India's banking sector needs market-friendly reforms: New York University don Viral Acharya

Prof Acharya emphasised that while the economic backdrop plays a significant role in shaping the banking sector, it is the political economy that also drives its trajectory.
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BENGALURU: India’s banking sector must undergo market-friendly reforms instead of reforms that favour incumbents, said Professor Viral V Acharya, CV Starr Professor of Economics at New York University Stern School of Business, during his keynote address at IIM Bangalore on Friday.

Speaking at the inauguration of the IMR Doctoral Conference 2025, Prof Acharya laid out a roadmap for the future of India’s banking system, stressing the importance of addressing both economic and political factors in driving long-term reforms.

Prof Acharya emphasised that while the economic backdrop plays a significant role in shaping the banking sector, it is the political economy that also drives its trajectory. “The banking system in India is steered not by the economic backdrop alone, but by the political economy of banking as well.”

He explained that the nationalisation of banks was not solely a measure for financial inclusion, but also a political strategy. “It is a misconception that banks in the country got nationalised for financial inclusion, there was the realisation of political objectives as well. Very often, banks are used by the government to achieve delivery of populist expenditure.”

Discussing the evolution of India’s banking sector, Professor Acharya outlined how the system had stabilised over the past decade following the financial excesses of the preceding years, especially after the Global Financial Crisis.

One of the key points in his address was the discussion on digital finance, where he commended India’s approach. “India got this right from the very beginning. Digital finance got a big boost post-Covid,” he said.

Turning to broader economic concerns, Prof Acharya addressed the issue of concentrated wealth in India, particularly the ‘savings glut of the rich.’ He explained how the wealth gap has led to an imbalance in economic benefits.

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