INTRODUCTION Financial sector reforms in India were undertaken as a corollary to the trade and industrial policy reforms initiated in 1991. Banks, as a group being the most important financial intermediary in the economy, have received special attention in the reform process. There was a realization in both academic and policy circles that the policy of social control of banks had led to a decline in the productivity, profitability, and efficiency of the banking sector. The main objective initially had been to nurse the banks back to health, provide them more operational flexibility, introduce a more competitive environment in the banking sector, and develop a regulatory and supervisory regime wherein depositors’ interests are adequately looked after. Whatever the faults of the pre-reform regime, there is little doubt that in this regime a bank network, which improved financial access to India’s poor, most of whom resided in the poorer states, was successfully developed. Sen and Vaidya (1997) have demonstrated that there was a distinct tendency towards equalization in the population per bank branch across states between 1969 and 1994, indicating a rapid shrinkage in interstate disparities with regard to demographic penetration of banking services. This period saw a substantial increase in the amount of deposits mobilized, essentially due to the positive real rate of return that was available on bank term deposits between 1974 and 1988 due to the fact that these rates were directly administered by the government. In addition, the government put in place a directed credit programme which stipulated that scheduled commercial banks should lend 40 per cent of their net bank credit to the priority sector (agriculture, small-scale industries, and exports). Moreover, it was required that 25 per cent of the priority sector loans should be made to weaker sections of society. This, without doubt, had led to a higher cost of intermediation (Narasimham Committee 1998). Nevertheless, the importance of these achievements needs to be recognized. The fact that India compared very favourably with other developing countries in the distribution of financial services has been well documented (Basu and Srivastava 2005). This is important for various reasons. It is argued that financial outreach has an impact on poverty reduction (Beck et al. 2004; Honohan 2004). Providing access to finance to the less well-off sections of the population can be seen as a method