Banking & Financial Reforms

Group 3 Anantharaman N Karthic R Pranay Kumar Apoorv S Vijay V

Introduction
Pre-Reform Banking Sector
Planned development, mixed economy framework Fiscal activism- Focus on long gestation projects Lowered interest rates for govt. securities Ad Hoc treasury bills High levels of fiscal deficits Frequent increase in CRR

Contd..
Issues
Segmented and underdeveloped financial markets Complex structure of interest rates Lack of importance to transparency, accountability and prudential norms

Objectives of Reforms
Eliminate complexity Enabling growth of financial market Provide operational and functional autonomy Accommodate global growth Opening of external sectors

Pre liberalization period An Overview

Handcuffed institutions Strong govt regulations Preference for public sector institutions Stringent regulation in WCM Exploitation of loopholes The balance of payments crisis Threat of insolvency

Financial & Banking Sector Reforms

Tarapore Committee Recommendations
Set by RBI to lay road map to capital account convert ability in 1997, 5 member committee Preconditions
Fiscal consolidation Mandated Inflation target Strengthening of financial system

Account limit specification Capital inflow should be converted to semi-liquid assets

Tarapore Committee Recomendation

Capital Account Convertibility
Freedom to convert local financial assets into foreign financial assets and vice versa. Undergone changes from the emerging market economics Portfolios or FDI

Key Lessons
Preparedness, Infrastructure Prolonged, over valued exchange rates Gradual and phased liberalization

Tarapore Committee Recomendation

Key Lessons cntd
Channelizing the investments Regulatory and supervisory measures Capital inflows should be put in semi liquid assets CAC does not serve the main purpose of the major problems in the country Transaction across countries help them to provide a cheaper rates of interest Improve the efficiency of the business transactions.

Pending Reforms
Pension Sector
Help the elderly people from the economic deprivation Tier I &Tier II accounts Contribution based reform Govt cut down the salary components Conditions of withdrawal No mention about the tax benefits Economical transaction of 2100 crore rupees

 Goods & Service Tax

To be implemented by april 2012 Replaces indirect taxes GST is a comprehensive value added tax levied on goods and services ( No differentiation) Dual rate -- Central GST and State GST Both the taxes would be applying on the same tax base 15 Million for the central and 1 Million for state Low rate for unnecessary items and standard rate for general goods Procurement Higher tax outgo, credit availability, exemptions Distribution Tax efficiency, replacement by refund schemes Commercial increase in rate of tax, increase in GST credit Others Redesign of IT system, registrations, Interoperability

 Land Acquisition
Acquisition, industrialization, infrastructure development Provides better deal, higher compensation Information exchange with authorities Enables rehabilitation and relief to the person Protection against forceful occupation Law applicable for 50 acres in urban area and 100 acres in rural Agitation and increased responsibility

 Direct tax code

Replacement of the current tax system Brackets and dividend distribution tax Exemption investment limit ITA to be follow the DTC Surcharge and cess are abolished TE on LTA, Medical reimbursement Impact on the tax savings Impact on the home loans Enforcement of tax legislation Strong and bold step to eliminate ambiguity Tax benefits for foreign companies GAAR,CFC to avoid aggressive tax avoidance plan

Narasimham Committee
1991 RBI proposed the committee chaired by M. Narasimham former RBI governor to review the financial system Review aspects relating to the structure, organization, procedure and functioning of the financial system Constituted in 1991, the committee submitted two reports in 1991 and 1992 which laid significant thrust on enhancing the efficiency and viability of banking sector The Narasimham committee laid the foundation for the reformation of the Indian Bank sector

Why
Phenomenal increase in the geographic coverage of our banking institution Despite impressive quantitative achievement low efficiency and productivity, bad portfolios performance and eroded profitability Several public sector banks and financial institutions were incurring losses year after year

Problems Faced
Higher rates of CRR(15%) and SLR(38.5%) Directed credit programs Political and Administrative interference Subsidizing of credit Mounting expenditures of banks

Recommendations
Reduction of Statutory Liquidity Ratio (SLR) to 25% over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) to 3-5% Phasing out of directed credit programme and redefinition of the priority sector Stipulation of minimum capital adequacy ratio of 8% by March 1996 Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

Continued
Setting up of special tribunals to speed up the recovery process 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 Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Speedy liberalization of capital market Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions, etc

Committee On Banking Sector Reforms 1998

1998- Finance minister appointed Mr. Narasimham as chairman of one more committee This committee was asked to review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it internationally competitive The committee submitted its report to the government in April 1998

The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized banks

Major Recommendations of Narasimham Committee 1998

Need for stronger banking system Experiment with concept of narrow banking Small local banks Capital Adequacy Ratio Review and update banking laws

The Effect
Emergence of 9 new private sector banks Opening up of vibrant capital market Great impact on banks balance sheets both on assets and liabilities side

Some Facts
Branch expansion: Increased from 8260 in 1969 to 71177 in 2006 Population served per branch has come down from 64000 to 16000 A rural branch office serves 15 to 25 villages within a radius of 16 kms However, at present only 32,180 villages out of 5 lakh have been covered

Continued
Banking has moved from deposit and lending to
Merchant banking Mutual funds Retail banking ATMs Internet banking Venture capital funds

Conclusion
Way Ahead
Consolidation Adoption of Basel II Risk Management Improvement in customer service