10/20/2014

Banking Sector Reforms full report - 1:Commerce Seminar Topics

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Banking Sector Reforms full report

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Banking Sector Reforms full report

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04-06-2011, 10:49 AM

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Banking Sector Reforms full report

HISTORY OF BANKING
Before we look into the knitty-gritty of banking sector reforms process, we must have a proper perspective of what is the history of our banking system in India
and also understand the rationale of why reform is necessary and what reforms are essential. Like in many other aspects, India had a long tradition of banking.
Evidence regarding the existence of money-lending operations in India is found in the literature of the Vedic times, i.e., 2000 to 1400 B.C. The literature of the
Buddhist period, for e.g., the Jatakas, and recent archaeological discoveries supply evidence of the existence of sresthis, or bankers. From the laws of menu, it
appears that money-lending and allied problems had assumed considerable importance in ancient India.
What were the interest rates? They were prescribed by almost all Hindu law-givers, Manu, Vasistha, Yajnavalkya, Gautama, and Baudhayana as also Kautilya. A
common base number was 15 per cent annum what the banker-economist Dr. Thingalaya calls Hindu rate of interest. Incidentally, this is close to current Prime
Lending Rate (PLR) of many banks. However, Chanakya gives a different approach. The interest works out for 15 per cent annum for general advances. The
traders are charged a rate of 60 per cent per annum. Where the merchandise has to pass through forests, the traders have to pay 120 per cent while those
engaged in the export-import business handling sea-borne cargo have to pay 240 per cent per annum. Chanakyas interest rate structure is risk-weighted; the
rate of interest increases with the risk involved in the borrowers business. Again, it is not everyone who could take up banking business. The
Dharmashastra laid down the rates according to the castes of the borrowers, and the eligibility of men belonging to Vaishya caste alone could take up the
money-lending profession. In other words, in ancient times, your caste gives you license to banking; not RBI!!!
Banking Sector Reforms
.INTRODUCTION TO THE TOPIC
As the real sector reforms began in 1992, the need was felt to restructure the Indian banking industry. The reform measures necessitated the deregulation of
the financial sector, particularly the banking sector. The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. In
1991, the RBI had proposed to form the committee chaired by M. Narasimham, former RBI Governor in order to review the Financial System viz. aspects relating
to the Structure, Organisations and Functioning of the financial system. The Narasimham Committee report, submitted to the then finance minister, Manmohan
Singh, on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. The
guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector.
The main recommendations of the Committee were: Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years
Progressive reduction in Cash Reserve Ratio (CRR)
Phasing out of directed credit programmes and redefinition of the priority sector
Banking Sector Reforms
Deregulation of interest rates so as to reflect emerging market conditions
Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993, 8 per cent by March 1996, and 8 per cent by those banks
having international operations by March 1994
Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts
Imparting transparency to bank balance sheets and making more disclosures
Setting up of special tribunals to speed up the process of recovery of loans
Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount
Restructuring of the banking system, so as to have 3 or 4 large banks, which could become international in character, 8 to 10 national banks and local banks

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10/20/2014

Banking Sector Reforms full report - 1:Commerce Seminar Topics

Restructuring of the banking system, so as to have 3 or 4 large banks, which could become international in character, 8 to 10 national banks and local banks
confined to specific regions. Rural banks, including RRBs, confined to rural areas
Abolition of branch licensing
Liberalising the policy with regard to allowing foreign banks to open offices in India
Rationalisation of foreign operations of Indian banks
Giving freedom to individual banks to recruit officers
Banking Sector Reforms
Inspection by supervisory authorities based essentially on the internal audit and inspection reports
Ending duality of control over banking system by Banking Division and RBI
A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI
Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks
Obtaining resources from the market on competitive terms by DFIs
Speedy liberalisation of capital market

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