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Indian Banking Sector Reforms

Indian Banking Sector Reforms

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Published by anikettt

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Published by: anikettt on Aug 25, 2009
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06/19/2013

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EXECUTIVE SUMMARY 
A retrospect of the events clearly indicates that the Indian banking sectorhas come far away from the days of nationalization. The NarasimhamCommittee laid the foundation for the reformation of the Indian bankingsector. Constituted in 1991, the Committee submitted two reports, in1992 and 1998, which laid significant thrust on enhancing the efficiencyand viability of the banking sector. As the international standards becameprevalent, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of whichled to deterioration in the quality of loan portfolios, inadequacy of capitaland the erosion of profitability. The recent international consensus on preserving the soundness of thebanking system has veered around certain core themes. These are:effective risk management systems, adequate capital provision, soundpractices of supervision and regulation, transparency of operation,conducive public policy intervention and maintenance of macroeconomicstability in the economy.Until recently, the lack of competitiveness vis-à-vis global standards, lowtechnological level in operations, over staffing, high NPAs and low levelsof motivation had shackled the performance of the banking industry.However, the banking sector reforms have provided the necessaryplatform for the Indian banks to operate on the basis of operationalflexibility and functional autonomy, thereby enhancing efficiency,productivity and profitability. The reforms also brought about structuralchanges in the financial sector and succeeded in easing externalconstraints on its operation, i.e. reduction in CRR and SLR reserves,capital adequacy norms, restructuring and recapitulating banks andenhancing the competitive element in the market through the entry of new banks.
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 The reforms also include increase in the number of banks due to the entryof new private and foreign banks, increase in the transparency of thebanks’ balance sheets through the introduction of prudential norms andincrease in the role of the market forces due to the deregulated interestrates. These have significantly affected the operational environment of the Indian banking sector. To encourage speedy recovery of Non-performing assets, the Narasimhamcommittee laid directions to introduce Special Tribunals and also lead tothe creation of an Asset Reconstruction Fund. For revival of weak banks,the Verma Committee recommendations have laid the foundation. Lastly,to maintain macroeconomic stability, RBI has introduced the AssetLiability Management System. The East-Asian crisis has demonstrated the vital importance of financialinstitutions in sustaining the momentum of growth and development. It isno longer possible for developing countries like India to delay theintroduction of these reforms of strong prudential and supervisory norms,in order to make the financial system more competitive, more transparentand more accountable. The competitive environment created by financial sector reforms hasnonetheless compelled the banks to gradually adopt modern technologyto maintain their market share.
 
 Thus, the declaration of the VoluntaryRetirement Scheme accounts for a positive development reducing theadministrative costs of Public Sector banks. The developments, in general,have an emphasis on service and technology; for the first time that Indianpublic sector banks are being challenged by the foreign banks and privatesector banks.
 
Branch size has been reduced considerably by usingtechnology thus saving manpower.
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 The deregulation process has resulted in delivery of innovative financialproducts at competitive rates; this has been proved by the increasingdivergence of banks in retail banking for their development and survival.In order to survive and maintain strong presence, mergers andacquisitions has been the most common development all around theworld. In order to ensure healthy competition, giving customer the best of the services, the banking sector reforms have lead to the development of a diversifying portfolio in retail banking, and insurance, trend of mergersfor better stability and also the concept of virtual banking. The Narasimham Committee has presented a detailed analysis of variousproblems and challenges facing the Indian banking system and madewide-ranging recommendations for improving and strengthening itsfunctions.
TABLE OF CONTENTS
CH.NO. TITLEPAGE NOCHAPTER - 1
 
REFORMS IN THE INDIAN BANKING SECTOR1.1 Introduction011.2 Reduction of SLR and CRR041.3 Minimum Capital Adequacy Ratio 071.4 Prudential Norms 111.5 Disclosure Norms 171.6 Rationalisation of Foreign Operations in India19
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