A study of Banking Sector Reforms in India

DR. DES RAJ BAJWA

Department of Commerce
Govt.P.G. College, Ambala Cantt
E-mail:- drbajwa7@gmail.com
ABSTRACT
A globally competitive economy requires a robust and competitive banking system. The present banking
system is a result of reforms and policy changes that have taken place in the past. Pre-1991, India had
nationalized banks in two phases in 1969 and 1980. It meant that public sector banks (PSBs) controlled
the credit supply. The post-1991 period can be thought of in three distinct chronological phases. The
first one was roughly from 1991 to 1998. The second started from 1998 and continued until the
beginning of global financial crisis. The third we believe is an ongoing process. This paper focuses on
India’s banking sector, which has been attracting increasing attention since 1991 when financial reform
programme was launched. This paper throws light on some of the developments that have taken place in
the Indian banking sector as a result of process of banking reforms initiated in 1992.
KEYWORDS: Narasimham Committee, SLR, CRR, E-Banking, CAN, NPAs
INTRODUCTION
India faced the acute economic crisis in 1991. foreign exchange reserve were too depleted to finance
our imports even for two weeks. fresh loans were not available and non resident funds were being
withdrawn. Lack of confidence in the Indian economic system became almost a global phenomenon. It
was high time to introduce new reforms in order to redeem the economy from this crisis and put it back
on the road to rapid and constant development. In August 1991, the government appointed a committee
on financial system under the chairmanship of M. Narasimhan.
First Phase of Banking Sector Reforms/Narasimham committee report 1991
To promote healthy development of financial sector, the narasimham committee made
recommendations. On the recommendations of Narasimham Committee, following measures were
undertaken by government since 1991:-

 Lowering SLR And CRR to left more funds with banks for allocation to agriculture, industry, trade
etc.
 Prudential Norms required banks to make 100% provision for all Non-performing Assets (NPAs).
 Capital Adequacy Norms (CAN) is fixed at 8% by RBI
(Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio.)
 Deregulation of Interest Rates the prime lending rate of SBI and other banks on general advances
of over Rs. 2 lakhs has been reduced.
 Recovery of Debts Six Special Recovery Tribunals have been set up. An Appellate Tribunal has
also been set up in Mumbai.
 Competition From New Private Sector Banks New private sector banks are allowed to raise
capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has
led to increased competition.

SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) / NARASIMHAM
COMMITTEE REPORT 1998

To make banking sector stronger the government appointed Committee on banking sector
Reforms under the Chairmanship of M. Narasimhan. It submitted its report in April 19 98. The
Committee placed greater importance on structural measures and improvement in standards of
disclosure and levels of transparency. On the recommendations of committee follo wing reforms have
been taken
 New Areas and New Instrument New areas have been opened up, such as: Insurance, credit cards,
asset management, leasing, gold banking, investment banking etc. New instruments have been
introduced such as: Interest rate swaps, cross currency forward contracts etc.
 Risk Management and Strengthening Technology Banks have started specialized committees to
measure and monitor various risks. For payment and settlement system technology infrastructure has
been strengthened with electronic funds transfer, centralized fund management system, etc.
 Increase in FDI Limit In private banks the limit for FDI has been increased from 49% to 74%.
 Adoption Of Global Standards and Information Technology Best international practices in
accounting systems, corporate governance, payment and settlement systems etc. are being adopted.
Banks have introduced online banking, E-banking, internet banking, telephone banking etc.
 Management Of NPA RBI and central government have taken measures for management of NPAs
such as corporate Debt Restructuring (CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts.
 Guidelines For Anti-Money Laundering In recent times, prevention of money laundering has been
given importance in international financial relationships. In 2004, RBI revised the guidelines on
know your customer (KYC) principles.
 Base Rate System Of Interest Rates In 2003 the system of Benchmark Prime Lending Rate
(BPLR) was introduced to serve as a benchmark rate for banks pricing of their loan products so as to
ensure that it truly reflected the actual cost. However the BPLR system tells short of its objective.
RBI introduced the system of Base Rate since 1st July, 2010. The base rate is the minimum rate for
all loans. For banking system as a whole, the base rates were in the range of 5.50% - 9.00% as on
13th October, 2010.
Recently banking sector reforms
 Lowering SLR and CRR
SLR (statutory liquidity ratio
It means a certain % of deposits to be kept by banks in the form of liquid assets. This is kept by bank
itself. The liquid assets here include government securities, treasury bills and other securities notified by
RBI. If SLR is more than banks have to keep more part of deposits in specified securities and banks will
have less surplus funds for granting loans. It will contract credit. Similarly, if SLR is less than banks
have to keep less parts of deposits in specified securities and banks will have more funds for granting
loans.SLR is fixed by RBI and usually it has been ranging between 24% to 39%. Now this ratio is 21.5%
CRR (cash reserve ratio)
Reserve bank controls cash reserve ratio of commercial banks. It is obligatory for commercial banks to
maintain this ratio.CRR is the minimum cash reserve that every bank has to maintain with the central
bank RBI. If RBI increases CRR then banks will have to maintain more cash holdings with RBI and it
will reduce their loan giving capacity. So higher CRR will contract credit. If RBI decreases CRR then
banks will have to maintain less cash holdings with RBI and banks will have more of surplus cash for
granting loans. So low CRR will expand credit. In 1993 CRR was very high at 14%. Now CRR is4%
Along with the interest rate deregulation quantitative restrictions was initiated simultaneously. In 1990,
40 percent of the bank credit was directed towards priority sectors. The reserve requirement pre-emoted
 more than 40 percent of the net demand and time liabilities of the banking sector. The amount of money
available with the banks for credit was very small. The reserve requirement was progressively brought
down in time.

40
35
30
25
20
15
SLR %
10
5 CRR %
0
1998-99
1999-2000

2003-04
2004-05

2007-08
2008-09

2012-13
2013-14
2000-01
2001-02
2002-03

2005-06
2006-07

2009-10
2010-11
2011-12

2014-15
2015-2016
.
Source: RBI, Chronology of SLR,CRR rate in india
This graph shows that the statutory liquidity ratio (SLR) was brought down from 25 % in 1998 and
21.25 % in 2016. The cash reserve ratio (CRR) was also steadily brought down from 10.5 % in 1998 to
4% in 2016.
 REPO (repurchase auction rate) and REVERSE REPO ( reverse repurchase auction rate )
Repo and Reverse repo are the main monetary policy rates. Repo rate means the interest rate at which
commercial banks can borrow funds from RBI. Reverse repo rate means the interest rate given by RBI
on deposits made by commercial banks with it. Increase in repo rate will contract credit as now
commercial banks get funds from RBI at higher rate of interest. Similarly increase in reverse repo will
also contract credit as commercial banks are more inclined to deposits their funds with RBI to earn
higher interest. Depositing more funds by commercial banks with RBI reduce their loan giving capacity.
In current year Repo rate is 7.25 % and Reverse Repo rate is 6.25 %.

18
16
14
12
10
8
reverse repo rate %
6
4 repo rate%
2
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16

Source: RBI, Chronology of repo rate in India

This graph shows that REPO and REVERSE REPO are changed time to time by RBI to control credits
of commercial banks for their growth and development.
  E-BANKING
Online banking, also known as internet banking, e-banking or virtual banking, is an electronic
payment system that enables customers of a bank or other financial institution to conduct a range of
financial transactions through the financial institution's website. The online banking system will
typically connect to or be part of the core banking system operated by a bank and is in contra st to branch
banking which was the traditional way customers accessed banking services. Fundamentally and in
mechanism, online banking, internet banking and e-banking are the same thing.

In India e-banking is of fairly recent origin. The traditional model for banking has been through branch
banking. Only in the early 1990s there has been start of non-branch banking services. The good old
manual systems on which Indian Banking depended upon for centuries seem to have no place today. The
credit of launching internet banking in India goes to ICICI Bank. Citibank and HDFC Bank followed
with internet banking services in 1999. Several initiatives have been taken by the Government of India
as well as the Reserve Bank to facilitate the development of e-banking in India. The Government of
India enacted the IT Act, 2000 with effect from October 17, 2000 which provided legal recognition to
electronic transactions and other means of electronic commerce. The Reserve Bank is monitoring and
reviewing the legal and other requirements of e-banking on a continuous basis to ensure that e-banking
would develop on sound lines and e-banking related challenges would not pose a threat to financial
stability. A high level Committee under chairmanship of Dr. K.C. Chakrabarty and members from IIT,
IIM, IDRBT, Banks and the Reserve Bank prepared the “IT Vision Document- 2011-17”, for the
Reserve Bank and banks which provides an indicative road map for enhanced usage of IT in the banking
sector. Indian banks offer to their customers some following E-BANKING services:

NEFT

ATMs
E- SMART
BANKING CARDS

MOBILE
BANKING

ATMs - Automated teller machines are computerized telecommunications devices that provide clients of a
financial institution with access to financial transactions in a public place. According to a survey ATMs
users are increasing day by day in India.
TABLE: ATMs per 1,00,000 adults in INDIA
ATMs 2006 2007 2008 2009 2010 2011 2012 2013 2014
INDIA 2.76 3.41 4.33 5.36 7.34 8.95 11.13 13.05 18.07
Source: The world bank IBRD-IDA report
NEFT (National electronic fund transfer)
National Electronic Funds Transfer (NEFT) is a nation-wide payment system facilitating one-to-one
funds transfer. Under this Scheme, individuals, firms and corporate can electronically transfer funds
from any bank branch to any individual, firm or corporate having an account with any other bank branch
in the country participating in the Scheme. The structure of charges that can be levied on the customer
for NEFT is given below:
a) Inward transactions at destination bank branches (for credit to beneficiary accounts)– Free, no charges
to be levied on beneficiaries
b) Outward transactions at originating bank branches – charges applicable for the remitter
- For transactions up to Rs 10,000 : not exceeding Rs 2.50 (+ Service Tax)
- For transactions above Rs 10,000 up to Rs 1 lakh: not exceeding Rs 5 (+ Service Tax)
- For transactions above Rs 1 lakh and up to Rs 2 lakhs: not exceeding Rs 15 (+ Service Tax)
- For transactions above Rs 2 lakhs: not exceeding Rs 25 (+ Service Tax)
With effect from 1st July 2011, originating banks are required to pay a nominal charge of 25 paise each
per transaction to the clearing house as well as destination bank as service charge. However, these
charges cannot be passed on to the customers by the banks. Beneficiary can expect to get credit for the
NEFT transactions within two business hours (currently NEFT business hours is from morning 8 AM to
evening 7 PM on all week days and from morning 8 AM to afternoon 1 PM on Saturdays) from the
batch in which the transaction was settled.
Smart Card
Also known as an Integrated Circuit Card (ICC), a smart card is a small, credit card-sized device, with
a microprocessor and other circuits embedded inside it. These devices are generally made up of
synthetic plastic, and are used for a variety of purposes as enlisted below. They are used in ATM and
credit cards and contain the Personal Identification Number (PIN) and the account details of an
individual. They are used in SIMs, which need to be placed inside a mobile phone, and this is necessary
to acquire the services of a network provider. They can be used as electronic wallets, and can be used as
a payment mode at many different sources. They can be used to pay for many public transportation
services. They can be used for identification and time log purposes in business organizations. They can
carry immense data and details about an individual, and this has many benefits when the person goes to
acquire health care facilities. They can be used as identification proof in many countries around the
world. They can be used to store information about personnel on the Armed Forces, and special military
smart card readers are required to access this information. The network security provided by the
microprocessor on the card is what that makes it such a popular method of distributing information. The
reader and the computer actually talk to the microprocessor, and thus, access the information on it. This
is the primary difference between a smart card and any other data storage device.
Mobile banking-Mobile banking is a service provided by a bank or other financial institutio n that
allows its customers to conduct a range of financial transactions remotely using a mobile device such as
a mobile phone or tablet, and using software, usually called an app, provided by the financial institution
for the purpose. Mobile banking is usually available on a 24-hour basis. Some financial institutions have
restrictions on which accounts may be accessed through mobile banking, as well as a limit on the
amount that can be transacted. ICICI Bank, India’s second largest bank launched on 11 January, 2008
iMobile, a unique mobile banking platform on mobile phones.
 Capital Adequacy Norms

Along with profitability and safety, banks also give importance to Solvency. Solvency refers to the
situation where assets are equal to or more than liabilities. A bank should select its assets in such a way
that the shareholders and depositors' interest are protected. The Government of India (GOI) appointed
the Narasimham Committee in 1991 to suggest reforms in the financial sector. In the year 1992-93 the
Narasimham Committee submitted its first report and recommended that all the banks are required to
have a minimum capital of 8% to the risk weighted assets of the banks. The ratio is known as Capital to
Risk Assets Ratio (CRAR). All the 27 Public Sector Banks in India (except UCO and Indian Bank) had
achieved the Capital Adequacy Norm of 8% by March 1997. The Second Report of Narasimham
Committee was submitted in the year 1998-99. It recommended that the CRAR to be raised to 10% in a
phased manner. It recommended an intermediate minimum target of 9% to be achieved by the year 2000
and 10% by 2002.
CAR (Capital Adequacy Ratio) It is the measure of a bank's financial strength expressed by the ratio
of its capital (net worth and subordinate debt) to its risk-weighted credit exposure (loans).It is also called
CRAR-Capital to Risk-weighted Assets Ratio. The Reserve Bank of India (RBI), currently prescribes a
minimum capital of 9% of risk-weighted assets, which is higher than the internationally prescribed
percentage of 8%. Most banks in India have a capital adequacy of more than 12 %. A bank with a higher
capital adequacy is considered safer because if its loans go bad, it can make up for it from its net worth.

 NPAs (non performing assests) Non Performing Assets (NPA) The assets of the banks which don’t
perform (that is – don’t bring any return) are called Non Performing Assets (NPA) or bad loans.
According to RBI, terms loans on which interest or installment of principal remain overdue for a
period of more than 90 days from the end of a particular quarter is called a Non-performing Asset.
Provisioning Coverage Ratio For every loan given out, the banks to keep aside some extra funds to
cover up losses if something goes wrong with those loans. This is called provisioning.

Types of assests Provision coverage ratio

Standard assets(which neverNPA) 0.40%
Sub standard assets(which NPA less than 15% for secured loans
12months) 25% for unsecured loans
Doubtful assets(which NPA more than Upto 1 year 25%
12months) 1 to 3 years 40%
More than 3 years 100%
Loss assets (which always NPA) 100%
Twenty months into the Modi government rule, it wouldn’t be an exaggeration to say that state-run
banks are on the verge of a crisis due to their high NPAs, which constitute over 90 percent of the total
bad loans of the industry. Many of them have reported losses on account of huge NPAs in the December
quarter, surprising analysts. Investors are dumping shares of these banks while there is a sense of
uncertainty prevailing on the extent of troubles in the banking sector.
Nine out of 10 most stressed banks in the sector are government banks. The RBI has given a deadline of
March 2017 for all banks to clean up their balance sheets, which also require these lenders to set aside
huge chunk of capital in the form of provisions. RBI governor Raghuram Rajan has given a clear
message to banks to deal with the NPA problem upfront, instead of postponing it and worsening it.
But, there is also huge capital implication on these banks on account of high NPAs too. Banks need to
set aside money (known as provisions) to cover their bad loans. The onus to keep government banks stay
afloat lies with the government, which is the owner of these banks that control 70 per cent of the
banking industry assets. Experts have opined that the government’s promised capital infusion in these
banks is inadequate. Finance minister, Arun Jaitley, has to work out ways to bring in solutions in the
long term.
Conclusion
Government is also playing a vital role through implementation of the recommendations made by
various committees and all these activities became a part of the reforms. Since the Narasimham
Committee Report of 1991 and 1998 have been significant favorable changes in India’s highly regulated
banking sector. With the help of lowering SLR, CRR banks are granting loans and these loans are used
for industrial and economic development. E-Banking is creating new opportunity for development in
banking sector. It is now experiencing increased efficiency ( measured in terms of reduction of NPAs),
systematic stability, and financial deepening with greater access. In some areas banking sector is inching
towards world standards (in terms of prudential norms). According to T.T. Ram Mohan “it is not just
that Indian banks have achieved a turn-around. They have gone on to become the most profitable in the
world”.
References
1. http://www.icicibank.com/managed-assets/docs/about-us/2008/iMobileBanking.pdf
2. Automated teller machines (ATMs) (per 100,000 adults) | Data | Table
data.worldbank.org/indicator/FB.ATM.TOTL.P5
3. http://economictimes.indiatimes.com/all-about-capital-adequacy-ratio/what- is-capital-adequacy-
ratio/slideshow/6222228.cms
4. http://www.gktoday.in/non-performing-assets- npa/
5. http://www.firstpost.com/business/explained- in-5-charts-how- indian-banks-big-npa-problem-
evolved-over- years-2620164.html
6. http://study- material4u.blogspot.in/2012/07/chapter-2-banking-sector-reforms.html
7. http://www.economicsdiscussion.net/banking/banking-sector-reforms- in- india-a-survey/6527
8. Dr. Shurveer S. Bhanawat: Impact of Banking Sector Reforms on Profitability of BankingIndustry in
India, http://www.pbr.co.in/Dec2013/10.pdf
9. http://www.allbankingsolutions.com/Banking- Tutor/Chronology-CRR-Rate-India.shtml
10. http://www.allbankingsolutions.com/Banking- Tutor/Chronology-SLR-Rate-India.shtml
11. http://www.allbankingsolutions.com/Banking- Tutor/Chronology-Reverse-Repo-Rate-India.shtml
12. http://www.allbankingsolutions.com/Banking- Tutor/Chronology-Repo-Rate-India.shtml