Banking sector reforms in India

An efficient banking structure can promote greater amount of investment which can help to achieve a faster growth of the economy. In India, the year 1991 saw a drastic change in the economic policy of government. Liberalization, privatization, globalization emerged as vital parameters of growth and development. But at that time India was facing macro economic crisis.

1.) The economy was growing at very low rate.

2) There were high non performing assets.

3) The customer service was unsatisfactory.

4) Banking system was not sound enough.

5) Poor financial condition of commercial banks.

6) The banks were lagging behind international standards in terms of computer technology, accounting standards and capital adequacy etc.

So government of India appointed a high level committee headed by Shri M. Narsinham, a former governor of the reserve bank of India. Government of India set up two committees.

1) Narsinham committee on financial sector reform in 1991.

2) Narsinham committee on banking sector reform in 1998.

Recommendation of Narsinham committee on financial sector reform in 1991

i) Reduction in CRR and SLR:- the Narsinham committee recommended reduction in CRR and SLR with a view to increase credit creation capacity of banks. SLR to be reduced to 25% over a period of five years and CRR from 15% to 5.5%.

ii) Abolition of direct credit programmes: – Narsinham committee recommended abolition of direct credit programme gradually. The priority sector should include farmers, tiny sectors, cottage industries, rural artisans and weaker sections.

iii) Deregulate and lowering interest rate: – Narsinham committee recommended prime lending rate which will be the minimum lending rate by the banks.

iv) Adoption of uniform accounting practices: – Narsinham committee recommended transparency regarding bank balance sheets and making full disclosures.

v) Establishment of special tribunal (asset reconstruction fund):- Tiwari committee suggested to set up special tribunal to speed up the process of recovery of loan and asset reconstruction fund should be set up to take off bad and doubtful debts from banks and financial institution at discount.

vi) Reconstitution of banking system: – Narsinham committee recommended reconstitution of banking system in a pattern of;

a) 3 or 4 large banks of international character.

b) 8 to 10 national banks with branches through out country engaged in universal banking.

c) Local banks with operation in specified region.

d) Rural banks should be confined to rural areas to provide agricultural finance.

vii) Abolition of branch licensing: – Narsinham committee recommended abolition of branch licensing and leaving the matter of opening and closing of branch to individual banks. In case of nationalized banks 3 tier structures of head office, zonal office and branch is favored, local banks may have 2 tier and SBI may have 4 tier system.

viii) Computerization: – on the recommendation of Rangrajan committee the Narsinham committee favored computerization.

ix) Ending of dual control: – duality of control by RBI and Ministry of finance should be ended. Only RBI should have control over the banks.

x) Capital adequacy norms: – Narsinham committee recommended bank of international standards in phased manner. A capital adequacy ratio of 4% to be achieved by March 1993 and 8% by March 1996.

xi) Non performing assets: – an asset is classified as Non Performing Assets if due in the form of principal and interest are not paid by the borrower for a period of 180 days. However, with a view to moving toward international best practices and to ensure greater transparency it has been decided to adopt the 90 days overdue norm for identification of Non Performing Assets from the year ending March 31, 2004. The committee recommended that assets should be classified into 4 categories; Standard, sub standard, doubtful, loss assets.

 xii) Development financial institutions: – Narsinham committee recommended regarding financial institutions that

a) Capital market should be liberalized.

b) The RBI should set up a new agency to supervise financial institutions.

These were the recommendation of Narsinham committee on the financial system in 1991.