India's banking sector is inefficient and customers pay the cost, making reforms imperative

RBI governor Raghuram Rajan recently promised banking reforms, which includes more operational freedom for foreign banks if they adhere to some conditions. If Rajan can deliver on his promise, the impact will be significant as Indian bankingneeds more competition. A more competitive banking sector will translate into economic gains and provide access to the organised financial sector for more people.

Presently, Indian banking packs a lot of inefficiency, which is passed to consumers in terms of higher costs. Enhanced competition in any business will result in declining profitability as the opportunity to make easy money disappears. Banks here however have largely maintained their profitability over the last decade, suggesting that the 154 commercial banks hardly push each other.

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