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Reforms in Financial and Banking Sector

Chapter

3
Reforms in Financial and Banking Sector

Copyright 2007, G. Vijayaragavan Iyengar

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Introduction to Banking

G. Vijayaragavan Iyengar

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Reforms in Financial and Banking Sector

Owing to 1991 crisis of balance of payment, the government appointed the Narsimham Committee on 14th August, 1991. It submitted its report, known as its first report, on 16th November 1991. The first phase of banking sector reform which began during 1992-93 was based on twin principles of "Operational

Flexibility" and "Functional autonomy".

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Reforms in Financial and Banking Sector

NARSIMHAM COMMITTEE REPORT (I)


i. SLR & CRR

ii.

PRIORITY SECTOR LENDING

iii. INTEREST RATES iv. CAPITAL ADEQUACY v. ACCOUNTING POLICIES

vi. New Institution vii. Entry of Private Sector Banks viii. Branch Licensing Policy ix. Legislative Measures

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Reforms in Financial and Banking Sector

NARASIMHAM COMMITTEE REPORT (II)


RBI should withdraw from 91 days T Bill market. Minimum shareholding by the government/RBI in the nationalised banks and SBI should be brought down to 33%. equity of

5% risk weight be considered for market risk for government and approved securities. Banks should attain a minimum CRR of 9% by 2000 AD and 10% by 2002 AD. Accrual of interest for income recognition should be done in 90 days instead of 180 days. Bank Chairman should be given a minimum of three years at the helm. All loans in doubtful/loss category should be identified and their realisable value determined. The start up requirements of Rs. 100 crore for new private sector banks should be hiked.
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Reforms in Financial and Banking Sector

Assessment of the Financial Sector Reforms


This reflects the view of the Narasimham Committee that ensuring the integrity and autonomy of public sector banks is the more relevant issue and they could improve profitability and efficiency without changing their ownership if competition were enhanced. The Reserve Bank Of India has permitted commercial banks to engage in diverse activities such as securities related transactions, foreign exchange transactions and leasing activities. The reforms have contributed to the good performance of some major banks in the country post reform period, for instance State Bank Of India, Punjab National Bank etc. The government's commitment on restructuring the highly regulated banking appears strong despite lack of arithmetic of the government in the parliament to push through the agenda of reforms in an effective manner. The apex monetary authority's encouragement to enhance the appetite of the banks to do more non- traditional activities like novel schemes in the credit front.
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Introduction to Banking

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Reforms in Financial and Banking Sector

REPORTS OF OTHER IMPORTANT COMMITTEES VERMA

COMMITTEE REPORT ON WEAK BANKS


The committee was constituted on 8.2.1999 for suggesting of weak banks. The committee submitted report on 3.10.1999. The major recommendations are as under: OPERATIONAL ORGANISATIONAL SYSTEMIC

FINANCIAL

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Introduction to Banking

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Reforms in Financial and Banking Sector

GHOSH COMMITTEE (1993)

PADMANABHAN COMMITTEE (1995)


RASHID JILANI COMMITTEE (1992) SHERE COMMITTEE (1995) SARAF COMMITTEE (1994) KALIA COMMITTEE (1994) MALEGAM COMMITTEE (1995) DR. A.C. SHAH COMMITTEE J.V. SHETTY COMMITTEE (1993) VAZ COMMITTEE (1993) (Chairperson Miss I.T. Vaz, ED, RBI) SODHANI COMMITTEE (1994)
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Reforms in Financial and Banking Sector

R.V. GUPTA COMMITTEE ON AGRICULTURAL CREDIT

Interest rates on agricultural loans to be fixed by banks.


90% of loan applications to be cleared by local branches. A liquid savings facility in built into loan products.

Special agriculture credit plans to accelerate flow of credit.


Extension of composite cash credit limit to include farm credit. Abolition of stamp duty on mortgage of farm land.

Indicate annual increase in credit flow to agriculture.


Modify so as to provide borrowers a choice of banks.

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Reforms in Financial and Banking Sector

RECOMMENDATIONS OF STUDY GROUP UNDER THE

CHAIRMANSHIP OF SH. B.D. NARANG ON LARGE VALUE FRAUDS (RUPEES ONE CRORE AND ABOVE)
There is always a time lag between the detection and reporting of a fraud It is not the lacunae in the rules but the non-observance of the same, which leads to the fraud.

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Introduction to Banking

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Reforms in Financial and Banking Sector

NARESH CHANDRA COMMITTEE ON CORPORATE GOVERNANCE


Major Recommendations of the Committee i. ii. Maintaining Auditor's Independence List of prohibited non-audit services

iii. Rotation of Audit Partners iv. Disclosures v. Replacement of Auditors vi. Audit firm to file a 'certificate of independence vii. Empowering Audit Committees viii. Certification of financial reports by the CEO and CFO ix. Supervising the work of Auditors x. Changes in the structure and composition of Board of Directors xi. Setting up a Corporate Serious Fraud Office (CSFO)
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Reforms in Financial and Banking Sector

SARKAR COMMITTEE ON ANTI-MONEY LAUNDERING GUIDELINES FOR BANKS IN INDIA


1. 2. 3. 4. 5. Urgent need to adopt anti-money laundering policy. Each bank must have its own anti-money laundering policy. A time-bound action plan to implement the bank's anti-money laundering policy. Adoption of 'Know Your Customer' guidelines by banks. The bank account opening forms should contain information about the financial status of the customer, his source of income etc. 6. Customers profiles be prepared while opening of accounts and the bank should classify the account into appropriate risk category (high/low) for monitoring activity/transaction. 7. Banks should follow uniform norms for activity monitoring, e.g. the threshold may be reduced to Rs. 5 lacs and be continued to Rs. 10 lacs respectively. 8. Banks should endeavour to track transaction chains in case of suspicion. 9. Bank branches should report all types of suspicious activities/transactions to the Money Laundering Reporting Officer (MLRO - identified at the bank level). 10. Both inward as well as outward remittances (fund transfer etc.) especially the cross-border remittances should be closely monitored. Copyright 2007, G. Vijayaragavan Iyengar
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Reforms in Financial and Banking Sector

PLAN FOR BANKING SECTOR REFORMS IN FUTURE


Phase I: March (2005 To March 2009)

a)
b) c)

New banks - First Time Presence


Existing banks - Branch expansion policy Conversion of Existing Branches to Wholly Owned Subsidiaries

d)

Acquisition of Shareholding in Select Indian Private Sector Banks

Cont. Copyright 2007, G. Vijayaragavan Iyengar

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Reforms in Financial and Banking Sector

Phase II: April 2009


a) b) c) d) e) According Full National Treatment to Wholly Owned Subsidiaries of Foreign Banks Dilution of Stake in Wholly Owned Subsidiaries Mergers and Acquisition of any Private Sector Bank in India Foreign Investment in Private Sector Banks Foreign Institutional Investors (Flls)

f)

Non-Resident Indians (NRIs)

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Introduction to Banking

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