Reforms in Financial and Banking Sector

Chapter

3
Reforms in Financial and Banking Sector

Copyright © 2007, G. Vijayaragavan Iyengar

3-1

Introduction to Banking

G. Vijayaragavan Iyengar

Excel Books

Reforms in Financial and Banking Sector Owing to 1991 crisis of balance of payment. Vijayaragavan Iyengar 3-2 Introduction to Banking G. on 16th November 1991. Copyright © 2007. Vijayaragavan Iyengar Excel Books . G. It submitted its report. the government appointed the Narsimham Committee on 14th August. 1991. known as its first report. The first phase of banking sector reform which began during 1992-93 was based on twin principles of "Operational Flexibility" and "Functional autonomy".

Reforms in Financial and Banking Sector NARSIMHAM COMMITTEE REPORT (I) i. PRIORITY SECTOR LENDING iii. ACCOUNTING POLICIES vi. SLR & CRR ii. Vijayaragavan Iyengar Excel Books . Branch Licensing Policy ix. INTEREST RATES iv. Vijayaragavan Iyengar 3-3 Introduction to Banking G. Legislative Measures Copyright © 2007. New Institution vii. CAPITAL ADEQUACY v. Entry of Private Sector Banks viii. G.

Copyright © 2007. Minimum shareholding by the government/RBI in the nationalised banks and SBI should be brought down to 33%. G. Banks should attain a minimum CRR of 9% by 2000 AD and 10% by 2002 AD.Reforms in Financial and Banking Sector NARASIMHAM COMMITTEE REPORT (II)   RBI should withdraw from 91 days T Bill market. Accrual of interest for income recognition should be done in 90 days instead of 180 days. Vijayaragavan Iyengar 3-4 Introduction to Banking G. Vijayaragavan Iyengar Excel Books . Bank Chairman should be given a minimum of three years at the helm. 100 crore for new private sector banks should be hiked. All loans in doubtful/loss category should be identified and their realisable value determined. equity of       5% risk weight be considered for market risk for government and approved securities. The start up requirements of Rs.

Copyright © 2007.  The reforms have contributed to the good performance of some major banks in the country post reform period.  The government's commitment on restructuring the highly regulated banking appears strong despite lack of arithmetic of the government in the parliament to push through the agenda of reforms in an effective manner.Reforms in Financial and Banking Sector Assessment of the Financial Sector Reforms  This reflects the view of the Narasimham Committee that ensuring the integrity and autonomy of public sector banks is the more relevant issue and they could improve profitability and efficiency without changing their ownership if competition were enhanced. Vijayaragavan Iyengar 3-5 Introduction to Banking G.traditional activities like novel schemes in the credit front.  The Reserve Bank Of India has permitted commercial banks to engage in diverse activities such as securities related transactions. G. Vijayaragavan Iyengar Excel Books . foreign exchange transactions and leasing activities. Punjab National Bank etc. for instance State Bank Of India.  The apex monetary authority's encouragement to enhance the appetite of the banks to do more non.

2. The major recommendations are as under:    OPERATIONAL ORGANISATIONAL SYSTEMIC  FINANCIAL Copyright © 2007.1999.1999 for suggesting of weak banks. The committee submitted report on 3. Vijayaragavan Iyengar Excel Books .Reforms in Financial and Banking Sector REPORTS OF OTHER IMPORTANT COMMITTEES VERMA COMMITTEE REPORT ON WEAK BANKS The committee was constituted on 8.10. G. Vijayaragavan Iyengar 3-6 Introduction to Banking G.

V. G.T. SHAH COMMITTEE J. A. Vaz.Reforms in Financial and Banking Sector  GHOSH COMMITTEE (1993)           PADMANABHAN COMMITTEE (1995) RASHID JILANI COMMITTEE (1992) SHERE COMMITTEE (1995) SARAF COMMITTEE (1994) KALIA COMMITTEE (1994) MALEGAM COMMITTEE (1995) DR.C. Vijayaragavan Iyengar Excel Books . SHETTY COMMITTEE (1993) VAZ COMMITTEE (1993) (Chairperson Miss I. ED. Vijayaragavan Iyengar 3-7 Introduction to Banking G. RBI) SODHANI COMMITTEE (1994) Copyright © 2007.

Copyright © 2007. Modify so as to provide borrowers a choice of banks.   Indicate annual increase in credit flow to agriculture. Vijayaragavan Iyengar 3-8 Introduction to Banking G. Extension of composite cash credit limit to include farm credit.Reforms in Financial and Banking Sector R. Vijayaragavan Iyengar Excel Books . A liquid savings facility in built into loan products.    Special agriculture credit plans to accelerate flow of credit. G.V. GUPTA COMMITTEE ON AGRICULTURAL CREDIT    Interest rates on agricultural loans to be fixed by banks. 90% of loan applications to be cleared by local branches. Abolition of stamp duty on mortgage of farm land.

G. Vijayaragavan Iyengar Excel Books . Copyright © 2007. B. Vijayaragavan Iyengar 3-9 Introduction to Banking G. NARANG ON LARGE VALUE FRAUDS (RUPEES ONE CRORE AND ABOVE)   There is always a time lag between the detection and reporting of a fraud It is not the lacunae in the rules but the non-observance of the same.Reforms in Financial and Banking Sector RECOMMENDATIONS OF STUDY GROUP UNDER THE CHAIRMANSHIP OF SH. which leads to the fraud.D.

Vijayaragavan Iyengar 3-10 Introduction to Banking G.Reforms in Financial and Banking Sector NARESH CHANDRA COMMITTEE ON CORPORATE GOVERNANCE Major Recommendations of the Committee i. ii. Setting up a Corporate Serious Fraud Office (CSFO) Copyright © 2007. Certification of financial reports by the CEO and CFO ix. Supervising the work of Auditors x. Audit firm to file a 'certificate of independence‘ vii. Vijayaragavan Iyengar Excel Books . Empowering Audit Committees viii. Disclosures v. Rotation of Audit Partners iv. Maintaining Auditor's Independence List of prohibited non-audit services iii. G. Replacement of Auditors vi. Changes in the structure and composition of Board of Directors xi.

Vijayaragavan Iyengar 3-11 Introduction to Banking G. his source of income etc. 2. the threshold may be reduced to Rs. Banks should follow uniform norms for activity monitoring. Vijayaragavan Iyengar Excel Books . Adoption of 'Know Your Customer' guidelines by banks.identified at the bank level).Reforms in Financial and Banking Sector SARKAR COMMITTEE ON ANTI-MONEY LAUNDERING GUIDELINES FOR BANKS IN INDIA 1. 3. Each bank must have its own anti-money laundering policy. 6. 9. 10. Banks should endeavour to track transaction chains in case of suspicion. G. A time-bound action plan to implement the bank's anti-money laundering policy.) especially the cross-border remittances should be closely monitored. 5 lacs and be continued to Rs. Bank branches should report all types of suspicious activities/transactions to the Money Laundering Reporting Officer (MLRO . Urgent need to adopt anti-money laundering policy. Copyright © 2007. 7.g. Both inward as well as outward remittances (fund transfer etc. 8. Customers profiles be prepared while opening of accounts and the bank should classify the account into appropriate risk category (high/low) for monitoring activity/transaction. 10 lacs respectively. 4. The bank account opening forms should contain information about the financial status of the customer. e. 5.

G.Branch expansion policy Conversion of Existing Branches to Wholly Owned Subsidiaries d) Acquisition of Shareholding in Select Indian Private Sector Banks Cont…. Vijayaragavan Iyengar Excel Books . Vijayaragavan Iyengar 3-12 Introduction to Banking G. Copyright © 2007.Reforms in Financial and Banking Sector PLAN FOR BANKING SECTOR REFORMS IN FUTURE Phase I: March (2005 To March 2009) a) b) c) New banks .First Time Presence Existing banks .

G.Reforms in Financial and Banking Sector Phase II: April 2009 a) b) c) d) e) According Full National Treatment to Wholly Owned Subsidiaries of Foreign Banks Dilution of Stake in Wholly Owned Subsidiaries Mergers and Acquisition of any Private Sector Bank in India Foreign Investment in Private Sector Banks Foreign Institutional Investors (Flls) f) Non-Resident Indians (NRIs) Copyright © 2007. Vijayaragavan Iyengar 3-13 Introduction to Banking G. Vijayaragavan Iyengar Excel Books .

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