Bank Financing in India

The Indian banking sector has been remarkably successful in some respects. Its immense size and enormous penetration in rural areas are exemplary among developing countries, as is its solid reputation for stability among depositors. The penetration in rural areas has been associated with a reduction of poverty and a diversification out of agriculture.2 However, in recent years, it has been widely viewed as being both expensive and inept. In particular, it has been argued that most banks are overstaffed, that a large fraction of their assets are nonperforming, and that they under lend, in the sense of not putting enough effort into their primary task of financing industry.3 A wide range of remedies have been suggested ranging from strengthening the legal system to punish defaulters, to abolishing the targeted lending programs (so-called priority sector rules), to privatization of the entire banking system.