The South East Asian countries introduced banking reforms wherein bank CRR and SLR was reduced,

this increased the lending capacity of banks. Th e ma r k e t s f e l l p r e c i p i t o u s l y b e c a u s e b a n k s a n d c o r p o r a t e s d i d n o t accurately measure the risk spread that should have been reflected in their lending activities. Nor did they manage such risks or provide for them in their balance sheets. And followed the South East Asian Crisis. T h e m o n e t a r y p o l i c y p e r s p e c t i v e e s s e n t i a l l y l o o k s a t S L R a n d C R R requirements (especially CRR) in the light of several other roles they playi n t h e e c o n om y. T h e C R R i s c o n s i d e r e d a n e f f e c t i v e i n s t r u me n t f o r monetary regulation and inflation control. The SLR is used to impose financial discipline on the banks, provide protection to deposit holders, allocate bank credit between the government and the private sectors, and also help in monetary regulation. However bankers strongly feel that these along with high non-performing assets (on which banks do not earn any return) 10 percent CRR and 25 percent SLR (most banks have SLR investments way above the stipulation) are affecting banks' bottom lines. With an effective return of a mere 2.8 per cent, CRR is a major drag on banks' profitability.The Narasimham Committee had argued for reductions in SLR on theg r o u n d s t h a t t h e s t a t e d g o v e r n me n t o b je c t i v e o f r e d u c i n g t h e f i s c a l d e f i c i t s wi l l o b v i a t e t h e n e e d f o r a l a r g e p o r t i on o f t h e c u r r e n t S LR . Similarly, the need for the use of CRR to control secondary expansion of c r e d i t w o u l d b e l e s s e r i n a r e g i m e o f s m a l l e r f i s c a l d e f i c i t s . T h e committee offered the route of Open Market Operations (OMO) to theReserve Bank of Indiafor further monetary control beyond that providedb y t h e ( l o w e r e d ) S L R a n d C R R r e s e r v e s . U l t i m a t e l y , t h e r u l e w a s R e d u c t i o n i n t h e r e s e r v e r e q u i r e me n t s o f b a n k s , wi t h t h e S t a t u t o r y Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in aperiod of 5 years. T h e r e c e n t t r e n d i n s e v e r a l d e v e l o p e d c o u n t r i e s ( U S , S w i t z e r l a n d , Australia, Canada, and Germany) towards drastic lowering of reserverequirements is often used to support the argument for reduced reservelevels in India.The arguments for higher or lower SLR and CRR ratios stem from twodifferent perspectives one which favours the banks, and the other

whichfavours the bank reserves as a monetary policy instrument. The bankperspective seeks to maximise "lendable" resources, the banks' controlo v e r r e s o u r c e d e p l o y m e n t , a n d r e t u r n s t o t h e b a n k s f r o m t h e "preempted" funds. It is also claimed that thelow returns from the forcedi n v e s t m e n t s i n g o v e r n m e n t s e c u r i t i e s a d v e r s e l y a f f e c t t h e b a n k profitability - the cost of deposits for banks, which averages at 15-16 perc e n t , w a s mu c h g r e a t e r t h a n t h e ( e a r l i e r ) r e t u r n s o n t h e g o v e r n me n t securities.This argument is sometimes carried further to state that RBImakes profits on impounded money, at the cost of bank profitability. Tos o m e e x t e n t , t h i s a r g u m e n t h a s b e e n w e a k e n e d b y t h e i n c r e a s e i n interest on government securities to 13.5 per cent.Some problems with the stated aim of reducing SLR and CRR are:1 . T h e s u p p o r t i n g c o n d i t i o n o f s m a l l e r f i s c a l d e f i c i t s i s n o t happening in reality2 . Op e n ma r k e t o p e r a t i o n s h a v e n o t been used to any significantextent in India for mo n e t a r y c o n t r o l. Th e t i me r e q u i r e d f o r g a i n i n g e x p e r i e n c e wi t h t h e u s e o f s u c h o p e r a t i o n s wo u l d b e much more than 5-6 years. 3. A c o m m i t m e n t t o a u n i d i r e c t i o n a l m o v e m e n t o f t h e s e v i t a l co ntrols irrespective of the effects on, and the response of, othereconomic factors (such as inflation), would be unwise . This scenario thus indicates that despite the stated aim of reductions inSLR and CRR, RBI may be forced to revert to higher reserve levels, if theeconomic indicators become unfavourable, and RBI has already indicatedas much. Bank investment are, therefore, not likely to stabilize in thenear future. The RBI had announced an increase in interest rate on CRR balance to 6%from the present 4%. This will certainly boost the profits of banks, as theyhave to maintain a minimum balance of 8% with the RBI.

The CRR was reduced from a level of 8.5 percent in August 2008 to 6 percent in September, 2008 to ease liquidity in domestic markets on the face of the global financial crisis. The cut continued through 2008 reaching a level of 5 percent in

January 2009. The CRR was maintained at this level throughout 2009 and eventually raised to 6 percent in April, 2010

Rate 10/03/2012 28/01/2012 24/04/2010 27/02/2010 13/02/2010 17/01/2009 08/11/2008 01/11/2008 15/10/2008 11/10/2008 30/08/2008 19/07/2008 05/07/2008 24/05/2008 10/05/2008 26/04/2008 10/11/2007 04/08/2007 28/04/2007 14/04/2007 03/03/2007 17/02/2007 08/12/2006 02/10/2004 18/09/2004 14/06/2003 16/11/2002 01/06/2002

4.75 5.5 6 5.75 5.5 5 5.5 6 6.5 7.5 9 8.75 8.5 8.25 8 7.75 7.5 7 6.5 6.25 6 5.75 5.5 5 4.75 4.5 4.75 5

29/12/2001 03/11/2001 19/05/2001

5.5 5.75 7.5 Date Rate 8 8.25 8.5 8.25 8 8.5 9 9.5 10 10.5 11 10 10.2 10.5 10 9.5 9.75 10 10.5 11 11.5 12 13 13.5 14 14.5 15

24/02/2001 12/08/2000 29/07/2000 22/04/2000 08/04/2000 20/11/1999 06/11/1999 08/05/1999 13/03/1999 29/08/1998 11/04/1998 28/03/1998 17/01/1998 06/12/1997 22/11/1997 25/10/1997 18/ 01/ 1997 04/ 01/ 1997 09/ 11/ 1996 26/ 10/ 1996 06/ 07/ 1996 11/ 05/ 1996 27/ 04/ 1996 09/ 12/ 1995 11/ 11/ 1995 06/ 08/ 1994

09/ 07/ 1994 11/ 06/ 1994 15/ 05/ 1993 17/ 04/ 1993 08/ 10/ 1992

14.7 14.5 14 14.5 15

The 1991 report of the Narasimham Committee served as the basis for the initial banking sector reforms. In the following years, reforms covered the areas of interest rate deregulation, directed credit rules, statutory pre-emptions and entry deregulation for both domestic and foreign banks. The objective of banking sector reforms was in line with the overall goals of the 1991 economic reforms of opening the economy, giving a greater role to markets in setting prices and allocating resources, and increasing the role of the private sector (Arun and Turner, 2002a, p. 183; Bhide, Prasad and Ghosh, 2001, p. 7; GuhaKhasnobis and Bhaduri, 2000, p. 335f.; Hanson, 2001, pp. 5-7; Shirai, 2002a, p. 54). A brief overview of the most important reforms follows. Statutory pre-emptions The degree of financial repression in the Indian banking sector was significantly reduced with the lowering of the CRR and SLR, which were regarded as one of the main causes of the low profitability and high interest rate spreads in the banking system (Shirai, 2002b, p. 12). During the 1960s and 1970s the CRR was around 5%, but until 1991 it increased to its maximum legal limit of 15%. From its peak in 1991, it has declined gradually to a low of 4.5% in June 2003. In October 2004 it was slightly increased to 5% to counter inflationary pressures, but the RBI remains committed to decrease the CRR to its statutory minimum of 3%. The SLR has seen a similar development. The peak rate of the SLR stood at 38.5% in February 1992, just short of the upper legal limit of 40%. Since then, it has been gradually lowered to the statutory minimum of 25% in October 1997 (Ghose, 2000, p. 199; Reserve Bank of India, 2004a, p. 10).

The reduction of the CRR and SLR resulted in increased flexibility for banks in determining both the volume and terms of lending

DO WE REALLY HAVE ADEQUATE MONEY MARKET REFORMS(REVIEW OF MONEY MARKET REFORMS IN INDIA)by :Dr. T.K. JainChief Mentor AFTERCHOOOLcentre for social entrepreneurshipBikaner Abstract :In this paper, the author reviews money market reforms in India and tries to criticallyevaluate the present money market status. The author suggest further liberalisation andintroduction of innovative money market instruments, particularly for the betterment of small entrepreneurs, artisans, small farmers and poor people.CONTENTS :IntroductionNeed of moneey market reformsreview of money market reformscritical evaluation of the reforminadequacy of the reformsIntroduction :Money market is the pulse of the nation. It denotes the quantum of money available in thesystem. It refers to all the institutions that operate in short term money transactions. Itincludes all the instruments, which are intended to provide liquidity. Over the past years,money market has evolved and the process of liberalisation, privatisation and globalisationhave contributed to the development of money market. All these have helped in thedevelopment of a mature money market in India. Till 1991, we had a regulated andcontrolled economy. The money market was confined to government regulated market,and included few instruments. The scenario has changed since then.Need of moneey market reformsTill 80's, we followed closed economic system. Banks were expected to keep very highCRR and SLR. They had to invest as per government guidelines. Very few money marketinstruments were available.Money market has become important in the context of globalisation, liberalisation andprivatisation across the globe. Economic slowdown affects nations. Central banks have topromptly tackle these issues in order to enure that the economy grows on positive lines.We cannot adopt close economies in order to workout the systems. review of money market reforms Liberalisation started in 1991. when the government realised that it has to start the process of money market reforms, it set-up a committee under the Chairmanship of Mr. Narismhan namely, the Committee on the Financial System in 1991. Thus the reform process startedi n l i n e wi t h s u g g e s t i o n s g i v en b y t h e c o mmi t t e e . Th e g o v e r n me n t f u r t h e r a p p o i n t e d another committee called the Banking Sector Reforms

in 1998. During the past years, ont h e b a s i s o f t h e r e c o m m e n d a t i o n s o f t h e F i r s t C o m m i t t e e f o l l o w i n g r e f o r m s w e r e introduced in the financial sectors.The quantum of statutory liquidity ratio (SLR) and cash reserve ratio (CRR) weresteadily increased during 1980s to contain inflationary pressures occurring becauseof large budgetary deficits. The measure resulted into adverse impact on banksprofitability which pressurized them to levy higher interest rates on commercialadvances. The RBI has been using SLR and CRR to check excess liquidity in theeconomy. After 1991, SLR and CRR were reduced, which enabled the banks to give more credit and operate profitably. It also helped banks in introducing new products. Banks started offering loans at lower interest rates. Consumer credit also flourished. Reduction in CRR and SLR helped banks in bringing liquidity to the economy and there was huge consumer credit. Banks liberally gave consumer loans, housing loans, and industrial credit. All these measures lifted the economic scenario and economy grew @ 6 to 8 % during this period due rise in demand. In March, 2007, the CRR has raised to 6.5%.i . T i l l 1 9 9 1 , banks had piled up huge NPAs due to priority sector l e n d i n g a n d o t h e r policies of the government. It was ususal for the borrowers not to pay assuming that the government will waive off the loans. Banks were in difficult conditions. A number of measures were taken up and these helped banks in improving their working. The government tempered with the crdit system again when it announced waiver of o u t s t a n d i n g a g r i c u l t u r a l l o a n s . T h e s e me a s u r e s o n l y c r e a t e h u r d l e s f o r s o u n d b an k i n g s ys t e m i n o u r c o u n t r y. Wh i l e b a n k s a l r e a d y wo r k u n d e r t r e me n d o u s pressure and have to be accountable to public as well as to the shareholders, these measures put them in tight rope walk. There is also a demand of higher capital a d q ua c y o n b e h a l f o f b a n k s . G AT S a n d o t h e r s u c h i n t e r n a t i o n a l me e t i n g s p u t p r e s s u r e o n Go v e r n me n t o f I n d i a t o o p e n t h e b a n k i n g s e c t o r a n d o t h e r s u c h services. Indian banks also aspire to be global banks. The RBI issued new normsfor income recognition, classification of assets, provision for bad debts and capitala d e q u a c y. Th e mi n i mu m c a p i t a l a d e q u a c y o f 8 % o f t h e a g g r e g a t e o f t h e r i s k weighted assets were prescribed to be followed by March 1996 in accordance withthe Basel Committee recommendations. It was increased to 9% to be attained byMarch 2000. At the end of March 2006 the CRR for nationalized banks stood at12.3%, for new private sector banks at 12.6% and for foreign banks operating inIndia at 12.3%. Public sect or banks, which were reeling under pressure of NPAsdemanded support

from the govrnment. To attain CRR norms the public sector banks received budgetary support amounting to Rs.20,046 crore. This being notsufficient, banks raised debt and went in for Initial Public Offers (IPOs) and Followon Public Offers (FPOs) in the Capital Market. The Banks were required to preparet h e i r b a l a n c e s h e e t s a n d p r o f i t a n d l o s s a c c o u n t s i n n e w f o r m a t s w . e . f . t h e accounting year 1991-92 so as to reflect true and correct position.i i .B a n k s h a v e n o w be e n g i v e n f r e e d om t o e x p a n d a n d s e t u p t h e i r b r a nc h e s . E a r l i e r i t wa s a v e r y d i f f i c u l t p r o c e s s . F u r t h e r , b r a n c h e s we r e n o t o p e n e d o n f i n a n c i a l viability, but on the demand from the region. Thus branches were matter of politicalpressure, and not the economic neccesity.From 1991, there has been continuousliberalisation and banks are given freedom to set up branches and grow. However,freedom to set-up new branches without the RBI approval was linked to attaining capital adequacy norms and adoption of new accounting standards.i i i . F o r setting up banks in the private sector the RBI issued g u i d e l i n e s t o s e e t h a t these banks were financially viable and there was no concentration of Credit andCrossholding with industrial houses. They were also required to adhere to prioritysector lendings.i v . T h e m u l t i i n t e r e s t r a t e s w e r e r e d u c e d f r o m 2 0 in 1989-90 to 2 in 1994-95. T h e o b je c t i v e b e h i n d i t w a s t o p r e v e n t c r o s s s u b s i d i z a t i o n . Th e B a n k s n o w h a v e freedom to decide their own interest rates.v . T o s t r e n g t h e n s u p e r v i s i o n o v e r b a n k s , t h e R B I h a s e s t a b l i s h e d a n e w B o a r d f o r Financial Supervision under the Chairmanship of a Deputy Governor. It looks after the implementation of the regulations with respect to credit management, assetclassification, income recognition, provision for bad debts, capital adequacy andtreasury operations.v i . T h e m a n a g e m e n t i n f o r m a t i o n s y s t e m , t h e i n t e r n a l a u d i t a n d c o n t r o l m e c h a n i s m s have been improved, so as to monitor and improve banks performance.v i i . To i mp r o v e d e b t r e c o v e r y b y t h e b a n k s a n d o t h e r f i n a n c i a l i n s t i t u t i o n s , n e c e s s a r y Act was enacted in 1993. Special Recovery Tribunals have been set-up under theAct for faster recovery of loan arrears.v i i i . T h e B a n k s h a v e n o w m o r e f l e x i b i l i t y i n d e t e r m i n i n g p e r m i s s i b l e b a n k f i n a n c e keeping in view the borrowers needs.With regard to the Second Committee, Banking Sector Reforms, Committee made thefollowing recommendations

:i . T h e B a n k i n g s e c t o r t o b e c o m e s t r o n g a n d c o m p e t i t i v e s h o u l d c o n s o l i d a t e . I t i s because of this reason many weak banks have merged with the strong banks (IDBItook over United Western Bank; ICICI took over Sangli Bank; State Bank of Indiah a s b e e n a l l o we d t o me r g e S t a t e B a n k o f S a u r a s h t r a ; a n d C e n t u r i o n B a n k o f Punjab to take over Lord Krishna Bank). The developmental financial institutionswere permitted to convert into banks (ICICI became ICICI Bank, IDBI became IDBIBank and even UTI started UTI Bank known as AXIS Bank).i i . I t s u g g e s t e d n e w n o r ms f o r c a p i t a l a d e q u a c y 1 0 % mi n i mu m c a p i t a l t o C R R .i i i .F o r r e c a p i t a l i z a t i o n t h e me t h o d o f B u d g e t a r y s u p p o r t b e a v o i d e d .i v . Le g a l f r a me wo r k f o r c r e d i t r e c o v e r y b e f u r t h e r s t r e n g t h e n e d .v . Ne t No n - P e r f o r mi n g As s e t s ( NP A) b e b r o u g h t d o wn t o 3 % b y 2 0 0 2 . v i . T h e r e s h o u l d b e r a t i o n a l i z a t i o n o f b r a n c h e s a n d s t a f f . v i i . Th e b a n ks n e e d t o b e d e p o l i t i s e d u n d e r t h e s u p e r v i s i o n o f t h e R B I .v i i i .Th e p o l i c y o f l i c e ns i n g n e w p r i v a t e s e c t o r b a n k s ma y b e c o n t i n u e d . i x . F o r e i g n b a n k s m a y be allowed to set-up subsidiaries and Joint Ventures in I n d i a and be given national treatment with regard to branches and directed credit.x . F o r r e g u l a t i o n a n d s u p e r v i s i o n t h e r e s h o u l d b e o n e i n t e g r a t e d a g e n c y n a m e d a s Board for Financial Regulation and Supervision.Strengthening the regulation and supervision of banks became particularly important in theaftermath of the South-East Asian crisis of 1996 which led to bank failures. Keeping inview the recommendation of the Committee, the Government undertook many measures : CRR was raised from 8% to 9%.

Accounting norms were strengthened. Asset liability Management and Risk Management Guidelines were laid down. Enactment of securitization & Reconstruction of Financial Assets and Enforcementof Security Act was passed for efficient recovery of bank credit.Banks have introduced a number of money market instruments like Commercial paper,Certificate of deposit etc. Some products have been introduced for the betterment of farmers, and people at the bottom of pyramid also. Farmers are now given credit cards.Plastic money is spreading fast in India.

CRITICAL EVALUATION OF MONEY MARKET REFORMS The initiation of money market reforms has completed eighteen years and now it is theright time to critically appraise their impact on Indian economy. During the last eighteenyears, a number of new money market instruments have been introduced like Certificate of d e p o s i t , c o mm e r c i a l p a p e r , e t c . B a n k s h a v e a l s o i n t r o d u c e d a n u mb e r o f i n n o v a t i v e products and services. The RBI and the government are working closely to ensure proper economic growth. A number of changes have been made in the policies of the centralbank, giving commercial banks much desired freedom and at the same time, these effortshave resulted in better regulation of inflation and fiscal deficit. A look at the facts relating toinflation and fiscal deficit lead to the conclusion that the objectives behind the reformshave been achieved partially. The fiscal deficit of centre and the states in 2005-06 was ashigh as 7.4% of GDP. However, on the forex reserve front we are surely comfortable as itcrossed $ 200 billion in April, 2007 and around $ 350 billion in October,2009.In fact, our market is overflowing with forex inflows, which has naturally led to rupee appreciationsubsequently in terms of the dollars.Despite a gradual increase in total tax revenue since the previous Review, India's tax toGDP ratio is relatively low and seemingly insufficient to meet its developmental needs.Further public spending on infrastructure and social services is constrained by the FiscalResponsibility and Budget Management (FRBM) Act, 2003, which requires India to reducei t s f i s c a l a n d r e v e n u e d e f ic i t s a n d t o e l i mi n a t e t h e r e v e n u e d e f i c i t b y 3 1 M a r c h 2 0 0 9 .P r i v a t e i n v e s t me n t i s a l s o d e t e r r e d b y h i g h r e a l r a t e s o f i n t e r e s t , wh i l e f o r e i g n d i r e c t investment (FDI) at around 1% of GDP has remained disappointing. In order to meet itsF R B M t a r g e t s , t h e Go v e r n me n t h a s i n t r o d u c e d t a x r e f o r m t o i m p r o v e c o l l e c t i o n a n d increase revenue. Expenditure reductions include further reform of the targeted publicdistribution system (TPDS) and a partial dismantling of administered pricing for petroleum.H o we v e r , s t a t e o wn e d e n t e r p r i s e s r e ma i n a c o n s i d e r a b l e d e ma n d o n g o v e r n me n t re sources and the recent decision to "pause" privatization will have implications for futuregovernment support for these enterprises.Today banks are comparatively free to set their own policies. Consolidation in bankingindustry is on the cards. Banks are planning to become global players. SBI, PNB, BOB,ICICI, IDBI, Axis Bank and some other banks have taken massive steps to introduce latesttechnology, improve operational performance, and to become iuyoooooooa global bank.Inadequcy of the reform