The predominance of government ownership in the banking sector has led to insufficient competition and consequently caused under-lending to the private sector, a World Bank report has said.
"The lack of competition has increased the cost of intermediation, lowered the efficiency of capital allocation and led to under-lending to the private sector," the report on 'India's services revolution' said.
The report said recent evidence had suggested that banking systems that were predominantly government-owned tended to be less efficient and less aggressive in lending to the private sector.
The report points out that while the marketshare of the public sector banks in total assets declined 10 percentage points between 1991 and 2001, the present public sector ownership still accounts for 80 percent share.
Continued dominant position of public sector banks in the banking system was also revealed by the fact that they accounted for over 85 per cent of the employment and 81 per cent of the deposit base of India's commercial banks, the report said.
The report also highlighted the fact that concentration ratios in the Indian banking sector remained virtually stagnant over the 1990's.
he share in total deposits of the top five banks, all of which are public sector banks, has changed from 50.2 in 1993 to 48.1 in 2000, it said.
Although the government has permitted foreign direct investment up to 49 per cent in banking and financial services barring insurance, the report points out that there are now only 18 foreign banks operating in India compared to 39 in 1997.
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