About one million bank employees began a two-day strike on Wednesday to protest against reforms that could ease mergers rules and allow more private capital into the sector, hitting banking transactions and some market trading operations.
The strike, involving mainly the staff of state-run banks that make up around 70% of the sector, came a day ahead of an expected parliamentary approval to some changes in rules to allow bigger role for investors in banks.
Foreign ownership of Indian public sector banks is capped at 20%, and some global banks have been pitching for a hike in their holding limit to help them expand their presence in Asia's third-largest economy by acquiring the smaller regional banks.
India has struggled to reform and liberalise key sectors such as banking, retail and insurance, partly because of political opposition and fears of the exploitation of domestic interests by foreign investors.
The strike, which forced No 1 lender State Bank of India to halt trading in onshore spot foreign exchange markets, comes as another blow to the economy that faces its worst slowdown in almost a decade.
"Any move towards increasing the private sector role in the banking sector is a big fear for the unions and that makes them oppose it," said DH Pai Panandiker, the head of New Delhi-based think tank the RPG Foundation.
"The changes in the banking laws can improve the health of the banks quite considerably," he said.
"The unions fear if the government continues with the reforms their positions will weaken and it will lead to job losses."
The Indian parliament is likely to approve on Thursday amendments to banking laws that include raising shareholders' voting rights limit in private banks to 26% from 10%, a senior government source said.
The amendments, which were earlier expected to be approved on Wednesday, will meet a major demand of foreign investors seeking more say in the country's financial system, though it is unlikely trigger fresh private investment in the sector and the 20% cap on foreign ownership in public sector banks will not change.
Analysts say the approval by parliament of the banking legislation amendments would be seen as a positive step by investors and would ease fears of "policy paralysis" in a government that has seen its free market reforms stall.
It was not immediately possible to assess the financial losses due to the strike, though trading volumes in government bonds were thin at Rs. 23.6 billion ($425 million) as against the average Rs. 40-50 billion in the first hour of trade.
Public sector State Bank has halted trading in onshore spot foreign exchange markets as its settlement operations' staff have not yet shown up for work, sources said, adding the bank could start trading later in the day if the situation improves.
In many cities across the country, bank branches were shut as thousands of employees, many brandishing banners, congregated in a large pickets and shouted slogans against the reforms in the financial sector.
"Unless the government relents or the government gives some positive response, we are going to intensify our agitation," said JP Sharma, vice president, All India Bank Employees Association.
Sharma said the amendments in the banking laws were "neither in the interest of the banking industry, nor in the interest of the customers, nor in the interest of the common people of this country".
Many public sector banks in Connaught Place, the commercial hub of the national capital New Delhi, saw only two or three employees trickle in for work early on Wednesday, while many joined their colleagues outside the branches.
"Both sides suffer. The public is inconvenienced and we also lose our daily clients," said Shashi Sharma, chief manager of Punjab National Bank, sitting in a dimly-lit vacant office.
In Kolkata, almost all public sector banks were shut on Wednesday, as some employees shouted slogans against the government policies outside their offices and others join in a protest march.