8 Min…

• BREATHE IN

• BREATHE OUT

• HOLD
BANKING SECTOR REFORMS
(1991 Onwards)
 Why?

 High reserve requirements

 Administered interest rate

 Directed credit

 Low productivity and poor asset quality

 Lack of competition

 Political interference and corruption

 Objectives

 Create viable and efficient banking system

 operational flexibility and functional autonomy

 Reform measures to enhance efficiency and

productivity
 Reforms

• First Phase (1991)

Narasimham Committee I

• Second Phase (1998)

Narasimham Committee II
 Narasimham Committee I
• Establishment of a four-tier hierarchy for the banking structure

• supervisory functions by quasi-autonomous body sponsored by RBI

• Phased reduction in SLR and CRR

• Deregulation of Interest rates

• Tightening the prudential norms for the commercial banks

• Abolition of branch licensing policy

• Setting up Asset Reconstruction Fund

• Proper classification of assets and full disclosure of accounts of

banks and financial institutions
 Phase I-Reform Measures

 Liberalization measures

 Prudential norms

 Competition directed measures

 Supportive measures

 Other measures
 Liberalization measures

• SLR
• CRR
38.5% (1991) 25% (1997) ?
15% (1991) 4% (2003) ?
 Prudential norms

 Impart greater transparency and accounting

operations

 Capital Adequacy Ratio 4 % (1993)- 8% (1996)

 Asset classification and provisioning

Competition directed measures

 Opening of private sector banks from 1993

 9 new banks

 Foreign banks - subsidiaries, joint ventures or

branches

 New branches, specialized branches

 Supportive measures

 Revised format for balance sheet and profit and loss

account

 RBI evolved a risk-based supervision methodology

 Board of Financial Supervision (1994)

 Three-tier supervisory model-CAMEL

 Special Recovery Tribunals

 Other measures

 The Banking Companies Act-1994

 Structural reorganization

 Access To Capital Market

 Local Area banks

IMPACT OF FIRST GENERATION REFORMS

• Diversified banking system

• Enhanced competition
• Self Autonomy
• Improvement in asset quality
• Ownership diversion
• Mergers and acquisitions
• Value added services
• improvement in key financial indicators
 Narasimham Committee II

• Merger of strong public sector banks and closure of some

weaker banks
• It suggested that 2 or 3 large banks should be given
international orientation
• Board for Financial Regulation and supervision (BFRS)
• Net NPA for all banks was to be brought down to 3% by 2002
• Rationalization of bank branches and staff was emphasized
• Foreign banks may be allowed to set up subsidiaries and
joint ventures
 Phase II-Reform Measures

 Higher norms of capital adequacy-10% (2002)

 Asset Quality NPAs and Directed Credit

 Prudential Norms and Disclosure Requirements

 Reform Measures of Government
• New areas and instruments

• Risk Management

• Strengthening Technology

• Universal banking

• Adoption Of Global Standards

• Management Of NPAs

• Mergers And Amalgamation

• Guidelines For Anti-Money Laundering

• Base Rate System Of Interest Rates

• Customer Service
BRAIN ACTIVATION
 9 mins…
Students discuss about their relevant topic among their
group or other group…

8 mins…
Summary…
 Assessment

 Reason behind the reform measures?

 What are all the reforms measures introduced?

 What is Phase I and II reforms?

 Reforms on prudential and capital adequacy norms