an integral part of the liberalisation process of the economy initiated in 1992. In particular, the data show that, in the post-reform period, investment in government securities by banks has remained persistently high and there has been a significant reduction in the flow of credit (as a proportion of deposits) to the real sectors of the economy. There have also been significant changes in the flow of credit to various groups and sectors within the economy, some of which might be thought not to be in conformity with the stated social goals of the government.