BANKING SECTOR REFORMS IN INDIA

What is Banking Sector Reforms? Adding new services and improvement in existing banking system is known as banking sector reforms.
The last two decades witnessed the maturity of India's financial markets. Since 1991, government of India took major steps in reforming the financial sector of the country. These steps were taken on the recommendations of NARASIMHAM COMMITTEE I and NARASIMHAM COMMITTEE II.

NARASIMHAM COMMITTEE I
The Narasimham Committee-I felt their recommendations will improve the solvency, health and efficiency of institutions. The measures were aimed at ensuring a degree of operational flexibility internal autonomy for public sector banks in their decision-making process, and greater degree of professionalism in banking operations

MEASURES GIVEN BY NARASIMHAM COMMITTEE I

Liberalization measures, Prudential norms, Competition directed measures, Supportive measures, and Other measures.

RECOMMENDATIONS BY NARASIMHAM COMMITTEE I

Reduction of Statutory Liquidity Ratio (SLR) to 25 percent over a period of five years. Progressive reduction in Cash Reserve Ratio (CRR) . Phasing out of directed credit programmes and redefinition of the priority sector. Deregulation of interest rates so as to reflect emerging market conditions.

RECOMMENDATIONS BY NARASIMHAM COMMITTEE I

Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts. Imparting transparency to bank balance sheets and making more disclosures. Setting up of special tribunals to speed up the process of recovery of loans. Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount.

NARASIMHAM COMMITTEE II
The second generation reforms could be conveniently looked at in terms of three broad inter-related issues: Measures that need to be taken to strengthen the foundations of the banking system, Streamlining procedures, upgrading technology and human resource development, and Structural changes in the system. These would cover aspects of banking policy, institutional, supervisory and legislative dimensions.

MEASURES TO STRENGTHEN THE BANKING SYSTEM Capital Adequacy Asset Quality NPAs and Directed Credit Prudential Norms and Disclosure Requirements
STRUCTURAL ISSUES Mergers Weak Banks Narrow Banks New Banks Need for Stronger Banks Banking Structure Local Area Banks

RECOMMENDATIONS BY NARASIMHAM COMMITTEE II

Capital adequacy requirements should take into account market risks also. In the next three years, entire portfolio of Govt. securities should be marked to market. Risk weight for a Govt. guaranteed account must be 100%. There should be no further re-capitalization by the Govt. NPA level should be brought down to 5% by 2000 and 3% by 2002.

RECOMMENDATIONS BY NARASIMHAM COMMITTEE II

An asset should be classified as doubtful if it is in the sub-standard category for 18 months instead of the present 24 months. Banks should avoid ever greening of their advances. A provision of 1% on standard assets is required. Govt. guaranteed accounts must also be categorized as NPAs under the usual norms.

ACHIEVEMENTS THROUGH THESE REFORMS

Important achievements in the following fields : Financial markets Regulators The banking system Non-banking finance companies The capital market Mutual funds Overall approach to reforms Deregulation of banking system Capital market developments

COMING SOON REFORMS

Acc. To RBI Governor Raghuram Rajan, The Reserve Bank of India (RBI) will soon come out with major reforms in the banking sector that will allow foreign banks to enter India in a big way and even take over domestic lenders. Acc. To RBI Governor Raghuram Rajan, The banking sector reforms, in particular to those facilitating entry of foreign banks in India in a big way is part of the five pillars of reforms, including monetary policy framework, which the RBI is going to implement in the next few years, the RBI Governor said. Source: The Hindu October 13, 2013

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