Public banks heavily dominate the banking sector. Although not burdened with foreign debt, many of them are saddled with non-performing loans, estimated at 20 percent of gross total assets, and are significantly exposed to the heavy industries, particularly steel. Weak performance in heavy industries is expected to increase the bad debts of the banks, particularly of the Industrial Development Bank, India's largest corporate lender. Fortunately, the financial sector has escaped the worst of the Asian crisis because of its highly regulated state. The financial sector is, however, being slowly modernized.
Most public banks are highly inefficient, with high intermediation costs.
Until now, they have been protected from competition by regulations on the activities of private banks. They are, however, starting to face greater competition from foreign private banks. The government is committed under WTO obligations to grant a minimum of 12 branch licenses to foreign banks every year. Furthermore, new rules are being passed that will force the public banks to comply more closely with the more stringent international regulatory standards, affecting their classification of bad loans and their capital requirements. The government has also decided to open the insurance sector to foreign investors for the first time, allowing 26 percent foreign direct equity in private insurance firms.