Budget 2012-13 Finance Minister Pranab Mukherjee presented the Union Budget for the year 2012-13, his

seventh. At the very beginning of his speech Mr Mukherjee said that a "year of recovery interrupted" meant that it was time to take tough decisions. The idea ahead of the budget was that fiscal deficit needed to be controlled by cutting subsidies and raising taxes. The finance minister has raised taxes and promised cuts in subsidies. Here are the highlights of the Budget. The key proposals of the budget are:

Budget identifies five objectives relating to growth recovery, private investment, supply bottlenecks, malnutrition and governance matters

GDP growth to be 7.6 per cent (+ 0.25 percent) during 2012-13 Amendment to the FRBM Act proposed as part of Finance Bill. New concepts of Effective Revenue Deficit and Medium Term Expenditure Framework introduced Central subsidies to be kept under 2 per cent of GDP; to be further brought down to 1.75 per cent of GDP over the next 3 years. Proposed: Mobile based fertilizer management system; LPG transparency portal; scaling up and rolling out of Aadhar enabled payment for government schemes in at least 50 districts. Rs. 30,000 crore to be raised through disinvestment Efforts to reach broadbased consensus on FDI in multi-brand retail Rajiv Gandhi Equity Saving Scheme: to allow income tax deduction to retail investors on investing in equities Rs. 15,888 crore to be provided for capitalization of public sector banks and financial institutions A central Know Your Customer depository to be developed Swabhimaan: remaining habitations to be covered; to be extended to more habitations; ultra small branches to be set up in Swabhimaan habitations Investment in 12th Plan in infrastructure to go uptoRs. 50,00,000 crore; half of this is expected from private sector Tax Free Bonds of Rs. 60,000 crore to be allowed for financial infrastructure projects Allocation of Road Transport and Highways Ministry enhanced by 14 per cent to Rs. 25,360 crore Financial package of Rs. 3,884 crore for waiver of loans to handloom weavers and their cooperative societies; mega handloom clusters in Andhra, Jharkhand; weaver service centres in Mizoram, Nagaland and Jharkhand ; powerloom mega cluster in Maharashtra; Rs. 500 crore pilot schemes for geo-textiles in North-Eastern region Rs. 5,000 crore India Opportunities Venture Fund to help small enterprises Allocation to agriculture enhanced; RKVY gets Rs. 9,217 crore; BGREI gets Rs. 1,000 crore; Rs.2242 crore project to improve dairy productivity; Rs. 500 crore for coastal aquaculture

Various other agricultural activities merged into 5 missions Target for agricultural credit raised to Rs. 5,75,000 crore Interest subvention for short-term crop loans to farmers at 7 per cent interest continues; additional 3 per cent for prompt paying farmers Rs. 200 crore for awards to incentivise agricultural research Provisions under rural housing fund increased to Rs. 4,000 crore from Rs. 3,000 crore Interest subvention of 1 percent on housing loans uptoRs. 15 lakh extended for one more year AIBP allocation raised by 13 per cent to Rs. 14,242 crore National Mission on Food Processing to be started in cooperation with State Governments Scheduled Caste Sub Plan allocation increases by 18 per cent to Rs. 37,113 crore; Tribal Sub Plan by 17.6 per cent to Rs. 21,710 crore Multi-sectoralprogramme to address maternal and child malnutrition in 200 high burden districts 58 per cent rise in allocation to ICDS, at Rs. 15,850 crore Rural drinking water and sanitation gets 27 per cent rise in allocation to Rs. 14,000 crore; PMGSY gets 20 per cent rise to Rs. 24,000 crore Projects covering length of 8800 km to be awarded under NHDP against 7,300 km during 2011-12 RTE-SSA gets Rs. 25,555 crore allocation, showing an increase of 21 per cent; 6000 schools to be set up at block level as model schools in the 12th Plan; Credit Guarantee Fund to be set up for better flow of credit to students National Urban Health Mission is being launched 34 per cent increase in allocation to National Rural Livelihood Mission, to Rs. 3915 crore Rs. 1000 crore allocated for National Skill Development Fund Bharat Livelihood Foundation to be established to support livelihood interventions particularly in tribal areas Widow pension and disability pension raised from Rs. 200 to Rs. 300 per month Grant on death of primary breadwinner of a BPL family in the age group 18-64 years doubled to Rs. 20,000 Defence services get Rs. 193407 crore; any further requirement to be met 4000 residential quarters to be constructed for Central Armed Police Forces

UID-Aadhar to get adequate funds for enrolment of 40 crore persons, in addition to the 20 crore persons already enrolled White Paper on Black Money to be laid in the current session of Parliament Tax proposals mark progress in the direction of movement towards DTC and GST Income tax exemption limit raised from Rs.1,80,000 to Rs.2,00,000; upper limit of 20 per cent tax slab raised from Rs.8 lakh to Rs.10 lakh Interest from savings bank accounts deductible upto Rs.10,000; deduction of upto Rs.5,000 for preventive health check-up Senior citizens without business income exempt from advance tax Investment linked deduction of capital expenditure enhanced for certain businesses; new sectors eligible for investment linked deduction Turnover limit for compulsory tax audit for SMEs raised from Rs.60 lakh to Rs.1 crore STT on cash delivery reduced by 25 per cent to 0.1% General Anti Avoidance Rule being introduced to counter aggressive tax avoidance A number of measures proposed to deter generation and use of unaccounted money All services to attract service tax except those in the negative list Central Excise and Service Tax being harmonized Standard rate of excise duty raised from 10 per cent to 12 per cent; service tax rates raised from 10 per cent to 12 per cent; no change in peak customs duty of 10 per cent on non-agricultural goods Relief in indirect taxes to sectors under stress; agriculture, infrastructure, mining, railways, roads, civil aviation, manufacturing, health and nutrition, and environment get duty relief Certain cigarettes and bidis attract higher excise duty; large cars attract higher customs duty Excise imposed on unbranded jewellery also; measures to minimize impact on small artisans and goldsmiths; branded silver jewellery exempted from excise duty Net gain of Rs.41,440 crore due to taxation proposals Total expenditure budgeted at Rs. 14,90,925 crore; plan expenditure at Rs. 5,21,025 crore 18 per cent higher than 201112 budget; non plan expenditure at Rs. 9,69,900 crore Fiscal deficit targeted at 5.1 per cent of GDP, as against 5.9 per cent in revised estimates for 2011-12 Central Government debt at 45.5 percent of GDP as compared to Thirteenth Finance Commission target of 50.5 percent Medium-term Expenditure Framework Statement to be introduced; will set forth 3-year rolling target

Difference between Money and Capital Market

Money market is distinguished from capital market on the basis of the maturity period, credit instruments and the institutions: 1. Maturity Period: The money market deals in the lending and borrowing of short-term finance (i.e., for one year or less), while the capital market deals in the lending and borrowing of long-term finance (i.e., for more than one year). 2. Credit Instruments: The main credit instruments of the money market are call money, collateral loans, acceptances, bills of exchange. On the other hand, the main instruments used in the capital market are stocks, shares, debentures, bonds, securities of the government. 3. Nature of Credit Instruments: The credit instruments dealt with in the capital market are more heterogeneous than those in money market. Some homogeneity of credit instruments is needed for the operation of financial markets. Too much diversity creates problems for the investors. 4. Institutions: Important institutions operating in the' money market are central banks, commercial banks, acceptance houses, nonbank financial institutions, bill brokers, etc. Important institutions of the capital market are stock exchanges, commercial banks and nonbank institutions, such as insurance companies, mortgage banks, building societies, etc. 5. Purpose of Loan: The money market meets the short-term credit needs of business; it provides working capital to the industrialists. The capital market, on the other hand, caters the long-term credit needs of the industrialists and provides fixed capital to buy land, machinery, etc. 6. Risk: The degree of risk is small in the money market. The risk is much greater in capital market. The maturity of one year or less gives little time for a default to occur, so the risk is minimised. Risk varies both in degree and nature throughout the capital market. 7. Basic Role: The basic role of money market is that of liquidity adjustment. The basic role of capital market is that of putting capital to work, preferably to long-term, secure and productive employment. 8. Relation with Central Bank: The money market is closely and directly linked with central bank of the country. The capital market feels central bank's influence, but mainly indirectly and through the money market. 9. Market Regulation: In the money market, commercial banks are closely regulated. In the capital market, the institutions are not much regulated

Functions of Reserve Bank of India RBI - RBI Credit Policy

Functions of RBI ( The India's Central Bank ) List
Reserve Bank of India is also known as India's Central Bank. It was established on 1st April 1935. Although the bank was initially owned privately, it has been taken up the Government of India ever since, it was nationalized. The bank has been vested with immense responsibility of reviewing and reconstructing the economic stability of the country by formulating economic policies and ensuring a proper exchange of currency. In this regard, the Reserve Bank of India is also known as the banker of banks. Preamble of the Reserve Bank of India

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." The Preamble of the RBI speaks about the basic functions of the bank. It deals with the issuing the bank notes and keeping reserves in order to secure monetary stability in the country. It also aims at operating and boosting up the currency and credit infrastructure of India.
As a central bank, the Reserve Bank has significant powers and duties to perform. For smooth and speedy progress of the Indian Financial System, it has to perform some important tasks. Among others it includes maintaining monetary and financial stability, to develop and maintain stable payment system, to promote and develop financial infrastructure and to regulate or control the financial institutions.

For simplification, the functions of the Reserve Bank are classified into the traditional functions, the development functions and supervisory functions.

Traditional Functions of RBI

Traditional functions are those functions which every central bank of each nation performs all over the world. Basically these functions are in line with the objectives with which the bank is set up. It includes fundamental functions of the Central Bank. They comprise the following tasks. 1. Issue of Currency Notes : The RBI has the sole right or authority or monopoly of issuing currency notes except one rupee note and coins of smaller denomination. These currency notes are legal tender issued by the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500, and 1,000. The RBI has powers not only to issue and withdraw but even to exchange these currency notes for other denominations. It issues these notes against the security of gold bullion, foreign securities, rupee coins, exchange bills and promissory notes and government of India bonds. 2. Banker to other Banks : The RBI being an apex monitory institution has obligatory powers to guide, help and direct other commercial banks in the country. The RBI can control the volumes of banks reserves and allow other banks to create credit in that proportion. Every commercial bank has to maintain a part of their reserves with its parent's viz. the RBI. Similarly in need or in urgency these banks approach the RBI for fund. Thus it is called as the lender of the last resort.

3.

Banker to the Government : The RBI being the apex monitory body has to work as an agent of the central and state governments. It performs various banking function such as to accept deposits, taxes and make payments on behalf of the government. It works as a representative of the government even at the international level. It maintains government accounts, provides financial advice to the government. It manages government public debts and maintains foreign exchange reserves on behalf of the government. It provides overdraft facility to the government when it faces financial crunch.

4.

Exchange Rate Management : It is an essential function of the RBI. In order to maintain stability in the external value of rupee, it has to prepare domestic policies in that direction. Also it needs to prepare and implement the foreign exchange rate policy which will help in attaining the exchange rate stability. In order to maintain the exchange rate stability it has to bring demand and supply of the foreign currency (U.S Dollar) close to each other.

5.

Credit Control Function : Commercial bank in the country creates credit according to the demand in the economy. But if this credit creation is unchecked or unregulated then it leads the economy into inflationary cycles. On the other credit creation is below the required limit then it harms the growth of the economy. As a central bank of the nation the RBI has to look for growth with price stability. Thus it regulates the credit creation capacity of commercial banks by using various credit control tools.

6.

Supervisory Function : The RBI has been endowed with vast powers for supervising the banking system in the country. It has powers to issue license for setting up new banks, to open new braches, to decide minimum reserves, to inspect functioning of commercial banks in India and abroad, and to guide and direct the commercial banks in India. It can have periodical inspections an audit of the commercial banks in India.

Developmental / Promotional Functions of RBI

Along with the routine traditional functions, central banks especially in the developing country like India have to perform numerous functions. These functions are country specific functions and can change according to the requirements of that country. The RBI has been performing as a promoter of the financial system since its inception. Some of the major development functions of the RBI are maintained below. 1. Development of the Financial System : The financial system comprises the financial institutions, financial markets and financial instruments. The sound and efficient financial system is a precondition of the rapid economic development of the nation. The RBI has encouraged establishment of main banking and non-banking institutions to cater to the credit requirements of diverse sectors of the economy. 2. Development of Agriculture : In an agrarian economy like ours, the RBI has to provide special attention for the credit need of agriculture and allied activities. It has successfully rendered service in this direction by increasing the flow of credit to this sector. It has earlier the Agriculture Refinance and Development Corporation (ARDC) to look after the credit, National Bank for Agriculture and Rural Development (NABARD) and Regional Rural Banks (RRBs). 3. Provision of Industrial Finance : Rapid industrial growth is the key to faster economic development. In this regard, the adequate and timely availability of credit to small, medium and large industry is very significant. In this regard the RBI has always been instrumental in setting up special financial institutions such as ICICI Ltd. IDBI, SIDBI and EXIM BANK etc. 4. Provisions of Training : The RBI has always tried to provide essential training to the staff of the banking industry. The RBI has set up the bankers' training colleges at several places. National Institute of Bank Management i.e NIBM, Bankers Staff College i.e BSC and College of Agriculture Banking i.e CAB are few to mention. 5. Collection of Data : Being the apex monetary authority of the country, the RBI collects process and disseminates statistical data on several topics. It includes interest rate, inflation, savings and investments etc. This data proves to be quite useful for researchers and policy makers. 6. Publication of the Reports : The Reserve Bank has its separate publication division. This division collects and publishes data on several sectors of the economy. The reports and bulletins are regularly published by the RBI. It includes RBI weekly reports,

RBI Annual Report, Report on Trend and Progress of Commercial Banks India., etc. This information is made available to the public also at cheaper rates. 7. Promotion of Banking Habits : As an apex organization, the RBI always tries to promote the banking habits in the country. It institutionalizes savings and takes measures for an expansion of the banking network. It has set up many institutions such as the Deposit Insurance Corporation-1962, UTI-1964, IDBI-1964, NABARD-1982, NHB-1988, etc. These organizations develop and promote banking habits among the people. During economic reforms it has taken many initiatives for encouraging and promoting banking in India. 8. Promotion of Export through Refinance : The RBI always tries to encourage the facilities for providing finance for foreign trade especially exports from India. The Export-Import Bank of India (EXIM Bank India) and the Export Credit Guarantee Corporation of India (ECGC) are supported by refinancing their lending for export purpose.

Supervisory Functions of RBI

The reserve bank also performs many supervisory functions. It has authority to regulate and administer the entire banking and financial system. Some of its supervisory functions are given below. 1. 2. 3. Granting license to banks : The RBI grants license to banks for carrying its business. License is also given for opening extension counters, new branches, even to close down existing branches. Bank Inspection : The RBI grants license to banks working as per the directives and in a prudent manner without undue risk. In addition to this it can ask for periodical information from banks on various components of assets and liabilities. Control over NBFIs : The Non-Bank Financial Institutions are not influenced by the working of a monitory policy. However RBI has a right to issue directives to the NBFIs from time to time regarding their functioning. Through periodic inspection, it can control the NBFIs. 4. Implementation of the Deposit Insurance Scheme : The RBI has set up the Deposit Insurance Guarantee Corporation in order to protect the deposits of small depositors. All bank deposits below Rs. One lakh are insured with this corporation. The RBI work to implement the Deposit Insurance Scheme in case of a bank failure.

Functions of Stock Exchange - Main Functions In The Market

1. Continuous and ready market for securities

Stock exchange provides a ready and continuous market for purchase and sale of securities. It provides ready outlet for buying and selling of securities. Stock exchange also acts as an outlet/counter for the sale of listed securities

2. Facilitates evaluation of securities

Stock exchange is useful for the evaluation of industrial securities. This enables investors to know the true worth of their holdings at any time. Comparison of companies in the same industry is possible through stock exchange quotations (i.e price list).

3. Encourages capital formation

Stock exchange accelerates the process of capital formation. It creates the habit of saving, investing and risk taking among the investing class and converts their savings into profitable investment. It acts as an instrument of capital formation. In addition, it also acts as a channel for right (safe and profitable) investment.

4. Provides safety and security in dealings

Stock exchange provides safety, security and equity (justice) in dealings as transactions are conducted as per well defined rules and regulations. The managing body of the exchange keeps control on the members. Fraudulent practices are also checked effectively. Due to various rules and regulations, stock exchange functions as the custodian of funds of genuine investors.

5. Regulates company management

Listed companies have to comply with rules and regulations of concerned stock exchange and work under the vigilance (i.e supervision) of stock exchange authorities.

6. Facilitates public borrowing

Stock exchange serves as a platform for marketing Government securities. It enables government to raise public debt easily and quickly.

7. Provides clearing house facility

Stock exchange provides a clearing house facility to members. It settles the transactions among the members quickly and with ease. The members have to pay or receive only the net dues (balance amounts) because of the clearing house facility.

8. Facilitates healthy speculation

Healthy speculation, keeps the exchange active. Normal speculation is not dangerous but provides more business to the exchange. However, excessive speculation is undesirable as it is dangerous to investors & the growth of corporate sector.

9. Serves as Economic Barometer

Stock exchange indicates the state of health of companies and the national economy. It acts as a barometer of the economic situation / conditions.

10. Facilitates Bank Lending

Banks easily know the prices of quoted securities. They offer loans to customers against corporate securities. This gives convenience to the owners of securities.

Narasimham Committee Report 1991 1998 - Recommendations

Problems Identified By The Narasimham Committee
1. Directed Investment Programme : The committee objected to the system of maintaining high liquid assets by commercial banks in the form of cash, gold and unencumbered government securities. It is also known as the statutory liquidity Ratio (SLR). In those days, in India, the SLR was as high as 38.5 percent. According to the M. Narasimham's Committee it was one of the reasons for the poor profitability of banks. Similarly, the Cash Reserve Ratio- (CRR) was as high as 15 percent. Taken together, banks needed to maintain 53.5 percent of their resources idle with the RBI. 2. Directed Credit Programme : Since nationalization the government has encouraged the lending to agriculture and small-scale industries at a confessional rate of interest. It is known as the directed credit programme. The committee opined that these sectors have matured and thus do not need such financial support. This directed credit programme was successful from the government's point of view but it affected commercial banks in a bad manner. Basically it deteriorated the quality of loan, resulted in a shift from the security oriented loan to purpose oriented. Banks were given a huge target of priority sector lending, etc. ultimately leading to profit erosion of banks. 3. Interest Rate Structure : The committee found that the interest rate structure and rate of interest in India are highly regulated and controlled by the government. They also found that government used bank funds at a cheap rate under the SLR. At the same time the government advocated the philosophy of subsidized lending to certain sectors. The committee felt that there was no need for interest subsidy. It made banks handicapped in terms of building main strength and expanding credit supply. 4. Additional Suggestions : Committee also suggested that the determination of interest rate should be on grounds of market forces. It further suggested minimizing the slabs of interest.

Along with these major problem areas M. Narasimham's Committee also found various inconsistencies regarding the banking system in India. In order to remove them and make it more vibrant and efficient, it has given the following recommendations.

Narasimham Committee Report I - 1991

The Narsimham Committee was set up in order to study the problems of the Indian financial system and to suggest some recommendations for improvement in the efficiency and productivity of the financial institution.

The committee has given the following major recommendations:-

1.

Reduction in the SLR and CRR : The committee recommended the reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' and the Cash Reserve Ratio 'CRR'. Both of these ratios were very high at that time. The SLR then was 38.5% and CRR was 15%. This high amount of SLR and CRR meant locking the bank resources for government uses. It was hindrance in the productivity of the bank thus the committee recommended their gradual reduction. SLR was recommended to reduce from 38.5% to 25% and CRR from 15% to 3 to 5%.

2.

Phasing out Directed Credit Programme : In India, since nationalization, directed credit programmes were adopted by the government. The committee recommended phasing out of this programme. This programme compelled banks to earmark then financial resources for the needy and poor sectors at confessional rates of interest. It was reducing the profitability of banks and thus the committee recommended the stopping of this programme.

3.

Interest Rate Determination : The committee felt that the interest rates in India are regulated and controlled by the authorities. The determination of the interest rate should be on the grounds of market forces such as the demand for and the supply of fund.

Hence the committee recommended eliminating government controls on interest rate and phasing out the concessional interest rates for the priority sector. 4. Structural Reorganizations of the Banking sector : The committee recommended that the actual numbers of public sector banks need to be reduced. Three to four big banks including SBI should be developed as international banks. Eight to Ten Banks having nationwide presence should concentrate on the national and universal banking services. Local banks should concentrate on region specific banking. Regarding the RRBs (Regional Rural Banks), it recommended that they should focus on agriculture and rural financing. They recommended that the government should assure that henceforth there won't be any nationalization and private and foreign banks should be allowed liberal entry in India. 5. Establishment of the ARF Tribunal : The proportion of bad debts and Non-performing asset (NPA) of the public sector Banks and Development Financial Institute was very alarming in those days. The committee recommended the establishment of an Asset Reconstruction Fund (ARF). This fund will take over the proportion of the bad and doubtful debts from the banks and financial institutes. It would help banks to get rid of bad debts. 6. Removal of Dual control : Those days banks were under the dual control of the Reserve Bank of India (RBI) and the Banking Division of the Ministry of Finance (Government of India). The committee recommended the stepping of this system. It considered and recommended that the RBI should be the only main agency to regulate banking in India. 7. Banking Autonomy : The committee recommended that the public sector banks should be free and autonomous. In order to pursue competitiveness and efficiency, banks must enjoy autonomy so that they can reform the work culture and banking technology upgradation will thus be easy. Some of these recommendations were later accepted by the Government of India and became banking reforms.

Narasimham Committee Report II - 1998

In 1998 the government appointed yet another committee under the chairmanship of Mr. Narsimham. It is better known as the Banking Sector Committee. It was told to review the banking reform progress and design a programme for further strengthening the financial system of India. The committee focused on various areas such as capital adequacy, bank mergers, bank legislation, etc.

It submitted its report to the Government in April 1998 with the following recommendations.

1.

Strengthening Banks in India : The committee considered the stronger banking system in the context of the Current Account Convertibility 'CAC'. It thought that Indian banks must be capable of handling problems regarding domestic liquidity and exchange rate management in the light of CAC. Thus, it recommended the merger of strong banks which will have 'multiplier effect' on the industry.

2.

Narrow Banking : Those days many public sector banks were facing a problem of the Non-performing assets (NPAs). Some of them had NPAs were as high as 20 percent of their assets. Thus for successful rehabilitation of these banks it recommended 'Narrow Banking Concept' where weak banks will be allowed to place their funds only in short term and risk free assets.

3.

Capital Adequacy Ratio : In order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribed capital adequacy norms. This will further improve their absorption capacity also. Currently the capital adequacy ration for Indian banks is at 9 percent.

4.

Bank ownership : As it had earlier mentioned the freedom for banks in its working and bank autonomy, it felt that the government control over the banks in the form of management and ownership and bank autonomy does not go hand in hand and thus it recommended a review of functions of boards and enabled them to adopt professional corporate strategy.

5.

Review of banking laws : The committee considered that there was an urgent need for reviewing and amending main laws governing Indian Banking Industry like RBI Act, Banking Regulation Act, State Bank of India Act, Bank Nationalisation Act, etc. This upgradation will bring them in line with the present needs of the banking sector in India.

Apart from these major recommendations, the committee has also recommended faster computerization, technology upgradation, training of staff, depoliticizing of banks, professionalism in banking, reviewing bank recruitment, etc.

Evaluation of Narsimham Committee Reports

The Committee was first set up in 1991 under the chairmanship of Mr. M. Narasimham who was 13th governor of RBI. Only a few of its recommendations became banking reforms of India and others were not at all considered. Because of this a second committee was again set up in 1998.

As far as recommendations regarding bank restructuring, management freedom, strengthening the regulation are concerned, the RBI has to play a major role. If the major recommendations of this committee are accepted, it will prove to be fruitful in making Indian banks more profitable and efficient.

Introduction: The efficient, dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem, increasing fiscal deficits our country too embarked upon economic reforms (Ahulwalia M. S; 1993). The Government of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. These were initiated in 1991 to make Indian banking sector more efficient, strong and dynamic. The recommendations of the Narishiman Commission-I in 1991 provided the blue print for the first generation reforms of the financial sector, the period 1992-97 witnessed the laying of the foundations for reforms in the banking system. This period saw the implementation of prudential norms (relating to capital adequacy, income recognition, asset classification and provisioning, exposure norms etc). The structural changes accomplished during the period provided foundation of further reforms. Against such backdrop, the Report of the Narishiman Committee- II in 1998 provided the road map of the second generation reforms processes. Y.V. Reddy noted that the first generation reforms were undertaken early in the reform cycle, and the reforms in the financial sector were initiated in a well structured, sequenced and phased manner with cautious and proper sequencing, mutually reinforcing measures; complimentarily between forms in banking sector and changes in fiscal, external and monetary policies, developing financial infrastructure and developing markets. By way of visible impact, one finds the presence of a diversified banking system. Another important aspect is that apart from the growth of banks and commercial banks there are various other financial intermediaries including mutual funds. NBFCs, primary dealers housing financing companies etc., the roles played by the commercial banks in promoting these institutions are equally significant. Other important developments are: 1. 2. 3. Financial regulation through statutory pre-emotions (Bank rate, deposit rate, Credit Reserve Ration, Statutory Liquidity ratio) has been lowered while stepping up prudential regulations at the same time. Interest rates have been deregulated, allowing banks the freedom to determine deposits and lending rates. Steps have been initiated to strengthen public sector banks, through increasing their autonomy recapitalization from the fiscal, several banks capital base has been written off and some have even returned capital to govt. Allowing new private sector banks and more liberal entry of foreign banks has infused competition. 4. 5. 6. 7. A set of prudential measures have been stipulated to impart greater strength to the banking system and also, ensure their safety and soundness with the objective of moving towards international practices. Measures have also been taken to broaden the ownership base of PSB; consequently, the private sector holding has gone up, ranging from 23% to 43%. The banking sector has also witnessed greater levels of transparency and standards of disclosure. As the banking system has liberalized and become increasingly market oriented, the financial markets have been concurrently developed ; while the conduct of monetary policy has been tailored to take into account the realities of the changing environment (switching to indirect instruments) In the post liberalization-era, Reserve Bank of India (RBI) has initiated quite a few measures to ensure safety and consistency of the banking system in the country and at the same point in time to support banks to play an effective role in accelerating the economic growth process. One of the major objectives of Indian banking sector reforms was to encourage operational self-sufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices (Reddy Y. V.; 2002). Although the Indian banks have contributed much in the Indian economy, certain weaknesses, i.e. turn down in efficiency and erosion in

profitability had developed in the system, observance in view these conditions, the Committee on Financial System (CFS) was lay down (Amit Kumar Dwivedi; D. Kumara Charyulu; 2011). Indias Pre-reform period Since 1991, India has been engaged in banking sector reforms aimed at increasing the profitability and efficiency of the then 27 public-sector banks that controlled about 90 per cent of all deposits, assets and credit. The reforms were initiated in the middle of a current account crisis that occurred in early 1991. The crisis was caused by poor macroeconomic performance, characterized by a public deficit of 10 per cent of GDP, a current account deficit of 3 per cent of GDP, an inflation rate of 10 per cent, and growing domestic and foreign debt, and was triggered by a temporary oil price boom following the Iraqi invasion of Kuwait in 1990. Indias financial sector had long been characterized as highly regulated and financially repressed. The prevalence of reserve requirements, interest rate controls, and allocation of financial resources to priority sectors increased the degree of financial repression and adversely affected the countrys financial resource mobilization and allocation. After Independence in 1947, the government took the view that loans extended by colonial banks were biased toward working capital for trade and large firms (Joshi and Little 1996). Moreover, it was perceived that banks should be utilized to assist Indias planned development strategy by mobilizing financial resources to strategically important sectors. Banking Sector Reforms 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. banking sector. The main recommendations of the Committee were: Banking Sector Reforms 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 Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets 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 The guidelines that were issued subsequently laid the foundation for the reformation of Indian

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 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 semiautonomous 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

Economic Reforms of the Banking Sector in India Indian banking sector has undergone major changes and reforms during economic reforms. Though it was a part of overall economic reforms, it has changed the very functioning of Indian banks. This reform has not only influenced the productivity and efficiency of many of the Indian Banks, but has left everlasting footprints on the working of the banking sector in India. Let us get acquainted with some of the important reforms in the banking sector in India below with a graph. 1. Reduced CRR and SLR: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are gradually reduced during the economic reforms period in India. By Law in India the CRR remains between 3-15% of the Net Demand and Time Liabilities. It is reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, the SLR Is also reduced from early 38.5% to current minimum of 25% level. This has left more loanable funds with commercial banks, solving the liquidity problem. 2. Deregulation of Interest Rate: During the economics reforms period, interest rates of commercial banks were deregulated. Banks now enjoy freedom of fixing the lower and upper limit of interest on deposits. Interest rate slabs are reduced from Rs.20 Lakhs to just Rs. 2 Lakhs. Interest rates on the bank loans above Rs.2 lakhs are full decontrolled. These measures have resulted in more freedom to commercial banks in interest rate regime. 3. Fixing prudential Norms: In order to induce professionalism in its operations, the RBI fixed prudential norms for commercial banks. It includes recognition of income sources. Classification of assets, provisions for bad debts, maintaining international standards in accounting practices, etc. It helped banks in reducing and restructuring Nonperforming assets (NPAs). 4. Introduction of CRAR: Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. It resulted in an improvement in the capital position of commercial banks, all most all the banks in India has reached the Capital Adequacy Ratio (CAR) above the statutory level of 9%. 5. Operational Autonomy: During the reforms period commercial banks enjoyed the operational freedom. If a bank satisfies the CAR then it gets freedom in opening new branches, upgrading the extension counters, closing down existing branches and they get liberal lending norms. 6. Banking Diversification: The Indian banking sector was well diversified, during the economic reforms period. Many of the banks have stared new services and new products. Some of them have established subsidiaries in

merchant banking, mutual funds, insurance, venture capital, etc which has led to diversified sources of income of them. 7. New Generation Banks: During the reforms period many new generation banks have successfully emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI Bank have given a big challenge to the public sector banks leading to a greater degree of competition. 8. Improved Profitability and Efficiency: During the reform period, the productivity and efficiency of many commercial banks has improved. It has happened due to the reduced Non-performing loans, increased use of technology, more computerization and some other relevant measures adopted by the government. Differential Rate Interest: The differential Rate of Interest (DRI) is a leading programme launched by the Government in April 1972 which makes it obligatory upon all the Public Sector Banks in India to lend I percent total leading of the preceding year to the The poorest among the poor at an interest rates of 4 percent paranom the total leading in 2005 06 was Rs. 351 crores, period 1969-2000 gives the following: from 1969-1980, the ratio of deposits in nationalized banks to deposits in private banks was approximately 5 to 1; from 1980 to 1993, the ratio was approximately 111; post liberalization, the ratio has been falling, and in 2000 stood at about 7.5 to 1.47 Thus, under the accounting that is most favorable to public sector banks, they squeak by as less costly to the government than private sector banks (the ratio of money spent bailing out public vs. private banks would be 62 3 to 1, less than the deposits ratio). However, using the estimate of 540 billion rupees total cost gives a 12-1 ratio, which would imply that the public sector banks lost a greater portion of their deposits to bad loans. The Future of Banking Reform Prior to the economic reforms, the financial sector of India was on the crossroads. To improve the performance of the Indian commercial banks, first phase of banking sector reforms were introduced in 1991 and after its success; government gave much importance to the second phase of the reforms in 1998. Uppal (2011) analyzes the ongoing banking sector reforms and their efficacy with the help of some ratios and concludes the efficacy of all the bank groups have increased but new private sector and foreign banks have edge over our public sector bank. The efficient, dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem, increasing fiscal deficits etc., our country too embarked upon economic reforms. The govt. of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. These were initiated in 1991 to make Indian banking sector more efficient, strong and dynamic. Rationale of Banking Sector Reforms To cope up with the changing economic environment, banking sector needs some dose to improve its performance. Since 1991, the banking sector was faced with the problems such as tight control of RBI, eroded productivity and efficiency of public sector banks, continuous losses by public sector banks year after year, increasing NPAs, deteriorated portfolio quality, poor customer service, obsolete work technology and unable to meet competitive environment. Therefore, Narasimham Committee was appointed in 1991 and it submitted its report in November 1991, with detailed measures to improve the adverse situation of the banking industry (Uppal;

2011. p. 69). The main motive of the reforms was to improve the operational efficiency of the banks to further enhance their productivity and profitability. First Phase of Banking Sector Reforms

The first phase of banking sector reforms essentially focused on the following: 1.) Reduction in SLR & CRR 2.) Deregulation of interest rates 3.) Transparent guidelines or norms for entry and exit of private sector banks 4.) Public sector banks allowed for direct access to capital markets 5.) Branch licensing policy has been liberalized 6.) Setting up of Debt Recovery Tribunals 7.) Asset classification and provisioning 8.) Income recognition 9.) Asset Reconstruction Fund (ARF) Second Phase of Banking Sector Reforms In spite of the optimistic views about the growth of banking industry in terms of branch expansion, deposit mobilization etc, several distortions such as increasing NPAs and obsolete technology crept into the system, mainly due to the global changes occurring in the world economy. In this context, the government of India appointed second Narasimham Committee under the chairmanship of Mr. M. Narasimham to review the first phase of banking reforms and chart a programme for further reforms necessary to strengthen Indias financial system so as to make it internationally competitive. Uppal (2011. p. 70) the committee reviewed the performance of the banks in light of first phase of banking sector reforms and submitted its report with some more focus and new recommendations. There were no new recommendations in the second Narasimham Committee except the followings: - Merger of strong units of banks - Adaptation of the narrow banking concept to rehabilitate weak banks. As the process of second banking sector reforms is going on since 1999, one may say that there is an improvement in the performance of banks. However, there have been many changes and challenges now due to the entry of our banks into the global market. Third banking sector reforms and fresh outlook

Rethinking for financial sector reforms have to be accorded, restructuring of the public sector banks in particular, to strengthen the Indian financial system and make it able to meet the challenges of globalization. The on-going reform process and the agenda for third reforms will focus mainly to make the banking sector reforms viable and efficient so that it could contribute to enhance the competitiveness of the real economy and face the challenges of an increasingly integrated global financial architecture.

When we take this evidence together, where does it leave us? There are obvious problems with the Indian banking sector, ranging from under-lending to unsecured lending, which we have discussed at some length. There is now a greater awareness of these problems in the Indian government and a willingness to do something about them. One policy option that is being discussed is privatization. The evidence from Cole, discussed above, suggests that privatization would lead to an infusion of dynamism in to the banking sector: private banks have been growing faster than comparable public banks in terms of credit, deposits and number of branches, including rural branches, though it should be noted that in our empirical analysis, the comparison group of private banks were the relatively small old private banks.48 It is not clear that we can extrapolate from this to what we could expect when the State Bank of India, which is more than an order of magnitude greater in size than the largest old private sector banks. The new private banks are bigger and in some ways would have been a better group to compare with. However while this group is also growing very fast, they have been favored by regulators in some specific ways, which, combined with their relatively short track record, makes the comparison difficult. Privatization will also free the loan officers from the fear of the CVC and make them somewhat more willing to lend aggressively where the prospects are good, though, as will be discussed later, better regulation of public banks may also achieve similar goals. Historically, a crucial difference between public and private sector banks has been their willingness to lend to the priority sector. The recent broadening of the definition of priority sector has mechanically increased the share of credit from both public and private sector banks that qualify as priority sector. The share of priority sector lending from public sector banks was 42.5 percent in 2003, up from 36.6 percent in 1995. Private sector lending has shown a similar increase from its 1995 level of 30 percent. In 2003 it may have surpassed for the first time ever public sector banks, with a share of net bank credit to the priority sector at 44.4 percent to the priority sector. Still, there are substantial differences between the public and private sector banks. Most notable is the consistent failure of private sector banks to meet the agricultural lending sub-target, though they also lend substantially less in rural areas. Our evidence suggests that privatization will make it harder for the government to get the private banks to comply with what it wants them to do. However it is not clear that this reflects the greater sensitivity of the public banks to this particular social goal. It could also be that credit to agriculture, being particularly politically salient, is the one place where the nationalized banks are subject to political pressures to make imprudent loans. Finally, one potential disadvantage of privatization comes from the risk of bank failure. In the past there have been cases where the owner of the private bank stripped its assets, and declared that it cannot honor its deposit liabilities. The government is, understandably, reluctant to let banks fail, since one of the achievements of the last forty years has been to persuade people that their money is safe in the banks. Therefore, it has tended to take over the failed bank, with the resultant pressure on the fiscal deficit. Of course, this is in part a result of poor regulationthe regulator should be able to spot a private bank that is stripping its assets. Better enforced prudential regulations would considerably strengthen the case for privatization. On the other hand, public banks have also been failingthe problem seems to be part corruption and part inertia/laziness on the part of the lenders. As we saw above, the cost of bailing out the public banks may well be larger (appropriately scaled) than the total losses incurred from every bank failure since 1969. Once again the fact that the new private banks pose a problem: So far none of them have defaulted, but they are also new, and as a result, have not yet had to deal with the slow decline of once successful companies, which is one of the main sources of the accumulation of bad debt on the books of the public banks. On balance, we feel the evidence argues, albeit quite tentatively, for privatizing the nationalized banks, combined with tighter prudential regulations. On the other hand we see no obvious case for abandoning the social aspect of banking. Indeed there is a natural

complementarity between reinforcing the priority sector regulations (for example, by insisting that private banks lend more to agriculture) and privatization, since with a privatized banking sector it is less likely that the directed loans will get redirected based on political expediency. However there is no reason to expect miracles from the privatized banks. For a variety of reasons including financial stability, the natural tendency of banks, public or private, the world over, is towards consolidation and the formation of fewer, bigger banks. As banks become larger, they almost inevitably become more bureaucratic, because most lending decisions in big banks, by the very fact of the bank being big, must be taken by people who have no direct financial stake in the loan. Being bureaucratic means limiting the amount of discretion the loan officers can exercise and using rules, rather human judgment wherever possible, much as is currently done in Indian nationalized banks. Berger et al. have argued in the context of the US that this leads bigger banks to shy away from lending to the smaller firms.50 Our presumption is that this process of consolidation and an increased focus on lending to corporate and other larger firms is what will happen in India, with or without privatization, though in the short run, the entry of a number of newly privatized banks should increase competition for clients, which ought to help the smaller firms. In the end the key to banking reform may lie in the internal bureaucratic reform of banks, both private and public. In part this is already happening as many of the newer private banks (like HDFC, ICICI) try to reach beyond their traditional clients in the housing, consumer finance and blue-chip sectors. This will require a set of smaller step reforms, designed to affect the incentives of bankers in private and public banks. A first step would be to make lending rules more responsive to current profits and projections of future profits. This may be a way to both target better and guard against potential NPAs, largely because poor profitability seems to be a good predictor of future default. It is clear however that choosing the right way to include profits in the lending decision will not be easy. On one side there is the danger that unprofitable companies default. On the other side, there is the danger of pushing a company into default by cutting its access to credit exactly when it needs it the most, i.e. right after a shock to demand or costs has pushed it into the red. Perhaps one way to balance these objectives would be to create three categories of firms: (1) Profitable to highly profitable firms. Within this category lending should respond to profitability, with more profitable firms getting a higher limit, even if they look similar on the other measures. (2) Marginally profitable to loss-making firms that used to be highly profitable in the recent past but have been hit by a temporary shock (e.g. an increase in the price of cotton because of crop failures, etc.). For these firms the existing rules for lending might work well. (3) Marginally profitable to loss-making firms that have been that way for a long time or have just been hit by a permanent shock (e.g., the removal of tariffs protecting firms producing in an industry in which the Chinese have a huge cost advantage). For these firms, there should be an attempt to discontinue lending, based on some clearly worked out exit strategy (it is important that the borrowers be offered enough of the pie that they feel that they will be better off by exiting without defaulting on the loans). Of course it is not always going to be easy to distinguish permanent shocks from the temporary. In particular, what should we make of the firm that claims that it has put in place strategies that help it survive the shock of Chinese competition, but that they will only work in a couple of years? The best rule may be to use the information in profits and costs over several years, and the experience of the industry as a whole. CONCLUSION It could be noted that there has been no banking crisis at the same time, efficiency of banking system as a whole, measured by declining spread has improved. This is not say that they have no challenges. There are emerging challenges, which appear in the forms of consolidation; recapitalization, prudential regulation weak banks, and non-performing assets, legal framework etc needs urgent attention. The paper concludes that, from a regulatory perspective, the recent developments in the financial sector have led to an appreciation of the

limitations of the present segmental approach to financial regulation and favors adopting a consolidated supervisory approach to financial regulation and supervision, irrespective of its structural design. In the post-era of IT Act, global environment is continuously changing and providong new direction, dimensions and immense opportunities for the banking industry. Keeping in mind all the changes, RBI should appoint another committee to evaluate the on-going banking sector reforms and suggest third phase of the banking sector reforms in the light of above said recommendations. Need of the hour is to provide some effective measures to guard the banks against financial fragilities and vulnerability in an environment of growing financial integration, competition and global challenges. The challenge for the banks is to harmonize and coordinate with banks in other countries to reduce the scope for contagion and maintain financial stability. It is not possible to play the role of the Oracle of Delphi when a vast nation like India is involved. However, a few trends are evident, and the coming decade should be as interesting as the last one.