WHAT HAPPENED IN 1991?
Financial Institutions such as Commercial Banks, investment banks, stock exchange operation and foreign exchange market is controlled by Reserve Bank of India(RBI), Central Bank of India. It is responsible for the issue and supply of the rupee and the regulation of the banking system.(decides the amount of money that the bank can keep with themselves, fix interest rates, nature of lending to various sectors, etc.). It also manages our country's main payment systems and works to promote and develop the economy
Initially, before 1991, RBI’s role was that of a regulator. As a regulator, RBI job was to fix interest rate structure. Also, commercial banks were forced yo to consult RBI in almost all financial matters.
Now with new economic policy, one of the major aims of financial sector reforms was to reduce the role of RBI from regulator to facilitator of financial sector. This means that the financial sector may be allowed to take decision on many financial matters without consulting RBI.
And before 1991 private sector banks were not encouraged as public sector was given more importance in government policies and the foreign investment in Indian financial markets was restricted.
The reform policies led to the establishment of private sector banks, Indian and foreign, which increased the size of competition and provided better services to the consumers. Foreign investment limit in banks was increased. Before, approval of RBI was required to set up new branches by the bank. But now banks which fulfill certain conditions are given freedom to set up new branches without the approval of RBI.
WHAT HAPPENED IN 2020?
The merger of 10 public sector banks into 4 banks, which came into existence on 1st April 2020. Mergers take place between a weak bank and a stronger Bank to improve its functioning and widen its capital base. Similarly, two equally strong Banks come together to improve their market share
The objective behind this merger is to help the banks to compete with the global banks and to increase their operational efficiency.
The interesting thing is, this came into effect during coronavirus lockdown as planned. There were huge disruptions in the preparations and questions raised, whether the merger would be possible if the pandemic is not contained. Our Finance Minister, Nirumala Sitharaman, made it clear that the plan will be executed as planned.
WHY IS MERGING OF BANKS NECESSARY?
Imagine a person is having 10 shops in the same market selling same product. He has to hire employees, furnish all the 10 shops, pay utility bills for all the shops. He can earn the same money or more by keeping a single shop. Similarly, by merging banks, Banks will become strong. With efficient management of resources, banks can focus on upgrading services and revenues, optimum staff utilization, and cost efficiencies. Unnecessary branches will be closed. A large bank has a lower risk profile since overall institutional risk is decreased by a numerous similar-risk, complimentary loans. This merger helped in increasing their lending capacity and made their balance sheet strong. It sped up the economic development of our country.
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