The importance of a financial system in the development process of an economy has been extensively dealt within the paper. Since Scheduled Commercial Banks, in India, have nearly three-fourth of the total financial assets of all financial institutions, they have a cardinal role to play in the development process of the economy. This paper examines whether their intermediation has improved, subsequent to initiation of sector reforms since 1991. Evidence found by the paper suggests improvement in the intermediation process under reform, which supports the view that removal of control would improve the allocative efficiency of banks. Such an improvement has to be, however, appreciated against the observed backdrop of declining credit-deposit ratio; declining share of productive sectors like agriculture and industry, and manufacturing in particular, in total bank credit; and a corresponding increase in the share of personal loans and finance. The paper concludes by pointing out the need for further improvement in the intermediary role of banks in terms of financing productive sectors in the economy.

The role of a financial system in the development process of an economy has been well emphasized in the literature as it helps to channel resources from savers to investors—a process known as financial intermediation.1 In the absence of intermediation, a dichotomy between decision to invest and decision to save would arise leading to a low level of economic growth. A financial system has three elements,namely, intermediaries, instruments and markets. Intermediaries are those who mediate between savers and investors, instruments are the claims issued, and market is a place where such claims are transacted. Role of intermediaries is fundamental in translating savings into investment.2 Levine aptly summarized the emergence and function of intermediaries as: The cost of acquiring information, enforcing contracts and making transactions create incentives for the emergence of financial intermediaries to mitigate the negative repercussions of these market frictions. In arising to ameliorate market frictions, financial intermediaries may facilitate the efficient allocation of resources across space and time (Levine, 2001: 691).