Financial sector reforms introduced in the early 1990s as a part of the structural reforms have touched upon almost all aspects of banking operations. For a few decades preceding the onset of banking and financial sector reforms in India, banks operated in an environment that was heavily regulated and characterised by sufficient barriers to entry, which protected them against too much competition.
This regulated environment set in complacency in the manner in which banks operated and responded to the customer needs. The administered interest rate structure, both on the liability and the assets sides, allowed banks to earn reasonable spread without much efforts. Despite this, however, banks’ profitability was low and NPLs level was high, reflecting lack of efficiency.