BANKING SECTOR REFORMSCompiled By: Vishal Chopra

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

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

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

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

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

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

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.

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.