Banking Sector Reforms

1. Banking Sector Reforms Compiled By: Vishal Chopra

2. Introduction • The initiation of the financial sector reforms brought about a paradigm shift in the banking industry • In 1991, the RBI had proposed to form the committee chaired by M. Narasimham, former RBI Governor in order to review the Financial System aspects relating to the Structure, and Functioning of the financial system • The Narasimham Committee report, submitted to the then finance minister, ManmohanSingh, on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms • The guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector

3. NARSIMHAM COMMITTEE REPORT(i) The main recommendations of the Committee were:--- • Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent 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 • Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993, 8 per cent by March 1996, and 8per cent by those banks having international operations by March1994

4. Contd.. • 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 • Restructuring of the banking system, so as to have 3 or 4 large banks, which could become international in character, 8 to 10national banks and local banks confined to specific regions. Rural banks, including RRBs, confined to rural areas • Abolition of branch licensing

5. Contd.. • Liberalising the policy with regard to allowing foreign banks to open offices in India • Rationalisation of foreign operations of Indian banks • Giving freedom to individual banks to recruit officers • Inspection by supervisory authorities based essentially on the internal audit and inspection reports • Ending duality of control over banking system by Banking Division and RBI

6. Contd.. • A separate authority for supervision of banks and financial Institutions which would be a semi-autonomous body under RBI • Revised procedure for selection of Chief Executives and Director of Boards of public sector banks • Obtaining resources from the market on competitive terms by DFIs • Speedy liberalisation of capital market

7. The Second Phase of Reforms • The second phase of Reforms envisaged greater autonomy to priority sector banks with respect to recruitment and promotion of staff, better Asset Liability Management, lesser external intervention and pressures etc The focus of the banks will be on profit maximization, NPA recovery management and diversification through merger , acquisition and participation with peer in the market

8. Narsimham committee report(II) • RBI should withdraw from 91 days T Bill market. Interbank and call money and term money market should be restricted only to bank and primary dealer • Minimum shareholding by the RBI in the equity of nationalised banks and SBI should be brought down to 33 %. RBI directors should be withdrawn from bank boards • 5 % risk weight be considered for market risk for government and approved securities • Bank should attain a minimum CRR of 9% by 2000 and 10 % by 2002 • Accrual of interest for income recognition should be done in 90 days instead of 180 days. • Minimum startup capital needs for foreign banks should be raised from $ 10 million to $ 25 million. This capital should be brought in one go and not in phases.

9. Contd.. • Bank Chairman should be given a minimum of three years at the helm. Need to de-link salaries of bank and FI chiefs and whole time directors from the civil services pay scale • All loans in doubtful/loss category should be identified and their realizable value determined. These asset could be transferred to an asset reconstruction company which would issue NPA swap bond to the bank • SBI’s associate banks should be constituted on the lines of Nationalized Bank with CMD and two whole time directors. No need for SBI chairman to be ex-officio Chairman of these banks • The startup requirement of Rs. 100 crore for new private sector banks should be hiked.