Financial sector reforms of

1991 and 1998

Financial reforms - 1991
• During this post-nationalization period, the banking sector suffered a
serious erosion in its productivity, efficiency and profitability.
The Committee pointed out to a few flaws in the post nationalisation banking
which lowered their efficiency. Important of them being –
• Directed credit programmes under the priority sector lending
• Very high levels of the CRR and SLR rates for the banks.
The recommendations of the Committee aimed at:
1) Ensuring higher degree of operational flexibility;
2) Autonomy in decision making.
3) Infuse more competitiveness in commercial banks.
THE FOLLOWING ARE THE RECOMMENDATIONS OF THE 1991 COMMITTEE:
1.Establishment of a four-tier hierarchy for the banking structure
consisting of three or four large banks including the SBI at the top, 8 to
10 national banks with a network of countrywide branches
Vaidehi Dhamankar
CONTINUED….
2 The Government should not contemplate to nationalize any private commercial
banks of the country in future and private banks should be treated at par with
public sector banks.
3 Lifting the bar on setting up new banks in the private sector and abolishing the
licensing procedure for branch expansion.
4 The Government should be more liberal in allowing the foreign bank to open
more branches keeping in line with the foreign investment policy. Joint ventures
of foreign and Indian banks be permitted in respect of merchant and investment
banking
5 The statutory liquidity ratio (SLR) and cash reserve ratio (CRR) should be
progressively brought down from 1991-92.
6. The directed credit programme should be re-examined at least in case of those
who were able to stand on their own feet and those who have turned this into a
source of economic rent. In this way, the priority lending should be curtailed.
The priority sector should be redefined to comprise small and marginal farmers,
the tiny industrial sector, small business operators and other weaker sections.

Vaidehi Dhamankar
CONTINUED…
7 Establishment of the ARF Tribunal : The proportion of
bad debts and Non-performing asset (NPA) of the public
sector Banks and Development Financial Institute was very
alarming in those days. The committee recommended the
establishment of an Asset Reconstruction Fund (ARF).
8 Those days banks were under the dual control of the
Reserve Bank of India (RBI) and the Banking Division of the
Ministry of Finance (Government of India). The committee
recommended to change this system. 
9 The committee felt that the interest rates in India are
regulated and controlled by the authorities. The
determination of the interest rate should be on the grounds
of market forces such as the demand for and the supply of
fund
Vaidehi Dhamankar
 Narsimham Committee – 2 ( 1998 )
•  The committee was tasked with progress review of  banking reforms
since 1992. The committee submitted its report on 23rd April 1998 to
the then Finance Minister Yashwant Sinha.
The following are its main recommendations :
1.Capital Adequacy: The committee suggested that it would be
desirable that capital adequacy requirements take into account market
risks in addition to the credit risks. The committee suggested that there
should be a 5% weight for market risk for Govt. and approved
securities.
The Committee accordingly recommended that the minimum capital
to risk assets ratio be increased to 10% from its present level of 8%. In
respect of PSBs (Public Sector Banks), the additional capital
requirement will have to come from either the Govt. or the market.
Those banks which are in a position to access the capital market at
home or abroad should be encouraged to do so.

Vaidehi Dhamankar
• Non-Performing Assets (NPA): The Committee recommended that an asset
be classified as doubtful if it is in the substandard category for 18 months in
the first instance and eventually for 12 months and loss if it has been so
identified but not written off. These norms, which should be regarded as the
minimum, may be brought into force in a phased manner. 
The Committee recommended that the objective should be to reduce the
average level of net NPAs for all banks to below 5% by the year 2000 and to
3% by 2002. 
• Prudential Norms: In India, income stops accruing when interest or
installment of principal is not paid within 180 days. The Committee
recommended to reduce this limit to 90 days in a phased manner by the year
2002. The committee recommended to apply 1% of general provision on
standard assets and RBI should consider its introduction in a phased manner
• Strengthening Banking System: Committee recommended that banks
should bring out revised Operational Manuals and update them regularly,
keeping in view the emerging needs and ensure adherence to the
instructions so that these operations are conducted in the best interest of a
bank and with a view to promoting good customer service.

Vaidehi Dhamankar
• Banking Structure: Committee recommended that DFIs (Development
Finance Institution) should, over a period, convert themselves to banks.
There would then be only two forms of intermediaries, viz. banking
companies and non-banking finance companies. If a DFI does not acquire
a banking license within a stipulated time it would be categorized as a non-
banking finance company
• Rural and Small Industrial Credits: The Committee recommended that a
distinction should be made between NPAs arising out of client specific and
institution specific reasons and general (agro-climatic and environmental
issues) factors. While there should be no concession in treatment of NPAs
arising from client specific reasons, any decision to declare a particular
crop or product or a particular region to be distress hit should be taken
purely on technoeconomic consideration by a technical body like NABARD
(National Bank for Rural and Agricultural Development).
• Banking policy should facilitate the evolution and growth of micro credit
institutions including LAB (Local Area Banks) which focus on agriculture,
tiny and small-scale industries promoted by NGOs for meeting the banking
needs of the poor.

Vaidehi Dhamankar