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More generally, there have been convincing theoretical buttressings of
the financial policies of the 1970s and 1980s. It is said that those policies
had followed Patrick’s (1966) supply-leading strategy, or they had resembled
an endogenous growth strategy in which finance itself was seen as a crucial
factor of production like knowledge and in which the influence of institutional
arrangements in regard to finance on growth rates has been forcefully
emphasized (see Eschenbach 2004; see also RBI 2001). Relying on K.N. Raj’s
work, Mihir Shah, et al (2007) argue that,
“rural credit was not merely a commodity that needed to reach the poor
to free them from usurious money lenders, it could also be seen as a
public good critical to the development of a backward agrarian economy
like India, especially as Indian agriculture moved decisively into the
green revolution phase, where private investments by richer farmers
needed massive credit support” (p.1353).
A Distinct Pause in the 1990s
In the EPW Research Foundation’s studies on the financial sector, we
have been repetitively emphasizing that sustained expansions in sectoral credit
growth in real terms during the latter half of the 1970s and the whole of the
1980s served
inter alia
as an important causal factor in the acceleration of
growth rates in agriculture and unregistered manufacturing (Shetty 2002).
Contrariwise
, after the financial sector reforms began in the early part of
the 1990s, every banking indicator representing post-nationalisation success
– spread of branch banking in rural and historically under-banked regions,
improved credit-deposit ratios of these regions, better credit delivery for
agriculture, small-scale industries, small borrowers and other priority areas
– received a setback. No doubt, the unprecedented growth of the banking
system for two decades prior to the 1990s brought in its trail many serious
infirmities in the working of the whole financial system: reduced bottomline,
large non-performing assets, poor capital base and insufficiency of loan loss
provisions, and exclusive staff and other organisational weaknesses leading
to serious deterioration in house-keeping tasks as well as customer service.
By the end of the 1980s, even the post-nationalisation successes cited above
had begun to wear thin. Therefore, the evolution of banking after the 1990s
reflected the enormous challenges that the public sector banks in particular
faced in cleaning up and consolidating their operations in an entirely new
competitive and reform-zest environment. Apart from the onerous discipline
imposed by regulatory and prudential norms as part of financial sector
reforms, there also occurred a sea-change in the role of banks as a result
