Strengthening the Resilience of Small and Medium Banks in India: Challenges, Performance, and Regulatory Landscape.

Abstract

Small banks in India, comprising regional rural banks, cooperative banks, and small finance banks, serve as the backbone of grassroots banking by catering to underserved and rural populations. Their contribution to economic development, financial inclusion, and local entrepreneurship is vital, yet often overlooked in mainstream financial discourse. The critical impact of India’s small and medium banks on the nation’s economy often remains understated, especially on the front of driving financial inclusivity. Their pivotal role is overshadowed by the multifaceted challenges they face, including fluctuating financial performance and issues with non-performing assets which have failed to catch the eyesight of the regulator. By examining the regulatory and governance hurdles these banks encounter, such as a web regulatory governance structure, heightened mandate for priority sector lending, and increased interference by political entities, the paper advocates for a separate and comprehensive overhaul of resolution mechanisms for small banks. The paper underscores the necessity for adaptive and long-due policy interventions which would bolster operational stability of these banks, enabling them to continue their essential contributions to India’s economic fabric without succumbing to systemic vulnerabilities.