Before the 1991 budget by Dr
Manmohan Singh that changed the face of the Indian economy, the government had
the full authority over the economy and the banking sector. Banking sector had
no sense of private entrepreneurship. Though the budget of 1991 changed the
rules of the game, there were many players who made a tremendous contribution of their own in liberalising the banking
industry.
C. Rangarajan,
RBI governor (1992 – 1997)
Before 1991, the banking section was much different
than today. There were no rules for bad loans, the bank didn’t have any fixed
deposit schemes. There were no mentions of either profit or loss in banking
sections. And to open a branch banks had to wait for months to get the RBI’s
permission. There was no financial marketplace.
RBI dictated the exchange rates based on what the bureaucrats felt it should
be, they also decided who got loans. All in all,
bankers did not do banking, they were mere executioners.
That is till the C.
Rangarajan became the governor of the RBI, public sector banks are still
largely in bad shape, but there're
competition and consumers have been able to fund their dream homes and cars
through loans. Also, individuals have made fortunes by buying bank stocks in
two decades. All thanks to the banking reforms Rangarajan lead from 1992 to
1997.
Besides playing an active
role in rupee devaluation as deputy governor, Rangarajan laid the foundation
for modern Indian banking without having to turn the economy, markets and banks
inside out. He was met with some resistance when he prescribed capital norms
and he had to convince stakeholders that this was an essential step to make the
system more vibrant, viable and reliable.
Under the leadership of
Rangarajan, private banks came into being. He unleashed the competitive spirit
in Indian banking, resulting in the HDFC Banks and ICICIs of today. He was
instrumental in ending the government's monarchy over the banking sector and
stopping its abuse of power and position by monetising debt, which had made
monetary policy ineffective and undermined RBI's independence.
Rangarajan's imprint was not
only confined to monetary policy, it also extended to the elimination of automatic monetization and a shift in the issuance of government bonds to market-based
auction system that reduced the fiscal
dominance of monetary policy and led to the development of government debt
markets.
But, the unfortunate part is
his reforms were discontinued after his tenure. The Narasimhan committee
proposed the DE-liberalisation of the banking sector as the RBI became hesitant
about moving ahead with the liberalisation because of a deep-rooted suspicion
of open markets.
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