Prior to reforms, DBs operated in an over-protected environment with most of the funding coming from assured sources at concessional terms. In the wake of financial sector reforms, the RBI started monitoring the functioning of DBs with a view to impart market orientation to their operations. In tune with the emerging scenario, their access to low cost funds of the RBI was discontinued.

On their part, DBs took several steps to reposition themselves and reorient their operations in the new competitive environment. They have diversified their activities into new areas of business such as investment banking , stock broking, and other fee and commission based business. Nevertheless, their business has slowed down and their operations have become less profitable. The Committee on Banking Sector Reforms (Chairman: M. Narsimham), 1998 recommended that DBs should, over a period of time, convert themselves into banks or NBFCs (Non- Banking Financial Institutions). It is noteworthy that ICICI, one of the leading DBs, has merged with the ICICI Bank.

Historically, the Reserve Bank of India and the Central Government have played a major role in financing these institutions by subscribing to the share capital , by allowing them to issue Government guaranteed bonds, and by extending long term loans at concessional terms. However, with the financial sector reforms in the nineties, concessional lending by the RBI and the Government was phased out, leaving the financial institutions to rely for financing their needs on the equity capital and the debt markets. Expansion of their equity base through public offers and public issues of long term bonds has become an important element of their market based financing. In order to provide flexibility, the Reserve bank has allowed FIs to raise resources by way of term deposits. Commercial Deposits and borrowings from the money market is allowed within the umbrella limit fixed in terms of net owned funds. In order to expand their scope of business, a large number of them have been entering into various businesses- venture capital, mutual funds, banking and insurance.