Banking & Financial Sector Reforms

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Banking Sector Reforms

Bank Nationalisation Act 1969
  • 14 banks with deposits more than Rs 50 crore nationalised in July 1969
  • 6 Banks with deposits more than Rs 200 crores nationalised in April 1980
Why Nationalisation
  • Private sector banks did not cater to masses
  • For Planned development, banks play crucial role
  • Remote area coverage
  • To cater to Priority sectors
  • To control the economy
  • Developmental Banking
  • Increase trust in Banking Sector
State Bank of India
  • Imperial bank was nationalised in 1955.
LPG in 1991
Denationalisation
  • SBI allowed to sell 33% share in 1993.
  • All nationalised banks allowed to sell 33% of its share in 1994.
  • In 1994 Private banks were allowed.
  • UTI was the first Private sector bank.
Financial sector reforms
  • Economic reforms initiated in 1991
  • Greater private participation for its development
  • Private sector was going to demand high investible capital out of the financial system
  • Need was felt to restructure the whole financial system of India
  • Certain rigidities and weaknesses were found to have developed in the system during the late eighties.
  • A high level Committee on financial System (CFS) chaired by Narasimhan was set up on August14,1991 to examine all aspects relating to structure, organization, function and procedures of the financial system
Recommendations of CFS
On Directed Investment
  • Not to Use CRR as Monetary policy tool.
  • CRR should be progressively reduced from the present high level of 15 percent to 3 to 5 percent.
  • RBI should pay interest on the CRR of banks.
  • SLR it was advised to cut it to the minimum level from the present high level of 38.5 per cent in the next 5 years.
  • These suggestions were directed to the goal of making more funds available to the banks, converting idle cash for use, and cutting down the interest rates banks charge on their loans.
On Directed Credit Programme
  • Directed credit programme should be phased out gradually.
  • Concessional rates of interest could be dispensed with Directed credit should not be a regular programme.
  • Redefined PSL should have 10 percent fixed of the aggregate bank credit.
  • Composition of the PSL should be reviewed after every 3 years.
On the Structure of Interest Rates
  • Interest rates to be broadly determined by market forces.
  • Controls of interest rates on deposit and lending to be withdrawn.
  • Bank rate to be the anchor rate and all other interest rates to be closely linked to it.
  • The RBI to be the sole authority to simplify the structure of interest rates.
On Structural Reorganization of the Bank
  • Substantial reduction in the number of the PSBs through mergers and acquisitions.
  • RBI to be made the primary agency for the regulation of the banking system.
  • PSBs to be made free and autonomous.
  • PSB to go for a radical change in work technology and culture, so as to became competitive internally and to be at par with the wide range of innovations taking place abroad.
  • Appointment of the Chief Executive of bank(CMD) was suggested not to be on political considerations but on professionalism and integrity.
Asset Reconstruction Companies/Fund
  • To tackle the menace of the higher non-performing assets(NPAs) of the banks and the financial institutions, the committee suggested setting up of the asset reconstruction companies/funds
  • Banking sector is abused by the Govt., the officials, the bank employees and the trade unions
  • Recommendations were opposed by the bank unions and the leftist political parties
Other major suggestions
  • Opening of new private sector banks
Another Banking Sector Reform
  • “To review the progress of banking sector reforms to date and chart a programme of financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”
  • Narashimham Committee-II handed over its report in 1998.
  • Mergers of the PSBs and the financial Institutions were suggested –stronger banks and the FIs to be merged while weaker and unviable ones to be closed
  • 3-tier banking structure
    • Tier-1 to have 2 to 3 banks of international orientation.
    • Tier-2 to have 8 to 10 banks of national orientation.
    • Tier-3 to have a large number of local banks.
  • First and second tiers were to take care of the banking needs of the corporate sector in the economy.
  • Budgetary recapitalization of the PSBs is not viable and should be abandoned.
  • Legal framework of loan recovery should be strengthened.
  • Net NPAs for all banks suggested to be cut down to below 5 percent by 2000 and 3 percent by 2002.
  • Rationalization of branches and staffs of the PSBs suggested.
  • Licensing to new private banks was suggested to continue with Bank ‘boards should be depoliticized under RBI supervision.
  • Board for financial Regulation and Supervision should be set up for the whole banking, financial and the NBFCs in India.
  • CAR to 10%.

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