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A description report

On

INDIAN BANKING REFORMS AND THEIR IMPACT
ON ECONOMY
By
Jalaj Kahnani
Under the guidance of
Mr.Raj kumar

Submitted to

Shaheed sukhdev college of business studies

DECLARATION
It gives me immense pleasure to declare that the project work
undertaken by me is an original and authentic work. the project is
being submitted in partial fulfillment of requirement for the award
of bachelor of management studies from Shaheed sukhdev
college of business studies, affiliated to university of delhi.

Serial Page no
no. TITLE
1. INTRODUCTION 1
2. LITERATURE REVIEW 6
3. OBJECTIVE AND SCOPE 7
4. REASEARCHMETHODOLOGY 9
5. DATA ANALYSIS
6. FINDINGS
7. CONCLUSION

8. SUGGESTIONS
9. BIBLIOGRAPHY

INTRODUCTION TO THE STUDY

transparency of operations. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operations. As the international standards became prevalent. over staffing. all of which led to deterioration in the quality of loan portfolios. adequate capital provision.e . the banking sector reforms have provided the necessary platforms for the indian banks to operate on the basis of operational flexibility and functional autonomy. The recent international consensus on preserving the soundness of the banking system has veered around certain core themes. i. constituted in 1991. inadequacy of capital and the erosion of profitability. the lack of competitiveness vis-a-vis global standards. high NPAs and low levels of motivation had shackled the performance of the banking industry. Until recently. low technological level in operations. The Narasimham committee laid the foundation for the reformation of the Indian banking sector. conducive public policy intervention and maintenance of macroeconomics stability in the economy. these are: effective risk management systems. which laid significant thrust on enhancing the efficiency and viability of the banking sector. in 1992 and 1998. However. sound practices of supervision and regulation.A retrospect of events clearly indicates that the Indian banking sector has come far away from the day of nationalization. the committee submitted two reports. banks had to unlearn their traditional operational methods of directed credit. directed investments and fixed interest rates. productivity and profitability. thereby enhancing efficiency.

Lastly. RBI has introduced the Asset Liability Management System. For revival of weak banks. This is the reason why banks have been tapping the market to fund their expansion plans. . Also the Act originally provided that the government must mandatorily hold 100 per cent stake in banks. to maintain macroeconomic stability.The Nationalisation Act provides that the PSU banks cannot sell a single share. The government holds majority or entire equity of 19 nationalized banks currently. To encourage speedy recovery of Non-performing assets. The 20 nationalised banks became 19 subsequently after New Bank of India merged with Punjab National Bank. but that has been within the prescribed 25 per cent cap. banks could reduce equity only up to 25 per cent of the paid up capital on the date of nationalisation. capital adequacy norms . A LOOK AT PAST The Indira Gandhi government had nationalised 14 commercial banks through the Banking Companies (Acquisitions and Transfer of Undertakings) Ordinance in 1969. Some banks like the Bank of Baroda have returned equity to the government in the past.reduction in CRR and SLR reserves. The 1970 and 1980 Acts brought about after the nationalisation of 14 and 6 banks respectively were first amended in 1994 to allow government to reduce its equity in them to up to 49 per cent.Till now. restructuring and recapitulating banks and enhancing the competitive elements in the market through the entry of new banks. the Verma Committee recommendations have laid the foundation. Only six of these 19 banks have so far accessed the market and to gone for public issues meet its additional capital needs. the Narasimham committee laid directions to introduce Special Tribunals and also lead to the creation of an Asset Reconstruction Fund.

Narasimham.particularly the banking sector. excluding government shares could be transferred. The guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector. Organisations and Functioning of the financial system. submitted to the then finance minister. Progressive reduction in Cash Reserve Ratio (CRR) iii. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years ii.The 1994 amendments brought it down to 51 per cent. former RBI Governor in order to review the Financial System viz. At this stage. to help induction of public as shareholders. The amendments remove restrictions on the transfer of government shareholding. Manmohan Singh. The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. the RBI had proposed to from the committee chaired by M. In 1991. aspects relating to the Structure. the need was felt to restructure the Indian banking industry. the government provided that all shares. Phasing out of directed credit programmes and redefinition of the priority sector . This was necessary to permit the transfer of shares when public shareholders sold their stake in banks. The Narasimham Committee report. The main recommendations of the Committee were: - i. on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. REFORMS IN BANKING SECTOR As the real sector reforms began in 1992. The reform measures necessitated the deregulation of the financial sector.

Deregulation of interest rates so as to reflect emerging market conditions v.iv. Rural banks. including RRBs. 8 to 10 national banks and local banks confined to specific regions. confined to rural areas xi. Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount x. A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI xviii. Liberalising the policy with regard to allowing foreign banks to open offices in India xiii. Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks xix. so as to have 3 or 4 large banks. Ending duality of control over banking system by Banking Division and RBI xvii. Rationalisation of foreign operations of Indian banks xiv. asset classification and provisioning against bad and doubtful debts vii. Giving freedom to individual banks to recruit officers xv. Inspection by supervisory authorities based essentially on the internal audit and inspection reports xvi. Imparting transparency to bank balance sheets and making more disclosures viii. which could become international in character. and 8 per cent by those banks having international operations by March 1994 vi. Abolition of branch licensing xii. Setting up of special tribunals to speed up the process of recovery of loans ix. 8 per cent by March 1996. Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. Obtaining resources from the market on competitive terms by DFIs . Adoption of uniform accounting practices in regard to income recognition. Restructuring of the banking system.

charting of a programme of banking sector reforms required to make the Indian banking system more robust and internationally competitive and framing of detailed recommendations in regard to make the Indian banking system more robust and internationally competitive. Keeping in view the need of further liberalisation the Narasimham Committee II on Banking Sector reform was set up in 1997. Supervision of merchant banks. This committee’s terms of reference included review of progress in reforms in the banking sector over the past six years. introduction of capital adequacy norms. Among these are the reductions in SLR/CRR.xx.. adoption of prudential norms for asset classification and provisions. by a separate agency to be set up by RBI and enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions. Several recommendations have been accepted and are being implemented in a phased manner. . etc. etc. and deregulation of most of the interest rates. Speedy liberalisation of capital market xxi. allowing entry to new entrants in private sector banking sector. mutual funds. leasing companies etc.

An asset should be classified as doubtful if it is in the sub- standard category for 18 months instead of the present 24 months vi. A provision of 1% on standard assets is required. In the next three years. ix. xiv. bonds representing the realisable value of the assets. CAR to be raised to 10% from the present 8%. xvi. xi. NPA level should be brought down to 5% by 2000 and 3% by 2002. . Recruitment of skilled manpower directly from the market be given urgent consideration xv. To rationalize staff strengths. There should be no further re-capitalization by the Govt. Banks having high NPA should transfer their doubtful and loss categories to ARCs which would issue Govt. an appropriate VRS must be introduced. Risk weight for a Govt. The major recommendations are: i. guaranteed accounts must also be categorized as NPAs under the usual norms xiii. Capital adequacy requirements should take into account market risks also ii. xii. entire portfolio of Govt. Govt. Banks should avoid ever greening of their advances vii. securities should be marked to market iii. viii. There is need to institute an independent loan review mechanism especially for large borrowal accounts to identify potential NPAs. guaranteed account must be 100 percent iv. A weak bank should be one whose accumulated losses and net NPAs exceed its net worth or one whose operating profits less its income on recap bonds is negative for 3 consecutive years. x. International practice of income recognition by introduction of the 90-day norm instead of the present 180 days. 9% by 2000 and 10% by 2002 v.This committee constituted submitted its report in April 1998.

shortened the life of sub-standard assets from 24 months to 18 months (by March 31. 2001).5 per cent risk-weightage on gilts by March 31. it has assigned a 2. 2000 LITERATURE REVIEW .25 per cent provisioning on standard assets (from fiscal 2000).To start with. called for 0. 100 per cent risk weightage on foreign exchange (March 31. 2000 and laid down rules for provisioning. 1999) and a minimum capital adequacy ratio of 9 per cent as on March 31.

After identifying various measures of productivity like total assets per employee. comparison is made with the banks at the international level. Rao (2007) studies how these reforms would help the banks. The study empirically proves that pre-liberalization banking being highly regulated and controlled industry. The banks have been adjusting very well to the new environment though gradually. Ojha (1992) in his study attempts to measure the productivity of public sector commercial banks in India. which have to perform other social functions unlike western commercial banks. ratio of establishment expenses to working funds and net interest per employee. He stated the following to conlude his study: -The response of the banks to the reforms has been impressive. pre-tax profits per employee. The study concludes the Indian banks have very less productivity ratio compared with western countries. The reforms have not only enhanced the . working funds per employee. total deposits per employee. Minakshi and Kaur (1990) attempted to measure quantitatively the impact of the various instruments of monetary policy on the profitability of commercial banks. total credit per employee. The factors leading to the deterioration of profitability are highlighted. The bank rates and reserve requirements ratio has played a significant role in having a negative impact on the bank’s profitability. net profit per employee. has suffered a lot so far as profitability concerned. The study discusses and trends in profits and profitability of commercial banks nationalization. specially the private sector ones. Since in his study a comparison has been made of Indian public sector banks.Joshi (1986) in his study of all scheduled commercial banks operating in India analyses the profitability and profit planning relating to the period 1970-1982.

the competitive pressures are constantly on the increase. As a result of entry of new generation private sector banks.opportunities for banks but at the same time through challenges as well. OBJECTIVE OF STUDY .

The study also looks from a macro level at the economy of India as the effects of the reforms are being checked on it REASEARCH METHODLOGY . share of market of banks.The main objective of the research paper is to make a simple assessment of the banking sector reforms in India. The study will try to list the major reforms of the Indian baking sector and to find out the impacts of these reform and the future prospects. As the reforms are a general initiative for all banks to follow. profitability and prudential regulations. the study is a macro perspective research. It has been more than 20 years of the start of the economic reform in India and the financial sector reform was one of the important parts of the process. The study will be confined to the impacts of reforms upon credit delivery. and the economy SCOPE OF STUDY The study focuses on the banking sector as a whole.

we have relied totally on research papers and various articles. DATA ANALYSIS AND INTERPRETATION . For this study. surveys and other techniques. The methodology may include publication research. thus the type ofdata used here is SECONDARY data. Data Collection:- The type of data that is used in the study is stated here. interviews.The term research methodology can be defined as a process used to collect data and information for the purpose of making business decisions.

a code stating adoption of uniform accounting practices in regard to income recognition. Ultimately. by March 31. asset classification and provisioning against bad and doubtful debts has been laid down by the Central Bank. 1. Close to 16 per cent of loans made by Indian banks were NPAs . REDUCTION IN CRR & SLR The Narasimham Committee had argued for reductions in SLR on the grounds that the stated government objective of reducing the fiscal deficits will obviate the need for a large portion of the current SLR. PRUDENTIAL NORMS To get a true picture of the profitability and efficiency of the Indian Banks. the need for the use of CRR to control secondary expansion of credit would be lesser in a regime of smaller fiscal deficits. as per the Basle Committee Recommendations. 8 per cent by March 1996. 2.MINIMUM CAPITAL ADEQUACY RATIO The committee recommended a Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. the rule was Reduction in the reserve requirements of banks. Similarly. with the Statutory Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a period of 5 years.very high compared to say 5 per cent in banking systems in advanced countries. The committee offered the route of Open Market Operations (OMO) to the Reserve Bank of India for further monetary control beyond that provided by the (lowered) SLR and CRR reserves. 1996. 4.INCOME RECOGNITION . all banks required attaining the capital adequacy norm of 8 per cent. 3. Later. and 8 per cent by those banks having international operations by March 1994.

Sub-standard Asset: An asset which remains as NPA for a period exceeding 24 months. but is to be treated as income only when actually received.where the current net worth of the borrower. Doubtful Assets: An NPA which continued to be so for a period exceeding two years (18 months. a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due Regulations for asset classification : Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA. guarantor or the current market value of the security charged to the bank is not enough to ensure recovery of the debt due to the bank in full. as recommended by Narasimham Committee II. RBI has advised the banks to evolve a realistic system for income recognition based on the prospect of realisability of the security.1998). An NPA is one where interest is overdue for two quar ters or more. However.ASSET CLASSIFICATION Loans and advances account for around 40 per cent of the assets of SCBs. with effect from March. . delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets non-performing. As regards to accounts classified in Health Code 4. In respect of NPAs.The regulation for income recognition states that the Income on NPAs cannot be booked. On non-performing accounts the banks should not charge or take into account the interest 5. Interest income should not be recognized until it is realized. interest is not to be recognized on accrual basis. As per RBI’s prudential norms. Income in respect of accounts coming under Health Code 5 to 8 should not be recognized until it is realized. 2001.

but the amount has not yet been written off wholly or partly 6. (ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the secured portion. deposits.Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset. the banks must be forced to make public the nature of NPAs being written off. RATIONALISATION OF FOREIGN OPERATIONS . and (iii) 10 per cent of the total out standings for substandard assets. Apart from this. investments and borrowings. The Narasimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out standings for loss assets. banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. 7.PROVISIONING NORMS Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. DISCLOSURE NORMS Banks should disclose in balance sheets maturity pattern of advances. This should be done to ensure that the taxpayer’s money given to the banks as capital is not used to write off private loans without adequate efforts and punishment of defaulters. These disclosures were to be made for the year ending March 2000 In fact. 8.

Liberalizing the policy with regard to allowing foreign banks to open offices in India or rather Deregulation of the entry norms for private sector banks and foreign sector.RECONSTRUCTION OF WEAK BANKS Keeping in view the urgent need to revive the weak banks.ASSET LIABLITIES MANGEMENT SYSTEM ALM framework rests on three pillars ALM Organisation: The ALCO consisting of the banks senior management including CEO should be responsible for adhering to the limits set by the board as well as for deciding the business strategy of the bank in line with the banks budget and decided risk management objectives. industrialists and financial experts  Independent Financial Restructuring Authority to monitor implementation of revival package 10. either through VRSs or through wage-cuts  Branch rationalisation. Verma to suggest measures for the revival of weak public sector banks in India. including the closure of loss-making foreign branches  Transfer of non-performing assets to an Asset Reconstruction Fund  Reconstitution of bank boards to include professionals. THE VERMA PRESCRIPTION  Identification of weak banks by using benchmarks for 7 critical ratios  Recapitalisation of 3 weak banks conditional on their achieving specified milestones  Five-year freeze on all wage-increases. including the 12.S. the Reserve Bank of India set up a Working Group in February.25% increase negotiated by the IBA  A 25% reduction in staff-strength. . 1999 under the Chairmanship of Shri M. 9.

measurement and management of risk parameters. an administered structure of interest rate has been in vogue in India. Banks must be self-reliant. lean and competitive. However RBI is expecting Indian banks to move towards sophisticated techniques like Duration. Banks are free to determine the interest rate on deposits and lending rates on all lendings above Rs. At present. The best way to achieve this is to privatise the banks and make the managements accountable to real shareholders.0 . VaR in the future.REDUCTION OF GOVERNMENT STAKE IN PSB's Banking is a business and not an extension of government. A good information system gives the bank management a complete picture of the bank's balance sheet. Information is the key to the ALM process. The 1998 Narasimham Reforms suggested deregulation of interest rates on term deposits beyond a period of 15 days. For long. a good starting point for us is to restrict government stake to 33 per cent 12. Simulation.DEREGULATION OF INTEREST RATES The interest rate regime has also undergone a significant change. 11. adequately and expeditiously. ALM Process The basic ALM process involves identification.200. If "privatisation" is a still a dirty word. the Reserve Bank prescribes only two lending rates for small borrowers. The RBI in its guidelines has asked Indian banks to use traditional techniques like Gap Analysis for monitoring interest rate and liquidity risk.ALM Information System ALM Information System for the collection of information accurately.

RBI softened the monetary policy by . RBI had kept the policy rates unchanged.MAJOR REFORMS TAKEN FROM 2014 ONWARDS  Till January 2015. As inflationary conditions eased.

 Currently 74% Foreign funding is allowed in private banking (49% through automatic and the rest via govt route)  In order to improve the Governance of Public Sector Banks. the Government intends to set up an autonomous Bank Board Bureau with professionals as its members.  Banks being allowed to raise capital from the market to meet capital adequacy norms by diluting the government’s stake up to 52 per cent.75%). increasing the minimum investment in security receipts to 15% from 5%.  The Reserve Bank of India (RBI) also adopted new Consumer Price Index (combined) as the measure for nominal anchor (Headline CPI) for policy communication. RBI has set up a working group recently under its Department of Banking Operations and Development to come out with necessary guidelines on consolidated accounts for .  Tightened norms to Asset Reconstruction Companies. as also for Non-Official Directors on the Boards of Banks. This would be an interim step towards moving in the direction of having a Bank Investment Company. RBI norms for consolidated PSU bank accounts The Reserve Bank of India (RBI) has moved to get public sector banks to consolidate their accounts with those of their subsidiaries and other outfits where they hold substantial stakes.  Pradhan Mantri Jan Dhan Yojana launched to provide universal access to banking facilities with at least one basic banking account for every household. Major Reform Initiatives Undertaken by Government in the Banking Sector (2014 onwards) Towards this end.cutting the Repo rates by 25 basis points in January 2015 (from 8% to 7. It would be responsible for search and selection of heads of PSBs.

to offload credit to state electricity distribution .  To provide relief to the state electricity distribution companies. THE GOVT HAS ALSO INITIATED THE FOLLOWING TO STRENGTHEN THE BANKING SECTOR:-  The Government of India is looking to set up a special fund. earlier subsidiaries were floated as external independent entities wherein the accounting details were not incorporated in the parent bank's balance sheet. According to a banker. as a part of National Investment and Infrastructure Fund (NIIF). to reinforce protection for consumers. the banks will be required to consolidate their accounts including all its subsidiaries and other holding companies for better transparency. to deal with stressed assets of banks. The special fund will potentially take over assets which are viable but don’t have additional fresh equity from promoters coming in to complete the project. such as common risk-based know-your-customer (KYC) norms. Government of India has proposed to their lenders that 75 per cent of their loans be converted to state government bonds in two phases by March 2017.especially public sector banks. As per the proposed new policy guidelines.  The Reserve Bank of India (RBI) plans to soon come out with guidelines. especially since a large number of Indians have now been financially included post the government’s massive drive to open a bank account for each household. and not as isolated entities. including all its branches and subsidiaries. but at the same time it was assumed that the problems will be dealt with by the parent.banks. The move is aimed at providing the investor with a better insight into viewing a bank's performance in totality.This will be a path-breaking change to the existing norms wherein each bank conducts its accounts without taking into consideration the disclosures of its subsidiaries and other divisions for disclosure. This will help several banks.

the Department of Industrial Policy & Promotion(DIPP) and the Finance Ministry are planning to raise the Foreign Direct Investment(FDI) limit in private banks sector to 100 per cent from 74 per cent.990 crore (US$ 1. Moreover. was also established to refinance all Micro- finance Institutions (MFIs). “This year.  The Union cabinet has approved the establishment of the US$ 100 billion New Development Bank (NDB) envisaged by the five- .companies from their loan book. the Government/RBI has launched Credit Guarantee Fund Scheme to provide guarantee cover for collateral free credit facilities extended to MSEs upto Rs 1 Crore (US$ 0. the new efficiency parameters would include return on assets and return on equity.15 million).05billion) in nine state run banks.  Government of India aims to extend insurance.<  The Government of India announced a capital infusion of Rs 6. thereby improving their asset quality. the Government of India has adopted new criteria in which the banks which are more efficient would only be rewarded with extra capital for their equity so that they can further strengthen their position. which are in the business of lending to micro / small business entities engaged in manufacturing.015 million). pension and credit facilities to those excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY). trading and services activities upto Rs 10 lakh (US$ 0. including State Bank of India (SBI) and Punjab National Bank (PNB). Micro Units Development & Refinance Agency(MUDRA) Ltd. According to the finance ministry.  The Reserve Bank of India (RBI). However. including income tax benefits for payments made through debit or credit cards.  The central government has come out with draft proposals to encourage electronic transactions."  To facilitate an easy access to finance by Micro and Small Enterprises (MSEs).

member BRICS group as well as the BRICS “contingent reserve arrangement” (CRA).  The government has plans to set up a fund that will provide surety to banks against loans given to students for higher education VARIOUS CHARTS SHOWING THE CHANGES DUE BANKING REFORMS ON THE ECONOMY : .

The above graph shows how interest rates have been liberalised and are changed depending upon the economical conditions. The RBI considers thr rate of INFLATION before changing the interest rates .

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FINDINGS OF THE STUDY: THE EFFECTS OF THE REFORMS ON THE ECONOMY .6.

it is cheating not only the government. financial sector reforms have made it imperative for firms to rely on capital markets to a greater degree for their needs of additional capital.50% at the year of 2013-14 . As long as firms relied on directed credit. This means that in order to survive companies will need to invest continuously on large scale. Financial sector set in motion several key forces that made these forces far more potent than in the past: Deregulation: economic reforms have not only increased growth prospects. It is not often realized that when a company makes profits in black money.Companies which borrow short term to fund their new projects may face difficulties if interest rates go up[ sharply. Large scale defaults (euphemistically described as rollover) took place during this time. . 26  Risk management: In the days when interest rate were fixed by the government and remained stable for long periods of time.00-8. but it was the structural changes created by economic reforms that effectively unleashed this power. the rate of interest on short term commercial paper was about 7. corporate have also been faced with high volatility in foreign exchange rate. interest rate risk was a relatively minor problem. Tax reforms: tax reforms coupled with deregulation and competition have titled the balance away from black money transaction. however. the capital markets. They can vote with their wallets in the primary market by refusing to subscribe to any fresh issues by the company. The rupee –dollar rate has on several occasions moved up or down by several percentage points in a single days as compared to the gradual. predictable changes of the eighties. Disintermediation: meanwhile. but they have also made markets more competitive. investors and intermediaries to the higher standards of disclosures and corporate governance that prevail in more developed capital markets. The most powerful impact of voting with the wallet is on companies with large growth opportunities that have a constant need to approach the capital market for additional funds. They can also sell their shares in the secondary markets their by depressing the share price. For instance. but also the minority shareholders. Minority investors can bring the discipline of capital markets to bear on companies by voting with their wallets.50% at the end of 2008- 2009 dropped back 6. Globalization: globalization of our financial markets has exposed issuers. Indian companies have found their dismay that foreign currency borrowings which looked very cheap because of low coupon rate of interest can suddenly become very expensive if the rupee depreciates against the currency in which the bond is denominated. what mattered was the ability to manipulate bureaucratic and political processes. Many companies which borrowed in inter corporate deposit (ICD) market in 2013-14 to finance acquisitions and expansion face this difficulty in 2013 and 2014 when the ICD market dried up. but usually go into the pockets of the promoters. The deregulation of interest rate as a part of financial sector reforms has changed all that and made interest rate highly volatile.50-7. Worse. companies may find it difficult to refinance their borrowings at any price in times when money is tight. the project is not viable at all.2010 and constant by 7.50% at the year of 2009. Black money profits do not enter the books of account of the company at all. Corporate governance: Capital markets have always had the potential to exercise discipline over promoters and management alike. In the post reform era.75-8. It may turn out that at the higher cost of finance. demand performance.

Bonds covenants have typically been quite lacks in India. In a protected economy. During the tight . may include cross. and also on how to deploy the cash. operating (business) risk was lower and companies could therefore afford to take more risks on the financing side. More importantly. Mostly of debt was institutional and could usually be rescheduled at little cost. cash flow discipline can be expected to become far more stringent.  Group structure and business portfolio: Indian business groups have been doing serious introspection about their business portfolio and about their group structure under the influence of academic like C. Moreover bond (and debentures) trustees have been generally very lacks in the performance of their duties. Debt on the other hand has a fixed re payment schedule and interest obligations. Bonds are typically rescheduled only a part of bankruptcy proceeding or a BIFR restructuring.K. These covenants may restrict the investment and dividend policies of the 27 companies may mandate sinking funds. Indian business groups which have traditionally been involved in a wide range of business have been contemplating a shift to a more focused strategy. At the same time. In many cases they have not gone beyond a statement of intend  Working capital management: Working capital management has been impacted by a number of the developments discussed above –operational reforms in the area of credit assessment and delivery. A company that is enabling to generate enough cash flow to meet this debt service requirement faces in solvency or painful restructuring of liability. the Indian corporate sector found itself significantly over-levered. Cash management has become an important task with the facing out of the cash credit system. Deployment in tern involves decision about maturity. change in the competitive 28 structure of the banking and credit system. Capital stricter: At the beginning of the reforms process. Institutions may be less willing to do so in future. This was because of several reasons: Subsidized institutional finance so attractive that it made sense for companies to avail of as much of it as they could get away with.too clauses which restrict the future borrowing ability of the company.default clauses and may contain me. Again. Bond covenants: international bond covenants are quite restrictive specially for companies whose credit worthiness is less than top class. rescheduled is not an easy option when the debt is raised in the market from the public. Companies now have to decide on the optimal amount of cash and near cash that they need to hold. and the emergency of the money and debt markets. credit risk and liquidity. As the next face of economic reforms targets bankruptcy related laws. Indian companies have not experienced much of this discipline in the past because much of their debt was owed to banks and institutions who have historical been willing to re schedule loan quite generously. Prahalad. This usually meant the maximum debtequity ratios laid down by th government for various industries.  Cash flow discipline: Equity has no fixed service cost and year to year fluctuations in income are not very serious so long as over all enough is earned to provide a decent return to the shareholder. interest rate deregulation. they have been trying to create a group organizations structure that would enable the formulation and implementation of a group wide corporate strategy.

 Investment by foreign companies into the economy increased and is going up due to opening up and ease in FDI limits  Inclusion of the deprived classes into the investment cycle due to the PMJDY. through which more than 20 crore bank accounts have been opened thus helping not just raise money but also include them in the money and credit cycle.  The monetary policy enacted has helped the Indian economy survive the 2008-09 global economic crisis. 29  Due to the reforms in the banking sector. debt recovery or avoidance of debt has increased. both for raising deposits and giving loans.  A healthy competition has been built between various banks. This is beneficial to the economy as the banks try hard to operate in the sector and compete for customers. some companies were left with to little liquidity cash. 31 8. There are fewer instances of bad debts which are needed to be written off which are a healthy sign of the economy. The economy runs on money. It can only work properly if the banking system is in perfect condition to fulfill the rising requirements that arise. Thus it should be reformed at regular intervals so that it doesn’t become obsolete. Here banks are now playing a positive role as intermediaries and help raise funds for the investors who require money. 30 7. Hence. This has helped to ease the capital raising process in the securities market. reforms play an important part for any sector or country to be sound and strong. even private banks are competing with the PSU banks as they are providing world class services. CONCLUSION Reforms should be an ongoing process. Today. They help the sector in which they are implemented to become robust and change as per the situations require. where India was the only country where not even a single bank filed for bankruptcy due to the slowdown.  The financial inclusion programme of the RBI has helped rural parts to be better equipped and be more integrated to the overall development of the economy. It will not only cut . Banking sector is the most important part of any economy. while other found that their cash looked up in unrealizable or illiquid assets of uncertain value. It is due to the reforms and policies that the Indian banks are known to be one of the most financially sound institutions in the world even after surviving the 2008-09 global slowdown and the 2015 slowdown. It acts as the arterial system of the economy which supplies money wherever needed.  Forex reserves have gone up dramatically in the past years. SUGGESTIONS  A total restructuring of all the PSU banks is the need of the hour.  The banking reforms have helped banks to venture into new businesses like the capital markets and money markets.money this policy of this period.

mutual funds and provide more agency functions like trustee.  Banks should tap more into the service sector to earn income thus depending less on the interest income. providing various loans etc.thetimesofindia.slideshare.com RESEARCH PAPERS:  Reforms In Indian Banking Sector .  Better credit appraisal procedures need to be followed to avoid bad debts.An Evaluative Study of the Performance of Commercial Banks BY DR.in www. Services like issuance of more credit and debit cards.com www. 32 9. BIBLIOGRAPHY Magazine and Article: -Business Today -Banking Frontiers -Reserve Bank of India bulletin -Times of India Web: www.com www. Strict CIBIL and appraisal norms should be implemented. This helps the banks to give more to the customers and save more for investments. trade credit.rbi.wikipedia. but would also reduce the costs of staff and operations. AN OVER VIEW by DR.org. All the PSU’s should be clubbed under one big bank which would act as the guardian bank.  A streamlining of services needs to be done by the banks to raise the quality of the services they provide.indiatimes.down the huge bad debt they have. Suryachandra Rao.scribd.com www.org www.google. MAMANSHETTY .  BANKING SECTOR REFORMS AND IT’S IMPACT ON INDIAN ECONOMY.com www.