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Indian Banking Sector Reforms Overview

The document summarizes the history of banking sector reforms in India. It discusses the nationalization of banks in 1969 and 1980, the expansion of branches and priority sector lending that followed. It then outlines problems with the nationalized banks like low productivity and profitability. Key banking committees in 1991 and 1997 recommended further reforms like increasing capitalization, entry of private banks, and restructuring of Regional Rural Banks. Private banks improved service quality and use of technology compared to public sector banks. The document concludes with recent issues regarding interest rates and rankings of Indian banks globally.

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107 views12 pages

Indian Banking Sector Reforms Overview

The document summarizes the history of banking sector reforms in India. It discusses the nationalization of banks in 1969 and 1980, the expansion of branches and priority sector lending that followed. It then outlines problems with the nationalized banks like low productivity and profitability. Key banking committees in 1991 and 1997 recommended further reforms like increasing capitalization, entry of private banks, and restructuring of Regional Rural Banks. Private banks improved service quality and use of technology compared to public sector banks. The document concludes with recent issues regarding interest rates and rankings of Indian banks globally.

Uploaded by

asifanis
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd

Banking Sector Reforms

FI 6
Indian Banking Reforms
• Nationalization of 14 major banks in 1969 followed
by 6 more in 1980
- Over riding objective to take banking to masses
- Buzzword was ‘Social lending’
- Concept of ‘Priority Sector’
- Priority sector share climbed to 43% from 14%
- Branch expansion( 8262 in 1970,67000 plus now)
- Population / office declined from 65000 to 14300
in three decades
Problems after nationalization of
banks
• Slow functioning & inefficient banks
• Low productivity of staff
• Poor service due to lack of competition
• Low profitability ( Average ROA - .015%, ROE -
9.5%)
• Low capitalization about 1.5% of assets, while
in other Asian countries it was 4-6%
• Directed lending, political interference, high
CRR,SLR, administered intt. rates
Genesis of Reforms
• Committee on Financial system 1991
- Headed by M. Narsimham
- SLR capped at 25%
- CRR used a tool for monetary control
- uniform accounting practices
- Entry of new players in the market
- abolition of branch licensing
- an autonomous body for bank supervision
- Phase out directed lending to priority sector to
10%
- Minimum Capital adequacy of 4%
Committee on Banking sector
Reforms -1997
• Merge strong banks, close weak unviable ones
• Enhance capital adequacy of banks to match
banking risks
• Strengthen legal framework to accelerate credit
recovery – Reduce NPAs.
• De-politicize bank boards under RBI supervision
• Rationalize branches and staff, review recruitment
and remuneration
Entry of Private sector banking
• New private sector banks 1992
• A paradigm shift in service standards
• Use of technology , speed in delivery,
products/ services offered, décor/ branch
ambience, marketing orientation, importance
of bottom line
• New bench marks of service quality &
application of technology
Select Indicators of Financial
Performance
• Operating Profit/total Public banks New pvt banks
assets 1.34 1.74
• Net profit/Total assets 0.42 0.81
• Intt. Income/Total assets 8.84 8.18
• Other income / total 1.22 1.35
assets
• Operating expenses/total 2.72 1.75
assets
• Wage Bill/ total assets 2.03 0.32
• Spread/ total assets 2.84 2.14
Regional Rural Banks
• A new breed of banks- hybrid of commercial
and cooperative banking systems, to cater to
banking needs of rural population
• 196 RRBs in 22 states,15000 branches in
551 districts
• Problems faced by RRBs
• Restructuring of RRBs - Dr. M.C.Bhandari
Committee,Rs.2,288 crores spent on re-
capitalization of RRBs
Problems faced by RRBs
• Poor recovery rate resulting in increasing
overdues and mounting losses
• Capital inadequacy
• Delays in decision making
• Restrictions in mobilization of funds,
deployment of funds etc
• Political interference
• Misutilization of loans
Interest Rate
• Banks needs greater freedom and
autonomy to fix intt. rates on deposits and
loans.
• De-regulation of interest rates to bring
competition and allow banks to chalk out
their own strategies.
• Benchmark Prime Lending Rate (BPLR)
• Working Group on BPLR
Working Group on BPLR
The working group headed by Deepak Mohanty has
suggested that the Base Rate should include:
1. the card interest rate on retail deposits (deposits below
Rs15 lakh) with one year maturity (adjusted for current
account and savings account deposits);
2. adjustment for the negative carry in respect of cash
reserve ratio (CRR) and statutory liquidity ratio (SLR); 
3. unallocatable overhead cost for banks which would
comprise a minimum set of overhead cost elements;
4. average return on net worth.
• The actual lending rates charged to borrowers would be
the Base Rate plus borrower-specific charges, which will
include product-specific operating costs, credit risk
premium and tenor premium, it said.
Indian banks rankings in the list of
top 1000 global banks
• 20 banks appearing in the list
• SBI in first 100
• ICICI bank
• PNB.
• BOI
• BOB
• Canara
• HDFC
• Union
• OBC

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