v leeladhar : the evolution of banking regulation in india – a retrospect on some aspects special address by mr v leeladhar, deputy governor of the reserve bank of india, at the bankers ’ conference ( bancon ) 2007, mumbai, 26 november 2007. * * * it is my pleasure to be here with you this afternoon on the occasion of the bankers ’ conference, which has become a landmark annual event in the indian banking industry. i am indeed grateful to the organisers for their kind invitation, which provided me an opportunity to share my thoughts on the evolutionary path of the banking regulation in india over the past several decades. the topic, to my mind, appears particularly relevant today when india has completed 60 years of its independence this year. while during the last six decades, the indian banking system has indeed come a long way traversing an arduous and tortuous path, it would perhaps be appropriate to assess in retrospect and take stock of how far we have come from where we started and what more remains to be achieved. i would, therefore, like to briefly present a bird ’ s eye view of the salient milestones crossed in the long journey of our banking system and to take stock of the current status of the industry. i would also like to take this opportunity to briefly touch upon certain doubts, which somehow seem to have crept in, about certain aspects of the current regulatory dispensation for the indian banking sector. institutional evolution of the indian banking as most of you would, no doubt, be aware, the indigenous system of banking had existed in india for many centuries, and catered to the credit needs of the economy of that time. the famous kautilya arthashastra, which is ascribed to be dating back to the 4th century bc, contains references to creditors and lending. for instance, it says " if anyone became bankrupt, debts owed to the state had priority over other creditors ". similarly, there is also a reference to " interest on commodities loaned " ( prayog pratyadanam ) to be accounted as revenue of the state. thus, it appears that lending activities were not entirely unknown in the medieval india and the concepts such as “ priority of claims of creditors ” and “ commodity lending ” were established business practices. during the period of modern history, however, the roots of commercial banking in india can be traced back to the early eighteenth century when the bank of calcutta was established in june 1806 – which

bank of japan ’ s may report of recent economic and financial developments1 bank of japan, may 21, 2001. * the bank ’ s view * * adjustments in economic activities have been under way, as production is declining reflecting a fall in exports. with regard to final demand, the recovery in private consumption continues to be weak as a whole, but there are somewhat positive signs in some indicators. housing investment is declining slightly. public investment is increasing. on the other hand, net exports ( real exports minus real imports ) continue to decrease reflecting a slowdown in overseas economies such as those of the u. s. and east asia. business fixed investment seems to be leveling off while the exporting conditions continue to deteriorate. industrial production is declining sharply, reflecting such developments in final demand and as excessive inventories of electronic parts and some materials are building up. the environment surrounding corporate profits is becoming more severe in line with the decline in exports and production, and business sentiment of firms is worsening particularly in manufacturing. income conditions of households have not yet deteriorated, but the decline in production is starting to affect the household sector mainly through the decrease in hours worked. as for the outlook, public investment is expected to continue increasing for the time being. net exports, however, are likely to continue decreasing for a while, reflecting the ongoing adjustments in overseas economies. business fixed investment is projected to peak out and then to start a downturn, as the effects from the implementation of a backlog of orders sustaining investment dissipates. in addition, inventory adjustments in goods such as electronic parts and materials will continue for the time being. industrial production, therefore, is expected to follow a declining trend. in these circumstances, corporate profits are likely to start decreasing and thus household income is expected to weaken gradually. overall, the adjustments are likely to continue for some time, mainly in production. meanwhile, it is generally thought that overseas economies, particularly the u. s., will follow a gradual recovery trend from the latter half of 2001. in this case, exports, helped also by the depreciation of the yen, are expected to underpin the economy once again. however, attention should still be paid to the possibility of a prolonged deceleration of overseas economies and the risk of a negative impact on the economy induced by developments in foreign and domestic capital markets via corporate and household confidence. with regard to prices, import prices are rising, mainly reflecting the depreciation of the yen. domestic