environment with most of the funding coming from assured sources. There was littlecompetition in insurance and mutual funds industries. Financial markets werecharacterized by control over pricing of financial assets, barriers to entry, and hightransactions costs. The banks were running either at a loss or on very low profits, and,consequently were unable to provide adequately for loan defaults, and build their capital.There had been organizational inadequacies, the weakening of management and controlfunctions, the growth of restrictive practices, the erosion of work culture, and flaws incredit management. The strain on the performance of the banks had emanated partlyfrom the imposition of high Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR)and directed credit programmers for the priority sectors
all at below market orconcessional or subsidized interest rates. This, apart from affecting bank profitabilityadversely, had resulted in the low or repressed or depressed interest rates on deposits andin higher interest rates on loans to the larger borrowers from business and industry.Further, the functioning of the financial system, and the credit delivery as well as recoveryprocess had become politicized, which damaged the quality of lending and the culture of repaying loans. The widespread write-offs of the loans had seriously jeopardized theviability of banks. As the closure of sick industrial units was discouraged by thegovernment, banks had to continue to finance non-viable sick units, which furthercompromised their own viability. The legal system was not of much help in recoveringloans. There was a lack of transparency in preparing statements of accounts by banks.In other words, the reforms had become imperative on account of the facts that despite itsimpressive quantitative growth and achievements, the financial health, integrity,autonomy, flexibility, and vibrancy in the financial sector had deteriorated over the pastmany years. The allocation of resources had become severely distorted, the portfolioquality had deteriorated, and productivity, efficiency and profitability had been eroded inthe system. Customer service was poor, work technology remained outdated, andtransaction costs were high. The capital base of the system remained low, the accountingand disclosure practices were faulty, and the administrative expenses had greatly soared.