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Banking Reform in India∗ - page 38 / 57

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period 1969-2000 gives the following: from 1969-1980, the ratio of deposits in nationalized banks to deposits in private banks was approximately 5 to 1; from 1980 to 1993, the ratio was approximately 11-1; post liberalization, the ratio has been falling, and in 2000 stood at about 7.5 to 1.47

Thus, under the accounting that is most favorable to public sector banks, they squeak by as

less costly public vs.

to the government than private banks would be

private sector banks (the ratio of money spent bailing

6

2 3

to

1,

less

than

the

deposits

ratio).

However,

using

out the

estimate of 540 billion rupees total cost gives a 12-1 ratio, which sector banks lost a greater portion of their deposits to bad loans.

would

imply

that

the

public

6

The Future of Banking Reform

When we take this evidence together, where does it leave us? There are obvious problems with the Indian banking sector, ranging from under-lending to unsecured lending, which we have discussed at some length. There is now a greater awareness of these problems in the Indian government and a willingness to do something about them.

One policy option that is being discussed is privatization. The evidence from Cole, discussed above, suggests that privatization would lead to an infusion of dynamism in to the banking sector: private banks have been growing faster than comparable public banks in terms of credit, deposits and number of branches, including rural branches, though it should be noted that in our empirical analysis, the comparison group of private banks were the relatively small ”old” private banks.48 It is not clear that we can extrapolate from this to what we could expect when the State Bank of India, which is more than an order of magnitude greater in size than the largest “old” private sector banks. The “new ” private banks are bigger and in some ways would have been a better group to compare with. However while this group is also growing very fast, they have been favored by regulators in some specific ways, which, combined with their relatively short track record, makes the comparison difficult.

Privatization will also free the loan officers from the fear of the CVC and make them some- what more willing to lend aggressively where the prospects are good, though, as will be discussed

47 Source, Reserve Bank of India figures. The ratio for 2000 excludes the new private sector banks. 48 Cole (2004).

38

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