Banking Sector Reforms

Banking Sector Reforms

Banking sector reforms in 1990s in India were based on

the report of the committee headed by Mr.M.Narasimhan
in 1991. Major recommendations of the committee were
as follows:

1. There should be no bar to set up new banks in the

private sector, provided they have the start-up capital and
other requirements prescribed by RBI.
2. The government should indicate that there would be no
further nationalization of banks and there should not be
difference in the treatment of public and private sector
banks.

3. Establishment of 4 tier hierarchy for banking structure

with 3 to 4 large banks (including SBI) at top and at
bottom rural banks engaged in agricultural activities
4. There should be an Asset Reconstruction Fund(ARF)
which could take over from the banks and Financial
Institutions (FIs) a portion of their bad and doubtful debts
at a discount, the level of discount being determined by
independent auditors on the basis of clearly defined
guidelines. The ARF should be provided with special
powers for recovery.
5. The Banks and Financial Institutions should be
authorized to recover bad debts through special tribunals
and based on the valuation given in respect of each asset by
panel of at least 2 auditors.

6. Branch licensing should be abolished and the option of

opening branches or closing branches other than rural
banks should be left to the commercial judgment of the
individual banks. Further, internal organization of the banks
is best left to judgment of the management of individual
banks
7. Phased reduction in Statutory Liquidity Ratio (minimum
amount of assets to be maintained by all banks) and Cash
Reserve ratio (certain percentage of their deposits to be
maintained in the form of balances with the central bank).

8. Phased achievement of 8% Capital Adequacy Ratio

(Minimum capital to risk assets ratio)

9. Proper classification of assets and full disclosure of accounts

of banks and financial institutions.

10. There should be speedy computerization of banking sector.

• 11. Foreign banks should be subjected to the same
requirements as are applicable to Indian banks and RBI
should be more liberal in respect of allowing foreign
banks to open subsidiaries.
• Most of the recommendations of the committee were
implemented.
 Banking Reform Measures Of Government

On the recommendations of Narasimhan Committee, following

measures were undertaken by government since 1991 :-

1. Local Area banks (LABs)

2. Supervision Of Commercial Banks (Board of Financial

Supervision) (Department of supervision)

3. Lowering SLR And CRR

4. Capital Adequacy Norms (CAN)

5. Freedom Of Operation
6. Prudential Norms

7. Deregulation Of Interest Rates

8. Competition From New Private Sector Banks

9. Recovery Of Debts (Recovery of Debts due to

Banks and Financial Institution Act 1993)

10. Access To Capital Market

• SECOND PHASE OF REFORMS OF BANKING
SECTOR (1998) / NARASIMHAN 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 1998. The Committee placed greater
importance on structural measures and improvement in
standards of disclosure and levels of transparency
1) The committee cautioned the merger of strong banks
with weak ones as this may have negative effect on stronger
banks.
2) It suggested that 2 or 3 large banks should be given
international orientation and global character.
3) There should be 8 to10 national banks and large
number of local banks.
4) It suggested new and higher norms for capital
adequacy.
5) To take over the bad debts of banks committee
suggested setting up of Asset Reconstruction Fund.
6) A Board for Financial Regulation and supervision
(BFRS) can be set up to supervise the activities of banks
and financial institutions.

7) There is urgent need to review and amend the

provisions of RBI Act, Banking Regulation Act, etc. to
bring them in line with current needs of industry.
8) Net Non-performing Assets for all banks was to be
brought down to 3% by 2002.

9) Rationalization of bank branches and staff was

emphasized. Licensing policy for new private banks can
be continued.

10) Foreign banks may be allowed to set up subsidiaries

and joint ventures.
•

• On the recommendations of committee following

reforms have been taken :-
• 1.New Areas
• 2) New Instruments
• 3) Risk Management
• 5) Increase Inflow Of Credit
• 6) Increase in FDI Limit
• 7) Information Technology
• 10) Management Of NPAs

• 11) Mergers And Amalgamation

• 12) Guidelines For Anti-Money Laundering

• 13) Managerial Autonomy

• 14) Customer Service