Budget 2012-13 Finance Minister Pranab Mukherjee presented the Union Budget for the year 2012-13, his

seventh. At the very beginning of his speech Mr Mukherjee said that a "year of recovery interrupted" meant that it was time to take tough decisions. The idea ahead of the budget was that fiscal deficit needed to be controlled by cutting subsidies and raising taxes. The finance minister has raised taxes and promised cuts in subsidies. Here are the highlights of the Budget. The key proposals of the budget are:

Budget identifies five objectives relating to growth recovery, private investment, supply bottlenecks, malnutrition and governance matters

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GDP growth to be 7.6 per cent (+ 0.25 percent) during 2012-13 Amendment to the FRBM Act proposed as part of Finance Bill. New concepts of “Effective Revenue Deficit” and “Medium Term Expenditure Framework” introduced Central subsidies to be kept under 2 per cent of GDP; to be further brought down to 1.75 per cent of GDP over the next 3 years. Proposed: Mobile based fertilizer management system; LPG transparency portal; scaling up and rolling out of Aadhar enabled payment for government schemes in at least 50 districts. Rs. 30,000 crore to be raised through disinvestment Efforts to reach broadbased consensus on FDI in multi-brand retail Rajiv Gandhi Equity Saving Scheme: to allow income tax deduction to retail investors on investing in equities Rs. 15,888 crore to be provided for capitalization of public sector banks and financial institutions A central “Know Your Customer” depository to be developed Swabhimaan: remaining habitations to be covered; to be extended to more habitations; ultra small branches to be set up in Swabhimaan habitations Investment in 12th Plan in infrastructure to go uptoRs. 50,00,000 crore; half of this is expected from private sector Tax Free Bonds of Rs. 60,000 crore to be allowed for financial infrastructure projects Allocation of Road Transport and Highways Ministry enhanced by 14 per cent to Rs. 25,360 crore Financial package of Rs. 3,884 crore for waiver of loans to handloom weavers and their cooperative societies; mega handloom clusters in Andhra, Jharkhand; weaver service centres in Mizoram, Nagaland and Jharkhand ; powerloom mega cluster in Maharashtra; Rs. 500 crore pilot schemes for geo-textiles in North-Eastern region Rs. 5,000 crore India Opportunities Venture Fund to help small enterprises Allocation to agriculture enhanced; RKVY gets Rs. 9,217 crore; BGREI gets Rs. 1,000 crore; Rs.2242 crore project to improve dairy productivity; Rs. 500 crore for coastal aquaculture

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Various other agricultural activities merged into 5 missions Target for agricultural credit raised to Rs. 5,75,000 crore Interest subvention for short-term crop loans to farmers at 7 per cent interest continues; additional 3 per cent for prompt paying farmers Rs. 200 crore for awards to incentivise agricultural research Provisions under rural housing fund increased to Rs. 4,000 crore from Rs. 3,000 crore Interest subvention of 1 percent on housing loans uptoRs. 15 lakh extended for one more year AIBP allocation raised by 13 per cent to Rs. 14,242 crore National Mission on Food Processing to be started in cooperation with State Governments Scheduled Caste Sub Plan allocation increases by 18 per cent to Rs. 37,113 crore; Tribal Sub Plan by 17.6 per cent to Rs. 21,710 crore Multi-sectoralprogramme to address maternal and child malnutrition in 200 high burden districts 58 per cent rise in allocation to ICDS, at Rs. 15,850 crore Rural drinking water and sanitation gets 27 per cent rise in allocation to Rs. 14,000 crore; PMGSY gets 20 per cent rise to Rs. 24,000 crore Projects covering length of 8800 km to be awarded under NHDP against 7,300 km during 2011-12 RTE-SSA gets Rs. 25,555 crore allocation, showing an increase of 21 per cent; 6000 schools to be set up at block level as model schools in the 12th Plan; Credit Guarantee Fund to be set up for better flow of credit to students National Urban Health Mission is being launched 34 per cent increase in allocation to National Rural Livelihood Mission, to Rs. 3915 crore Rs. 1000 crore allocated for National Skill Development Fund Bharat Livelihood Foundation to be established to support livelihood interventions particularly in tribal areas Widow pension and disability pension raised from Rs. 200 to Rs. 300 per month Grant on death of primary breadwinner of a BPL family in the age group 18-64 years doubled to Rs. 20,000 Defence services get Rs. 193407 crore; any further requirement to be met 4000 residential quarters to be constructed for Central Armed Police Forces

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1 crore STT on cash delivery reduced by 25 per cent to 0. agriculture.8 lakh to Rs.000.900 crore Fiscal deficit targeted at 5. plan expenditure at Rs. in addition to the 20 crore persons already enrolled White Paper on Black Money to be laid in the current session of Parliament Tax proposals mark progress in the direction of movement towards DTC and GST Income tax exemption limit raised from Rs.925 crore. 9.10 lakh Interest from savings bank accounts deductible upto Rs.000. as against 5.10. 14.00. branded silver jewellery exempted from excise duty Net gain of Rs.    UID-Aadhar to get adequate funds for enrolment of 40 crore persons.69. health and nutrition. roads.9 per cent in revised estimates for 2011-12 Central Government debt at 45. railways.80. non plan expenditure at Rs. will set forth 3-year rolling target                   .000 to Rs. service tax rates raised from 10 per cent to 12 per cent.025 crore – 18 per cent higher than 201112 budget. deduction of upto Rs.1% General Anti Avoidance Rule being introduced to counter aggressive tax avoidance A number of measures proposed to deter generation and use of unaccounted money All services to attract service tax except those in the negative list Central Excise and Service Tax being harmonized Standard rate of excise duty raised from 10 per cent to 12 per cent.5.440 crore due to taxation proposals Total expenditure budgeted at Rs. civil aviation. and environment get duty relief Certain cigarettes and bidis attract higher excise duty.21.1 per cent of GDP. new sectors eligible for investment linked deduction Turnover limit for compulsory tax audit for SMEs raised from Rs.41.5 percent of GDP as compared to Thirteenth Finance Commission target of 50. infrastructure. measures to minimize impact on small artisans and goldsmiths. 5.1.000 for preventive health check-up Senior citizens without business income exempt from advance tax Investment linked deduction of capital expenditure enhanced for certain businesses. mining. manufacturing.90. upper limit of 20 per cent tax slab raised from Rs.60 lakh to Rs. no change in peak customs duty of 10 per cent on non-agricultural goods Relief in indirect taxes to sectors under stress.5 percent Medium-term Expenditure Framework Statement to be introduced.2. large cars attract higher customs duty Excise imposed on unbranded jewellery also.

The maturity of one year or less gives little time for a default to occur. it provides working capital to the industrialists. building societies. Credit Instruments: The main credit instruments of the money market are call money. on the other hand. Too much diversity creates problems for the investors. for one year or less). such as insurance companies. 5. acceptances. The capital market feels central bank's influence. etc. commercial banks and nonbank institutions. mortgage banks. Basic Role: The basic role of money market is that of liquidity adjustment. Relation with Central Bank: The money market is closely and directly linked with central bank of the country. machinery. 2. preferably to long-term. 9. 7. credit instruments and the institutions: 1. shares. bills of exchange.. Institutions: Important institutions operating in the' money market are central banks. 8. Nature of Credit Instruments: The credit instruments dealt with in the capital market are more heterogeneous than those in money market. but mainly indirectly and through the money market. nonbank financial institutions.e. In the capital market. The risk is much greater in capital market. On the other hand. etc. while the capital market deals in the lending and borrowing of long-term finance (i. secure and productive employment. The capital market. caters the long-term credit needs of the industrialists and provides fixed capital to buy land. commercial banks are closely regulated. the main instruments used in the capital market are stocks. 6. Risk: The degree of risk is small in the money market.           Difference between Money and Capital Market Money market is distinguished from capital market on the basis of the maturity period. etc. Risk varies both in degree and nature throughout the capital market. for more than one year). Important institutions of the capital market are stock exchanges. The basic role of capital market is that of putting capital to work. bill brokers. 4. commercial banks..e. debentures. collateral loans. Some homogeneity of credit instruments is needed for the operation of financial markets. bonds. so the risk is minimised. acceptance houses. the institutions are not much regulated            . 3. securities of the government. Market Regulation: In the money market. Purpose of Loan: The money market meets the short-term credit needs of business. Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.

1. It also aims at operating and boosting up the currency and credit infrastructure of India. and 1. Among others it includes maintaining monetary and financial stability. These currency notes are legal tender issued by the RBI. It was established on 1st April 1935. 2. Every commercial bank has to maintain a part of their reserves with its parent's viz. to develop and maintain stable payment system. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. As a central bank. 5. It deals with the issuing the bank notes and keeping reserves in order to secure monetary stability in the country. help and direct other commercial banks in the country. Currently it is in denominations of Rs. 20. the Reserve Bank has significant powers and duties to perform. the RBI. it has been taken up the Government of India ever since.. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. In this regard. Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. rupee coins. it has to perform some important tasks. the Reserve Bank of India is also known as the banker of banks. . For smooth and speedy progress of the Indian Financial System. It issues these notes against the security of gold bullion. They comprise the following tasks. 10. exchange bills and promissory notes and government of India bonds. It includes fundamental functions of the Central Bank. Thus it is called as the lender of the last resort. foreign securities. 100. 50. Although the bank was initially owned privately. the development functions and supervisory functions. the functions of the Reserve Bank are classified into the traditional functions.RBI Credit Policy Functions of RBI ( The India's Central Bank ) List ↓ Reserve Bank of India is also known as India's Central Bank. The bank has been vested with immense responsibility of reviewing and reconstructing the economic stability of the country by formulating economic policies and ensuring a proper exchange of currency.000. Banker to other Banks : The RBI being an apex monitory institution has obligatory powers to guide.. to promote and develop financial infrastructure and to regulate or control the financial institutions. Basically these functions are in line with the objectives with which the bank is set up. it was nationalized.Functions of Reserve Bank of India RBI . 500. Preamble of the Reserve Bank of India ". Traditional Functions of RBI ↓ Traditional functions are those functions which every central bank of each nation performs all over the world. 2. For simplification." The Preamble of the RBI speaks about the basic functions of the bank.to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. Similarly in need or in urgency these banks approach the RBI for fund.

As a central bank of the nation the RBI has to look for growth with price stability. 3. The RBI has set up the bankers' training colleges at several places.e CAB are few to mention.e NIBM. it has to prepare domestic policies in that direction. Provisions of Training : The RBI has always tried to provide essential training to the staff of the banking industry. 5. National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs). It maintains government accounts. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. the RBI collects process and disseminates statistical data on several topics. 2. Credit Control Function : Commercial bank in the country creates credit according to the demand in the economy. Supervisory Function : The RBI has been endowed with vast powers for supervising the banking system in the country. These functions are country specific functions and can change according to the requirements of that country. and to guide and direct the commercial banks in India.e BSC and College of Agriculture Banking i. It works as a representative of the government even at the international level. 4. National Institute of Bank Management i. central banks especially in the developing country like India have to perform numerous functions. IDBI. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. It has powers to issue license for setting up new banks. savings and investments etc. provides financial advice to the government. the RBI has to provide special attention for the credit need of agriculture and allied activities. . Provision of Industrial Finance : Rapid industrial growth is the key to faster economic development. It manages government public debts and maintains foreign exchange reserves on behalf of the government. to decide minimum reserves. It has successfully rendered service in this direction by increasing the flow of credit to this sector. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. the adequate and timely availability of credit to small. 6. It can have periodical inspections an audit of the commercial banks in India. inflation. to inspect functioning of commercial banks in India and abroad. The RBI has been performing as a promoter of the financial system since its inception. 6. On the other credit creation is below the required limit then it harms the growth of the economy. It includes RBI weekly reports. SIDBI and EXIM BANK etc. This division collects and publishes data on several sectors of the economy. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools. In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. Development of Agriculture : In an agrarian economy like ours. Developmental / Promotional Functions of RBI ↓ Along with the routine traditional functions. Bankers Staff College i. This data proves to be quite useful for researchers and policy makers. 4. Some of the major development functions of the RBI are maintained below. to open new braches. The reports and bulletins are regularly published by the RBI. It performs various banking function such as to accept deposits. It includes interest rate. The sound and efficient financial system is a precondition of the rapid economic development of the nation. It provides overdraft facility to the government when it faces financial crunch. financial markets and financial instruments. In this regard. medium and large industry is very significant.3. Publication of the Reports : The Reserve Bank has its separate publication division. taxes and make payments on behalf of the government. Banker to the Government : The RBI being the apex monitory body has to work as an agent of the central and state governments. Exchange Rate Management : It is an essential function of the RBI. 5. 1. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U. Development of the Financial System : The financial system comprises the financial institutions. Collection of Data : Being the apex monetary authority of the country.S Dollar) close to each other. In order to maintain stability in the external value of rupee.

4. This information is made available to the public also at cheaper rates. even to close down existing branches. 2. Supervisory Functions of RBI ↓ The reserve bank also performs many supervisory functions. 3. Implementation of the Deposit Insurance Scheme : The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. new branches. It has set up many institutions such as the Deposit Insurance Corporation-1962. Through periodic inspection. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. License is also given for opening extension counters. Report on Trend and Progress of Commercial Banks India. 8. One lakh are insured with this corporation. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. NHB-1988. NABARD-1982. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose. 7. the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. . UTI-1964. These organizations develop and promote banking habits among the people. All bank deposits below Rs. 1.RBI Annual Report. etc.. Some of its supervisory functions are given below. It has authority to regulate and administer the entire banking and financial system. Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. it can control the NBFIs. etc. IDBI-1964. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. Promotion of Banking Habits : As an apex organization. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure. Granting license to banks : The RBI grants license to banks for carrying its business. Promotion of Export through Refinance : The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India.

Encourages capital formation Stock exchange accelerates the process of capital formation. 3. It enables government to raise public debt easily and quickly. Facilitates public borrowing Stock exchange serves as a platform for marketing Government securities. it also acts as a channel for right (safe and profitable) investment. 8.Functions of Stock Exchange . This enables investors to know the true worth of their holdings at any time. security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. Regulates company management Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i. Facilitates evaluation of securities Stock exchange is useful for the evaluation of industrial securities. 4. It provides ready outlet for buying and selling of securities. Due to various rules and regulations. Stock exchange also acts as an outlet/counter for the sale of listed securities 2. It creates the habit of saving. Provides clearing house facility Stock exchange provides a clearing house facility to members. stock exchange functions as the custodian of funds of genuine investors. investing and risk taking among the investing class and converts their savings into profitable investment. 7. In addition. It settles the transactions among the members quickly and with ease. Facilitates healthy speculation .e price list). The managing body of the exchange keeps control on the members.Main Functions In The Market 1. 5. It acts as an instrument of capital formation. Comparison of companies in the same industry is possible through stock exchange quotations (i. Fraudulent practices are also checked effectively. Continuous and ready market for securities Stock exchange provides a ready and continuous market for purchase and sale of securities. Provides safety and security in dealings Stock exchange provides safety. 6. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility.e supervision) of stock exchange authorities.

Serves as Economic Barometer Stock exchange indicates the state of health of companies and the national economy. Facilitates Bank Lending Banks easily know the prices of quoted securities. 10. It acts as a barometer of the economic situation / conditions. Normal speculation is not dangerous but provides more business to the exchange. excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector. 9.Healthy speculation. . This gives convenience to the owners of securities. keeps the exchange active. They offer loans to customers against corporate securities. However.

3. directed credit programmes were adopted by the government. etc.1991 The Narsimham Committee was set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution. It was hindrance in the productivity of the bank thus the committee recommended their gradual reduction. it has given the following recommendations. Taken together. in India. According to the M. In order to remove them and make it more vibrant and efficient. This programme compelled banks to earmark then financial resources for the needy and poor sectors at confessional rates of interest. This high amount of SLR and CRR meant locking the bank resources for government uses. Along with these major problem areas M. The committee opined that these sectors have matured and thus do not need such financial support. Narasimham's Committee it was one of the reasons for the poor profitability of banks. 2. 3. At the same time the government advocated the philosophy of subsidized lending to certain sectors. Narasimham's Committee also found various inconsistencies regarding the banking system in India. They also found that government used bank funds at a cheap rate under the SLR. It is known as the directed credit programme.(CRR) was as high as 15 percent. In those days. Directed Investment Programme : The committee objected to the system of maintaining high liquid assets by commercial banks in the form of cash. 2. ultimately leading to profit erosion of banks.5 percent of their resources idle with the RBI. It further suggested minimizing the slabs of interest. The committee recommended phasing out of this programme. resulted in a shift from the security oriented loan to purpose oriented. Reduction in the SLR and CRR : The committee recommended the reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve Ratio 'CRR'. . SLR was recommended to reduce from 38. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund. the Cash Reserve Ratio. Banks were given a huge target of priority sector lending. Interest Rate Determination : The committee felt that the interest rates in India are regulated and controlled by the authorities. Directed Credit Programme : Since nationalization the government has encouraged the lending to agriculture and small-scale industries at a confessional rate of interest.5 percent. 4. The committee has given the following major recommendations:- 1. gold and unencumbered government securities. Interest Rate Structure : The committee found that the interest rate structure and rate of interest in India are highly regulated and controlled by the government. Narasimham Committee Report I . The committee felt that there was no need for interest subsidy. It made banks handicapped in terms of building main strength and expanding credit supply. Basically it deteriorated the quality of loan.5% and CRR was 15%. Both of these ratios were very high at that time.Recommendations Problems Identified By The Narasimham Committee 1. the SLR was as high as 38. Additional Suggestions : Committee also suggested that the determination of interest rate should be on grounds of market forces.5% to 25% and CRR from 15% to 3 to 5%. banks needed to maintain 53. This directed credit programme was successful from the government's point of view but it affected commercial banks in a bad manner.Narasimham Committee Report 1991 1998 . Phasing out Directed Credit Programme : In India. It is also known as the statutory liquidity Ratio (SLR). It was reducing the profitability of banks and thus the committee recommended the stopping of this programme. The SLR then was 38. Similarly. since nationalization.

Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services. Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. 7. Narasimham Committee Report II . Strengthening Banks in India : The committee considered the stronger banking system in the context of the Current Account Convertibility 'CAC'. In order to pursue competitiveness and efficiency. it recommended that they should focus on agriculture and rural financing. It submitted its report to the Government in April 1998 with the following recommendations. bank mergers. This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes. banks must enjoy autonomy so that they can reform the work culture and banking technology upgradation will thus be easy. Local banks should concentrate on region specific banking. it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy. Some of these recommendations were later accepted by the Government of India and became banking reforms. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. . Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks will be allowed to place their funds only in short term and risk free assets. They recommended that the government should assure that henceforth there won't be any nationalization and private and foreign banks should be allowed liberal entry in India. It considered and recommended that the RBI should be the only main agency to regulate banking in India. 3. 1. Narrow Banking : Those days many public sector banks were facing a problem of the Non-performing assets (NPAs). The committee focused on various areas such as capital adequacy. 4. Structural Reorganizations of the Banking sector : The committee recommended that the actual numbers of public sector banks need to be reduced. Removal of Dual control : Those days banks were under the dual control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). This will further improve their absorption capacity also. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). It would help banks to get rid of bad debts. Banking Autonomy : The committee recommended that the public sector banks should be free and autonomous. The committee recommended the stepping of this system. Regarding the RRBs (Regional Rural Banks). Establishment of the ARF Tribunal : The proportion of bad debts and Non-performing asset (NPA) of the public sector Banks and Development Financial Institute was very alarming in those days. it recommended the merger of strong banks which will have 'multiplier effect' on the industry.Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector. 2. Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank autonomy. 6. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus. Some of them had NPAs were as high as 20 percent of their assets. Three to four big banks including SBI should be developed as international banks. 4. bank legislation. Narsimham. Currently the capital adequacy ration for Indian banks is at 9 percent.1998 In 1998 the government appointed yet another committee under the chairmanship of Mr. etc. 5. It is better known as the Banking Sector Committee.

This upgradation will bring them in line with the present needs of the banking sector in India. Only a few of its recommendations became banking reforms of India and others were not at all considered. Review of banking laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act. the committee has also recommended faster computerization. the RBI has to play a major role. As far as recommendations regarding bank restructuring. etc. Banking Regulation Act. strengthening the regulation are concerned. training of staff. . Narasimham who was 13th governor of RBI. professionalism in banking. technology upgradation. reviewing bank recruitment. Because of this a second committee was again set up in 1998. management freedom.5. If the major recommendations of this committee are accepted. State Bank of India Act. Apart from these major recommendations. depoliticizing of banks. Evaluation of Narsimham Committee Reports The Committee was first set up in 1991 under the chairmanship of Mr. M. it will prove to be fruitful in making Indian banks more profitable and efficient. Bank Nationalisation Act. etc.

one finds the presence of a diversified banking system. 6. the private sector holding has gone up. i. deposit rate. complimentarily between forms in banking sector and changes in fiscal. V. consequently. the period 1992-97 witnessed the laying of the foundations for reforms in the banking system.II in 1998 provided the road map of the second generation reforms processes. One of the major objectives of Indian banking sector reforms was to encourage operational self-sufficiency. Steps have been initiated to strengthen public sector banks. through increasing their autonomy recapitalization from the fiscal. primary dealers housing financing companies etc. 1993).e. sequenced and phased manner with cautious and proper sequencing. 7. 3. exposure norms etc).. The recommendations of the Narishiman Commission-I in 1991 provided the blue print for the first generation reforms of the financial sector. The Government of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. 4. Other important developments are: 1. A set of prudential measures have been stipulated to impart greater strength to the banking system and also.. several banks capital base has been written off and some have even returned capital to govt. dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. income recognition. Allowing new private sector banks and more liberal entry of foreign banks has infused competition.V. 5. Statutory Liquidity ratio) has been lowered while stepping up prudential regulations at the same time. The banking sector has also witnessed greater levels of transparency and standards of disclosure. certain weaknesses. ranging from 23% to 43%. Measures have also been taken to broaden the ownership base of PSB. external and monetary policies. the financial markets have been concurrently developed . By way of visible impact. As the banking system has liberalized and become increasingly market oriented. Reddy noted that the first generation reforms were undertaken early in the reform cycle. and the reforms in the financial sector were initiated in a well structured. Financial regulation through statutory pre-emotions (Bank rate. Y.Introduction: The efficient. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem. flexibility and competition in the system and to increase the banking standards in India to the international best practices (Reddy Y. increasing fiscal deficits our country too embarked upon economic reforms (Ahulwalia M. while the conduct of monetary policy has been tailored to take into account the realities of the changing environment (switching to indirect instruments) In the post liberalization-era. Another important aspect is that apart from the growth of banks and commercial banks there are various other financial intermediaries including mutual funds. Against such backdrop. This period saw the implementation of prudential norms (relating to capital adequacy. Reserve Bank of India (RBI) has initiated quite a few measures to ensure safety and consistency of the banking system in the country and at the same point in time to support banks to play an effective role in accelerating the economic growth process. developing financial infrastructure and developing markets. 2002). turn down in efficiency and erosion in . allowing banks the freedom to determine deposits and lending rates. Although the Indian banks have contributed much in the Indian economy. NBFCs. mutually reinforcing measures. S. ensure their safety and soundness with the objective of moving towards international practices. the Report of the Narishiman Committee. The structural changes accomplished during the period provided foundation of further reforms. 2. asset classification and provisioning. the roles played by the commercial banks in promoting these institutions are equally significant. strong and dynamic. These were initiated in 1991 to make Indian banking sector more efficient. Credit Reserve Ration. Interest rates have been deregulated.

profitability had developed in the system. The reforms were initiated in the middle of a “current account” crisis that occurred in early 1991. characterized by a public deficit of 10 per cent of GDP. and allocation of financial resources to priority sectors increased the degree of financial repression and adversely affected the country‟s financial resource mobilization and allocation. and growing domestic and foreign debt. 2011). Narasimham. The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. Manmohan Singh. asset classification and provisioning against bad and doubtful debts 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) to take over from banks a portion of their bad and doubtful advances at a discount The guidelines that were issued subsequently laid the foundation for the reformation of Indian . assets and credit. the need was felt to restructure the Indian banking industry. Kumara Charyulu. on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. the RBI had proposed to form the committee chaired by M. an inflation rate of 10 per cent. interest rate controls. the government took the view that loans extended by colonial banks were biased toward working capital for trade and large firms (Joshi and Little 1996). The prevalence of reserve requirements. In 1991. Banking Sector Reforms As the real sector reforms began in 1992. former RBI Governor in order to review the Financial System viz. banking sector. the Committee on Financial System (CFS) was lay down (Amit Kumar Dwivedi. aspects relating to the Structure. India’s Pre-reform period Since 1991. The main recommendations of the Committee were: Banking Sector Reforms • • • • • • • • Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) Phasing out of directed credit programmes and redefinition of the priority sector Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets Adoption of uniform accounting practices in regard to income recognition. After Independence in 1947. India has been engaged in banking sector reforms aimed at increasing the profitability and efficiency of the then 27 public-sector banks that controlled about 90 per cent of all deposits. it was perceived that banks should be utilized to assist India‟s planned development strategy by mobilizing financial resources to strategically important sectors. and was triggered by a temporary oil price boom following the Iraqi invasion of Kuwait in 1990. India‟s financial sector had long been characterized as highly regulated and financially repressed. Organisations and Functioning of the financial system. a current account deficit of 3 per cent of GDP. Moreover. observance in view these conditions. The reform measures necessitated the deregulation of the financial sector. The Narasimham Committee report. The crisis was caused by poor macroeconomic performance. particularly the banking sector. D. submitted to the then finance minister.

it has changed the very functioning of Indian banks. Classification of assets. 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 Inspection by supervisory authorities based essentially on the internal audit and inspection reports Ending duality of control over banking system by Banking Division and RBI A separate authority for supervision of banks and financial institutions which would be a semiautonomous body under RBI Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Obtaining resources from the market on competitive terms by DFIs Speedy liberalisation of capital market Economic Reforms of the Banking Sector in India Indian banking sector has undergone major changes and reforms during economic reforms. It is reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. which could become international in character. Some of them have established subsidiaries in . but has left everlasting footprints on the working of the banking sector in India. It resulted in an improvement in the capital position of commercial banks. Operational Autonomy: During the reforms period commercial banks enjoyed the operational freedom. 2. interest rates of commercial banks were deregulated. including RRBs. so as to have 3 or 4 large banks.20 Lakhs to just Rs. Similarly. Let us get acquainted with some of the important reforms in the banking sector in India below with a graph. during the economic reforms period. Interest rate slabs are reduced from Rs. Though it was a part of overall economic reforms. 2 Lakhs. etc. upgrading the extension counters. solving the liquidity problem. 1. maintaining international standards in accounting practices. Interest rates on the bank loans above Rs. the SLR Is also reduced from early 38. all most all the banks in India has reached the Capital Adequacy Ratio (CAR) above the statutory level of 9%. Deregulation of Interest Rate: During the economics reforms period. 4. It helped banks in reducing and restructuring Nonperforming assets (NPAs). provisions for bad debts. 5. closing down existing branches and they get liberal lending norms. Fixing prudential Norms: In order to induce professionalism in its operations. 6. By Law in India the CRR remains between 3-15% of the Net Demand and Time Liabilities. Reduced CRR and SLR: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are gradually reduced during the economic reforms period in India. It includes recognition of income sources. Introduction of CRAR: Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. 8 to 10 national banks and local banks confined to specific regions. This has left more loanable funds with commercial banks. Rural banks. If a bank satisfies the CAR then it gets freedom in opening new branches. Banking Diversification: The Indian banking sector was well diversified. Many of the banks have stared new services and new products.• Restructuring of the banking system.2 lakhs are full decontrolled. the RBI fixed prudential norms for commercial banks. This reform has not only influenced the productivity and efficiency of many of the Indian Banks. These measures have resulted in more freedom to commercial banks in interest rate regime. 3. Banks now enjoy freedom of fixing the lower and upper limit of interest on deposits.5% to current minimum of 25% level.

post liberalization. venture capital.47 Thus. dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. HDFC Bank. increasing NPAs. 351 crores. government gave much importance to the second phase of the reforms in 1998. banking sector needs some dose to improve its performance. The efficient. strong and dynamic. continuous losses by public sector banks year after year. under the accounting that is most favorable to public sector banks. and in 2000 stood at about 7. they squeak by as less costly to the government than private sector banks (the ratio of money spent bailing out public vs. with detailed measures to improve the adverse situation of the banking industry (Uppal.merchant banking. Banks such as ICICI Bank. It has happened due to the reduced Non-performing loans. more computerization and some other relevant measures adopted by the government.5 to 1. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem. mutual funds. our country too embarked upon economic reforms. insurance. The Future of Banking Reform Prior to the economic reforms. Therefore. obsolete work technology and unable to meet competitive environment. Improved Profitability and Efficiency: During the reform period. increased use of technology. These were initiated in 1991 to make Indian banking sector more efficient. . To improve the performance of the Indian commercial banks. eroded productivity and efficiency of public sector banks. less than the deposits ratio). private banks would be 62 3 to 1. using the estimate of 540 billion rupees total cost gives a 12-1 ratio. the ratio was approximately 111. the productivity and efficiency of many commercial banks has improved. etc which has led to diversified sources of income of them. Rationale of Banking Sector Reforms To cope up with the changing economic environment. which would imply that the public sector banks lost a greater portion of their deposits to bad loans. from 1980 to 1993. 8. 7. UTI Bank have given a big challenge to the public sector banks leading to a greater degree of competition. the ratio has been falling. the banking sector was faced with the problems such as tight control of RBI. Since 1991. New Generation Banks: During the reforms period many new generation banks have successfully emerged on the financial horizon. increasing fiscal deficits etc. Differential Rate Interest: The differential Rate of Interest (DRI) is a leading programme launched by the Government in April 1972 which makes it obligatory upon all the Public Sector Banks in India to lend I percent total leading of the preceding year to the “The poorest among the poor” at an interest rates of 4 percent paranom the total leading in 2005 – 06 was Rs. of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. first phase of banking sector reforms were introduced in 1991 and after its success. deteriorated portfolio quality. the ratio of deposits in nationalized banks to deposits in private banks was approximately 5 to 1. Narasimham Committee was appointed in 1991 and it submitted its report in November 1991. poor customer service. The govt. However.. period 1969-2000 gives the following: from 1969-1980. Uppal (2011) analyzes the ongoing banking sector reforms and their efficacy with the help of some ratios and concludes the efficacy of all the bank groups have increased but new private sector and foreign banks have edge over our public sector bank. the financial sector of India was on the crossroads.

several distortions such as increasing NPAs and obsolete technology crept into the system. p. mainly due to the global changes occurring in the world economy.Adaptation of the „narrow banking‟ concept to rehabilitate weak banks. Uppal (2011. There were no new recommendations in the second Narasimham Committee except the followings: . 70) the committee reviewed the performance of the banks in light of first phase of banking sector reforms and submitted its report with some more focus and new recommendations. deposit mobilization etc. . p. As the process of second banking sector reforms is going on since 1999.Merger of strong units of banks . restructuring of the public sector banks in particular. In this context.) Reduction in SLR & CRR 2. Narasimham to review the first phase of banking reforms and chart a programme for further reforms necessary to strengthen India‟s financial system so as to make it internationally competitive. to strengthen the Indian financial system and make it able to meet the challenges of globalization.2011. Third banking sector reforms and fresh outlook Rethinking for financial sector reforms have to be accorded. one may say that there is an improvement in the performance of banks.) Income recognition 9. However. M.) Asset Reconstruction Fund (ARF) Second Phase of Banking Sector Reforms In spite of the optimistic views about the growth of banking industry in terms of branch expansion. The main motive of the reforms was to improve the operational efficiency of the banks to further enhance their productivity and profitability. First Phase of Banking Sector Reforms The first phase of banking sector reforms essentially focused on the following: 1.) Setting up of Debt Recovery Tribunals 7. the government of India appointed second Narasimham Committee under the chairmanship of Mr. 69).) Branch licensing policy has been liberalized 6.) Public sector banks allowed for direct access to capital markets 5.) Asset classification and provisioning 8.) Transparent guidelines or norms for entry and exit of private sector banks 4. The on-going reform process and the agenda for third reforms will focus mainly to make the banking sector reforms viable and efficient so that it could contribute to enhance the competitiveness of the real economy and face the challenges of an increasingly integrated global financial architecture. there have been many changes and challenges now due to the entry of our banks into the global market.) Deregulation of interest rates 3.

this is in part a result of poor regulation–the regulator should be able to spot a private bank that is stripping its assets. including rural branches. with a share of net bank credit to the priority sector at 44. Once again the fact that the “new” private banks pose a problem: So far none of them have defaulted. is the one place where the nationalized banks are subject to political pressures to make imprudent loans. though. reluctant to let banks fail. combined with their relatively short track record. albeit quite tentatively. Historically. It could also be that credit to agriculture. they have been favored by regulators in some specific ways. There is now a greater awareness of these problems in the Indian government and a willingness to do something about them. but they are also new.5 percent in 2003. deposits and number of branches. as will be discussed later. understandably. In the past there have been cases where the owner of the private bank stripped its assets. there are substantial differences between the public and private sector banks. As we saw above. have not yet had to deal with the slow decline of once successful companies. The recent broadening of the definition of priority sector has mechanically increased the share of credit from both public and private sector banks that qualify as priority sector. though they also lend substantially less in rural areas. Of course. Our evidence suggests that privatization will make it harder for the government to get the private banks to comply with what it wants them to do. Privatization will also free the loan officers from the fear of the CVC and make them somewhat more willing to lend aggressively where the prospects are good. up from 36. the comparison group of private banks were the relatively small ”old” private banks. Indeed there is a natural .When we take this evidence together. ranging from under-lending to unsecured lending. which. a crucial difference between public and private sector banks has been their willingness to lend to the priority sector. with the resultant pressure on the fiscal deficit. and declared that it cannot honor its deposit liabilities. and as a result. it has tended to take over the failed bank. On balance. The “new” private banks are bigger and in some ways would have been a better group to compare with.48 It is not clear that we can extrapolate from this to what we could expect when the State Bank of India. the cost of bailing out the public banks may well be larger (appropriately scaled) than the total losses incurred from every bank failure since 1969. for privatizing the nationalized banks. Finally. Better enforced prudential regulations would considerably strengthen the case for privatization. However while this group is also growing very fast. which we have discussed at some length. since one of the achievements of the last forty years has been to persuade people that their money is safe in the banks.4 percent to the priority sector. being particularly politically salient. where does it leave us? There are obvious problems with the Indian banking sector. we feel the evidence argues.6 percent in 1995. public banks have also been failing–the problem seems to be part corruption and part inertia/laziness on the part of the lenders. Still. combined with tighter prudential regulations. one potential disadvantage of privatization comes from the risk of bank failure. Private sector lending has shown a similar increase from its 1995 level of 30 percent. though it should be noted that in our empirical analysis. discussed above. better regulation of public banks may also achieve similar goals. Most notable is the consistent failure of private sector banks to meet the agricultural lending sub-target. The government is. makes the comparison difficult. which is more than an order of magnitude greater in size than the largest “old” private sector banks. which is one of the main sources of the accumulation of bad debt on the books of the public banks. suggests that privatization would lead to an infusion of dynamism in to the banking sector: private banks have been growing faster than comparable public banks in terms of credit. However it is not clear that this reflects the greater sensitivity of the public banks to this particular social goal. In 2003 it may have surpassed for the first time ever public sector banks. On the other hand we see no obvious case for abandoning the “social” aspect of banking. One policy option that is being discussed is privatization. On the other hand. The evidence from Cole. The share of priority sector lending from public sector banks was 42. Therefore.

This may be a way to both target better and guard against potential NPAs. (2) Marginally profitable to loss-making firms that used to be highly profitable in the recent past but have been hit by a temporary shock (e. with or without privatization. which ought to help the smaller firms. Berger et al. Of course it is not always going to be easy to distinguish permanent shocks from the temporary. consumer finance and blue-chip sectors. (3) Marginally profitable to loss-making firms that have been that way for a long time or have just been hit by a permanent shock (e. This is not say that they have no challenges. what should we make of the firm that claims that it has put in place strategies that help it survive the shock of Chinese competition. have argued in the context of the US that this leads bigger banks to shy away from lending to the smaller firms. the entry of a number of newly privatized banks should increase competition for clients. right after a shock to demand or costs has pushed it into the red. they almost inevitably become more bureaucratic. legal framework etc needs urgent attention. public or private. the world over. the recent developments in the financial sector have led to an appreciation of the . On the other side. It is clear however that choosing the right way to include profits in the lending decision will not be easy. As banks become larger. measured by declining spread has improved. but that they will only work in a couple of years? The best rule may be to use the information in profits and costs over several years.). there should be an attempt to discontinue lending. Perhaps one way to balance these objectives would be to create three categories of firms: (1) Profitable to highly profitable firms.g.. from a regulatory perspective. prudential regulation weak banks.50 Our presumption is that this process of consolidation and an increased focus on lending to corporate and other larger firms is what will happen in India. For these firms the existing rules for lending might work well. the natural tendency of banks. ICICI) try to reach beyond their traditional clients in the housing. recapitalization. This will require a set of smaller step reforms. Being bureaucratic means limiting the amount of discretion the loan officers can exercise and using rules. For these firms. even if they look similar on the other measures. and non-performing assets. since with a privatized banking sector it is less likely that the directed loans will get redirected based on political expediency. is towards consolidation and the formation of fewer. CONCLUSION It could be noted that there has been no banking crisis at the same time. the removal of tariffs protecting firms producing in an industry in which the Chinese have a huge cost advantage). by the very fact of the bank being big. On one side there is the danger that unprofitable companies default. The paper concludes that. there is the danger of pushing a company into default by cutting its access to credit exactly when it needs it the most. which appear in the forms of consolidation.complementarity between reinforcing the priority sector regulations (for example. with more profitable firms getting a higher limit. because most lending decisions in big banks. largely because poor profitability seems to be a good predictor of future default.e. etc. must be taken by people who have no direct financial stake in the loan. In particular. In part this is already happening as many of the newer private banks (like HDFC. Within this category lending should respond to profitability. efficiency of banking system as a whole. There are emerging challenges. both private and public. much as is currently done in Indian nationalized banks. an increase in the price of cotton because of crop failures.g. For a variety of reasons including financial stability. bigger banks. i. and the experience of the industry as a whole. by insisting that private banks lend more to agriculture) and privatization. In the end the key to banking reform may lie in the internal bureaucratic reform of banks. designed to affect the incentives of bankers in private and public banks. though in the short run. However there is no reason to expect miracles from the privatized banks. rather human judgment wherever possible. based on some clearly worked out exit strategy (it is important that the borrowers be offered enough of the pie that they feel that they will be better off by exiting without defaulting on the loans). A first step would be to make lending rules more responsive to current profits and projections of future profits.

global environment is continuously changing and providong new direction. RBI should appoint another committee to evaluate the on-going banking sector reforms and suggest third phase of the banking sector reforms in the light of above said recommendations. dimensions and immense opportunities for the banking industry. Keeping in mind all the changes. irrespective of its structural design. . a few trends are evident. competition and global challenges.limitations of the present segmental approach to financial regulation and favors adopting a consolidated supervisory approach to financial regulation and supervision. and the coming decade should be as interesting as the last one. Need of the hour is to provide some effective measures to guard the banks against financial fragilities and vulnerability in an environment of growing financial integration. It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. However. The challenge for the banks is to harmonize and coordinate with banks in other countries to reduce the scope for contagion and maintain financial stability. In the post-era of IT Act.

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