The Banking Sector Reforms In India And Their Impact On The Economy

DISSERTATION PROJECT

RISHI . KUMAR46

INTRODUCTION

• From the 1991 India economic crisis to its status of third largest economy in the world by 2011, India has grown significantly in terms of economic development. So has its banking sector.

• During this period, recognising the evolving needs of the sector, the Finance Ministry of Government of India (GOI) set up various committees with the task of analysing India’s banking sector and recommending legislation and regulations to make it more effective, competitive and efficient.

• The purpose of the Narasimham-I Committee was to study all aspects relating to the structure, organisation, functions and procedures of the financial systems and to recommend improvements in their efficiency and productivity.

• The Narasimham-II Committee was tasked with the progress review of the implementation of the banking reforms since 1992 with the aim of further strengthening the financial institutions of India. It focussed on issues like size of banks and capital adequacy ratio

• OBJECTIVE OF STUDY • The main objective of the research paper is to make a simple assessment of

the banking sector reforms in India. It has been more than 20 years of the start of the economic reform in India and the financial sector reform was one of the important parts of the process.

• The study will try to list the major reforms of the Indian baking sector and to find out the impacts of these reform and the future prospects. The study will be confined to the impacts of reforms upon credit delivery, share of market of banks, profitability and prudential regulations, and the economy.

• SCOPE OF THE STUDY • The study focuses on the banking sector as a whole. As the reforms are a

general initiative for all banks to follow, the study is a macro perspective research. The study also looks from a macro level at the economy of India as the effects of the reforms are being checked on it.

RESEARCH METHODOLOGY

• The term research methodology can be defined as a process used to collect data and information for the purpose of making business decisions. The methodology may include publication research, interviews, surveys and other techniques.

• Here, the methodology used is DESCRIPTIVE . Data Collection:- • The type of data that is used in the study is stated here.• For this study, we have relied totally on research papers and various articles, thus

the type of data used here is SECONDARY data.

REFORMS INITIATED TILL 2005

• Reduction of Statutory Liquidity Ratio (SLR)• Progressive reduction in Cash Reserve Ratio (CRR) • Deregulation of interest rates• Adoption of uniform accounting practices• 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)• Restructuring of the banking system, so as to have 3 or 4 large banks, which could become

international in character, 8 to 10 national banks and local banks confined to specific regions. Rural banks, including RRBs, confined to rural areas

• Abolition of branch licensing • 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 • Speedy liberalisation of capital market • Supervision of merchant banks, mutual funds, leasing companies etc., by a separate agency to

be set up by RBI

REFORMS INITIATED SINCE 2014• The Reserve Bank of India (RBI) also adopted new Consumer Price Index

(combined) as the measure for nominal anchor (Headline CPI) for policy communication.

• Banks being allowed to raise capital from the market to meet capital adequacy norms by diluting the government’s stake up to 52 per cent.

• Pradhan Mantri Jan Dhan Yojana launched to provide universal access to banking facilities with at least one basic banking account for every household.

• In order to improve the Governance of Public Sector Banks, the Government intends to set up an autonomous Bank Board Bureau with professionals as its members. It would be responsible for search and selection of heads of PSBs, as also for Non-Official Directors on the Boards of Banks.

• Consolidation of financial statements- Bank with its subsidiaries.• Establishment of MUDRA and • Recapitalisation of PSU’s with 25,000 crores in the next 3 years.₹

IMPACT ON THE ECONOMYChanges in INTEREST RATES

Changes in RATE OF INFLATION

GROSS DOMESTIC PRODUCT RateIndicator

Current rate

Inflation 6.00%

Bank rate 7.75%

CRR 4.00%

SLR 21.50%

Repo rate 6.50%

Reverse repo rate

5.75%

Marginal Standing

facility rate7.75%

NIFTY SENSEX

Financial Inclusion

FOREX Reserves

The latest reserves stand at US$ 355560 million at the end of the week ending March 25th, 2016.

MAIN FINDINGS1. Corporate governance2. Risk management3. Cash flow discipline4. Group structure and business portfolio5. Working capital management6. Capital Structure7. Increase in FDI 8. Financial Inclusion specially PMJDY9. Competition between Private and PSU banks10. Surviving Economic Shocks11. Bad Debts and their recovery have become better12. Diversifying Bank’s business13. Increase in FOREX14. The stabilization of Public debt as to GDP15. Rise in the value of currency16. Share in Global Economy

SUGGESTIONS

• A total restructuring of all the PSU banks is the need of the hour. It will not only cut down the huge bad debt they have, but would also reduce the costs of staff and operations. All the PSU’s should be clubbed under one big bank which would act as the guardian bank.

• A streamlining of services needs to be done by the banks to raise the quality of the services they provide.

 • Better credit appraisal procedures need to be followed to avoid bad debts. Strict CIBIL

and appraisal norms should be implemented. • Banks should tap more into the service sector to earn income thus depending less on the

interest income. This helps the banks to give more to the customers and save more for investments. Services like issuance of more credit and debit cards, mutual funds and provide more agency functions like trustee, trade credit, providing various loans etc.

CONCLUSION

Reforms should be an ongoing process. They help the sector in which they are implemented to become robust and change as per the situations require. Banking sector is the most important part of any economy. It acts as the arterial system of the economy which supplies money wherever needed. Thus it should be reformed at regular intervals so that it doesn’t become obsolete. The economy runs on money. It can only work properly if the banking system is in perfect condition to fulfill the rising requirements that arise.

It is due to the reforms and policies that the Indian banks are known to be one of the most financially sound institutions in the world even after surviving the 2008-09 global slowdown and the 2015 slowdown.

Hence, reforms play an important part for any sector or country to be sound and strong

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