You are on page 1of 6

Abstract The Indian banking industry is measured as a flourishing and the secure in the banking world.

The countrys economy growth rate by over 9 percent since last several years and that has made it regarded as the next economic power in the world. The paper deals with the banking sector reforms and it has been discussed that Indias banking industry is a mixture of public, private and foreign ownerships. The major dominance of commercial banks can be easily found in Indian banking, although the co-operative and regional rural banks have little business segment. Further the paper has discussed an evaluation of banking sector reforms and economic growth of the country since from the globalization and its effects on Indian economy. Competition among financial intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation. Finally the paper deals with conclusion and inflation rates from the different years and regulation of economy and finance of the country through government policies and banking sector reforms. Key Words: Banking Sector, Reforms, Economy, Inflation, Growth Introduction: The efficient, dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem, increasing fiscal deficits our country too embarked upon economic reforms (Ahulwalia M. S; 1993). The Government of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. These were initiated in 1991 to make Indian banking sector more efficient, strong and dynamic.

The recommendations of the Narishiman Commission-I in 1991 provided the blue print for the first generation reforms of the financial sector, the period 1992-97 witnessed the laying of the foundations for reforms in the banking system. This period saw the implementation of prudential norms (relating to capital adequacy, income recognition, asset classification and provisioning, exposure norms etc). The structural changes accomplished during the period provided foundation of further reforms. Against such backdrop, the Report of the Narishiman Committee- II in 1998 provided the road map of the second generation reforms processes. Y.V. 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, sequenced and phased manner with cautious and proper sequencing, mutually reinforcing measures; complimentarily between forms in banking sector and changes in fiscal, external and monetary policies, developing financial infrastructure and developing markets. By way of visible impact, one finds the presence of a diversified banking system. Another important aspect is that apart from the growth of banks and commercial banks there are various other financial intermediaries including mutual funds. NBFCs, primary dealers housing financing companies etc., the roles played by the commercial banks in promoting these institutions are equally significant. Other important developments are: 1. Financial regulation through statutory pre-emotions (Bank rate, deposit rate, Credit Reserve Ration, Statutory Liquidity ratio) has been lowered while stepping up prudential regulations at the same time. 2. Interest rates have been deregulated, allowing banks the freedom to determine deposits and lending rates. 3. Steps have been initiated to strengthen public sector banks, through increasing their autonomy recapitalization from the fiscal, several banks capital base has been written off and some have even returned capital

to govt. Allowing new private sector banks and more liberal entry of foreign banks has infused competition. 4. A set of prudential measures have been stipulated to impart greater strength to the banking system and also, ensure their safety and soundness with the objective of moving towards international practices. 5. Measures have also been taken to broaden the ownership base of PSB; consequently, the private sector holding has gone up, ranging from 23% to 43%. 6. The banking sector has also witnessed greater levels of transparency and standards of disclosure. 7. As the banking system has liberalized and become increasingly market oriented, the financial markets have been concurrently developed ; 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, 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. One of the major objectives of Indian banking sector reforms was to encourage operational selfsufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices (Reddy Y. V.; 2002). Although the Indian banks have contributed much in the Indian economy, certain weaknesses, i.e. turn down in efficiency and erosion in profitability had developed in the system, observance in view these conditions, the Committee on Financial System (CFS) was lay down (Amit Kumar Dwivedi; D. Kumara Charyulu; 2011). Indias Pre-reform period

Since 1991, 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, assets and credit. The reforms were initiated in the middle of a current account crisis that occurred in early 1991. The crisis was caused by poor macroeconomic performance, characterized by a public deficit of 10 per cent of GDP, a current account deficit of 3 per cent of GDP, an inflation rate of 10 per cent, and growing domestic and foreign debt, and was triggered by a temporary oil price boom following the Iraqi invasion of Kuwait in 1990. Indias financial sector had long been characterized as highly regulated and financially repressed. The prevalence of reserve requirements, interest rate controls, and allocation of financial resources to priority sectors increased the degree of financial repression and adversely affected the countrys financial resource mobilization and allocation. After Independence in 1947, 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). Moreover, it was perceived that banks should be utilized to assist Indias planned development strategy by mobilizing financial resources to strategically important sectors. Banking Sector Reforms As the real sector reforms began in 1992, the need was felt to restructure the Indian banking industry. The reform measures necessitated the deregulation of the financial sector, particularly the banking sector. The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. In 1991, the RBI had proposed to form the committee chaired by M. Narasimham, former RBI Governor in order to review the Financial System viz. aspects relating to the Structure, Organisations and Functioning of the financial system. The Narasimham Committee report,

submitted to the then finance minister, Manmohan Singh, on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. The guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector. 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, 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 Restructuring of the banking system, so as to have 3 or 4 large banks, which could become international in character, 8 to 10 national banks and local banks confined to specific regions. Rural banks, including RRBs, 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 semi-autonomous 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 Indian banking sector has undergone major changes and reforms during

Economic Reforms of the Banking Sector in India economic reforms. Though it was a part of overall economic reforms, it has changed the very functioning of Indian banks. This reform has not only influenced the productivity and efficiency of many of the Indian Banks, but has left everlasting footprints on the working of the banking sector in India. Let us get acquainted with some of the important reforms in the banking sector in India below with a graph.