Reforms in Banking Sector.

• Bank of Hindustan, set up in 1870, was the earliest Indian

Bank.
• Banking in India on modern lines started with the
establishment of three presidency banks under Presidency
Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and
Bank of Madras.
• In 1921, all presidency banks were amalgamated to form the
Imperial Bank of India. Imperial bank carried out limited
central banking functions also prior to establishment of RBI.
• Reserve Bank of India Act was passed in 1934 & Reserve
Bank of India (RBI) was constituted as an apex bank without
major government ownership.
• Banking Regulations Act was passed in 1949. This
regulation brought Reserve Bank of India under government
control
 In 1955, RBI acquired control of the Imperial Bank of India, which was
renamed as State Bank of India.

 In 1959, SBI took over control of eight private banks floated in the
erstwhile princely states, making them as its 100% subsidiaries. 

 In July 1969, government nationalised 14 banks having deposits of Rs.50

crores & above.

 In 1980, government acquired 6 more banks with deposits of more than

Rs.200 crores.

 The Narsimham Committee report suggested wide ranging reforms for the
banking sector in 1992 to introduce internationally accepted banking
practices

 The amendment of Banking Regulation Act in 1993 saw the entry of new
private sector banks.
 Why Banking Sector Reforms
• High Regulated Sector
• Prevalence of High Reserve Requirements
• Interest Rate Controls
• Large Allocations to Priority Sector
• Poor Lending Strategies
• Lack of Internal Risk Management
• Low Yields on Government Securities
• Waiver of Loans on Political Grounds
• Lack of Competition
• High Cost of Operations
• Poor Customer Service
• Poor Loan Recovery
• Weak Capital Position
• Political Interference
• Lack of Institutional Autonomy
• Lack of Accountability in Banks
• Vague Reporting Formats
• Technology Deficiency
 Reforms in Banking Sector

The first wave of financial liberalization took place in the

second half of the 1980s, mainly taking the form of

– Introduction of Treasury Bills

– Development of money markets

– Partial Interest Rate Deregulation

– In 1989, both commercial paper and certificates of deposit

were introduced

– Based on the 1985 report of the Chakravarty Committee,

coupon rates on government bonds were gradually increased
to reflect demand and supply conditions
 Reforms in Banking Sector

Second wave of Liberalisation started with

Narsimham Committee Recommendations

– Reduction of the CRR and SLR

• The CRR has declined gradually from 15% in 1991 to 5.75%
in November 2001 and to 5.5% in December 2001.
• The SLR was reduced gradually from 38.5% in 1991 to 25%
in October 1997. The SLR has remained at this rate until
today, while the legal upper limit has stayed at 40%
throughout the period
– Interest Rate Deregulation
• The Government started interest rate deregulation in 1992
• It was completely market driven
Reforms in Banking Sector
Reform of Priority Sector Lending

• Advances to the priority sectors

should be reduced from 40% to 10%

• While the targets of 40% imposed on

domestic banks and 32% on foreign
banks
 Reforms in Banking Sector

Deregulation of Entry Barriers and Branching Restrictions

Entry Deregulation
– The RBI issued guidelines in 1993 governing the
establishment of new private sector banks. The
guidelines stated that a new bank needed to
• maintain minimum paid-up capital of Rs1 billion;
• list its shares on stock exchanges;
• fulfill the priority sector lending requirement with
modification allowed in the composition of such
lending for an initial period of three years;
• use modern infrastructural facilities to provide good
customer service

– The RBI approved six new private sector banks in 1994

 Deregulation of Branch Restrictions
– The RBI changed its licensing policy in 1992 in
order to provide banks with operational autonomy
to rationalize their branch networks.

– Banks were allowed to shift their existing branches

within the same locality, open certain types of
specialized branches, convert existing nonviable
rural branches into satellite offices, spin off business
of a branch, and open extension counters and
administrative units without prior approval of the
RBI.

– The RBI allowed banks to open branches freely,

provided that a bank met the capital adequacy ratio
of 8%; earned a net profit for three consecutive
years, and had NPAs not exceeding 15% of total
outstanding loans.
• Restructuring of Public Sector
Banks
• Recapitalization
• Debt Recovery and Bankruptcy
• Partial Privatization
• Writing-Off of Bad Debts
• Setting up of an Asset
Reconstruction Company
• Reduction of Operational Costs
THANK YOU