BANKING SECTOR REFORMS IN INDIA

Submitted by Preety Kohli Roll.no-16 Finance-II

Need for banking sector reforms

Phenomenal increase in the geographical coverage of our banking and financial institutions. Despite impressive quantitative achievement- low efficiency and productivity, bad portfolios performance, and eroded profitability. Several public sector banks and financial institutions were incurring losses year after year .

Thus certain reforms were taken place in the banking system.

BANKING SECTOR REFORMS

With effect from 1st ferbruary,1969,the government imposed social control on banks. Soon after nationalization, the govt wanted to examine the banking system. Thus owing to the1991 crisis of balance of payments, the government appointed the narasimhan committee on 14th august,1991 Reviewaspects relating to the Structure, Organization, Procedures and Functioning of the banking system.

TOPICS TO BE DISCUSSED : NARASIMHAM COMMITTEE-I NARASIMHAM COMMITTEE-II

VERMA COMMITTEE REPORT GHOSH COMMITTEE REPORT SARKAR COMMITTEE REPORT

KANNAN COMMITTEE REPORT R.V.GUPTA COMMITTEE REPORT STUDY GROUP UNDER B.D NARANG NARESH CHANDRA COMMITTEE REPORT

THE NARASIMHAM COMMITTEE

The first phase of banking sector reforms began during 1992-1993 The committee was appointed by then finance minister , Mr.Manmohan Singh. Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector.

The committee was headed by Mr. M.Narasimham (X-RBI governor)

The report was submitted on on 16th November ,1991. The Narasimhan Committee laid the foundation for the reformation of the Indian banking sector.

PROBLEMS IDENTIFIED IN NARASIMHAM COMMITTEE REPORT-I

Higher rates of CRR and SLR Directed credit programmes Political and Administrative interference Subsidizing of credit Mounting expenditures of government

MAIN RECOMMENDATIONS OF THE COMMITEE

SLR was recommended to reduce from 38.5% to 25%.

Progressive reduction in Cash Reserve Ratio from 15% to 3%-5%(CRR) Phasing out of directed credit programmes and redefinition of priority sector Stipulation of minimum capital adequacy ratio of 8 per cent by March(Capital adequacy ratios ("CAR") are a measure of the amount of a bank's capital expressed as a percentage of its risk weighted credit exposures.) Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

RECOMMENDATIONS.
Setting up of special tribunals to speed up the recovery process of loans

Set up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount portion
Abolition of branch licensing Liberalizing the policy with regard to allowing foreign banks to open offices in India Giving freedom to individual banks to recruit officers Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks

Speedy liberalization of capital market

Enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions, etc.

NARASIMHAM COMMITTEE-II
1998- Finance minister appointed Mr. Narasimhan as chairman of one more committee. This committee was asked to review the progress of banking sector reforms to date and a programme on financial sector reforms to strengthen India's financial system and make it reforms to strengthen India's financial system and make it internationally competitive. The committee submitted its report to the government in April1998.. The report covered issues like- capital adequacy, bank mergers, recasting bank board, and creation of global sized mergers.

Major Recommendations of narasimhan Committee

Need for stronger banking system Setting up of small local banks

Concept of narrow banking

Capital Adequacy Ratio Review and update banking laws.

VERMA COMMITTEE REPORT

The Reserve Bank of India set up the Verma Committee to identify and examine the problems of weak banks on the basis of certain criteria and to suggest a plan of restructuring. The panel went further than the Narasimhan Committee in introducing seven additional criteria for examining solvency o capital adequacy ratio, coverage ratio, o earning capacity (return on assets, net interest margin) o profitability (ratios of, operating profits to average working funds, cost to income and of staff cost to net interest income plus all other income)

Major recommendations of Verma committee

Cut staff strength by 25% through VRS If VRS scheme fails cut wages across the board Close down of subsidiaries of banks and selling out of foreign branches. Rationalize branch network Reconstruct bank board

CMD should have a long tenure

RBI should set up a special wing to supervise weak banks

Major recommendations of verma committee

Nodal body to monitor progress of weak banks Set up of Debt recovery tribunals

PARAMETERS TO IDENTIFY BANKS STRENGTH/WEAKNESS

1.CAPITAL ADEQUACY RATIO 2.NET INTT MARGIN

8% OR MORE MEDIAN LEVEL

0.50% OR MORE MEDIAN LEVEL Median level Median level

3.COVERAGE RATIO 4. PROFIT/WORKING FUND 5.RETURN ON ASSETS 6.BANK & STAFF COST/INCOME

WEAK BANKS IDENTIFIED

UCO BANK INDIAN BANK

UNITED BANK OF INDIA

GHOSH COMMITEE
The committee was appointed by RBI at the instance of government of India under the chairmanship of Mr. A Ghosh ,the then Dy.gov of RBI. Committee was set up to enquire various aspects of frauds and malpractices in banks.

Recommendations of the ghosh committee

Obtaining photographs of depositors at the time of opening of accounts Paper used for cheques /drafts should be such that any use of chemicals for making material alterations in the instruments should be visible to the naked eyes. Desk cards for staff to be prepared. Banks to designate one of the seniors officers as a compliance officer.

Recommendations of the ghosh committee

Cash and other valuables must kept in joint custody ,currency chest transactions would be reported to RBI on the same day No official should exceed his delegated authority except in every emergent circumstances. Cash should not be received other than in the cash department and cashier should not be allowed to make entries in passbook.

KANNAN COMMITTEE REPORT

Too much emphasis on security by the banks directed the flow of credit to affluent section of society with the result that economic resources of the country were concentrated in a few hands With the nationalization of the banks an entirely new breed of entrepreneurs made a demand on bank credit. This resulted in an unexpected demand on lendable funds of banks and naturally called for a reform in the policies of banks to orient them to the new developmental role assigned to the banking industry.

THE KANNAN COMMITTEE RECOMMENDATIONS

Cash credit should be replaced by system of loans for working capital
Banks should dispose off all loan applications within 2-8 weeks A credit information bureau be floated independently by bank.

Maximum permissible bank finance should be abolished and banks should have their own borrowing limits for corporate Corporate borrowers may be allowed to issue short term working capital debentures of 12-18 months maturity and banks may subscribe to these debentures
Banks should be allowed to decide policy norms for issue of commercial paper Banks should try out syndicate form of lending The benchmark current ratio of 1.33:1 and the debt equity ratio should be left to the discretion of the banks.

RV GUPTA COMMITEE
The Reserve Bank of India appointed a one-man Committee of Shri R. V. Gupta, then Dy. Governor of RBI in December 1997 to suggest measures for the removal of the constraints faced by the Commercial Banks in increasing flow of credit to agriculture. The Report of the Committee was submitted to Reserve Bank of India on 21 April 1998

RECOMMENDATIONS.
INTEREST RATES ON AGRICULTURAL LOANS TO BE FIXED BY BANKS

DELEGATION OF POWERS TO BRABCH MANAGERS TO DISPOSE OF 90% OF APPLICATIONS

INDICATE ANNUAL INCREASE IN CREDIT FLOW TO AGRICULTURE EXTENTION OF COMPOSITE CASH CREDIT LIMIT TO INCLUDE FARM CREDIT. SIMPLIFICATION OF PROCEDURES IN MATTERS RELATING TO DOCUMENTATION AND APPLICATION.

RECOMMENDATIONS.
Commercial Banks to be made free to fix the rates of interest for small loan amounts as has been done in the case of Cooperative and RRBS

Discourage additional collateral by way of guarantors where the land has already been mortgaged

Security and collateral requirements not to be prescribed by RBI or any other agency. Existing guidelines to continue for small loans up to Rs.10, 000.

THE STUDY GROUP UNDER THE

CHAIRMANSHIP OF SH.B.D.NARANG .

This study group was set up in 1998 It submitted its report in march,1999 This group studied fraud reports by commercial banks from 1995 to 1997. The group confined itself to those areas which led to weakening of the internal control system for prevention and detection of frauds.

NARESH CHANDRA COMMITTEE ON CORPORATE GOVERNANCE

This committee has recommended on : The poor structure and composition of the board of directors of Indian companies. Scant fiduciary responsibility Poor disclosure & responsibility Inadequate accounting & auditingetc..

RECOMMENDATIONS.
.Disclosure in plain English .Steps relating to Replacement of auditors Audit firm to file a certificate of independence Empowering the audit committee .Certificate of financial reports by CEO & CFO in review of balance sheet/l accounts, cash flow statements, directors report. Accountability in respect of transfer of money by way of inter-corporate deposits ,or deposits of any kind from listed company to any other company. Consolidated financial statements should be made mandatory for companies having subsidiaries.

SARKAR COMMITTEE ON ANTIMONEY LAUNDERING GUIDELINES FOR BANK OF INDIA

A study group set up by Indian banking association under chairman ship of P K Sarkar . Set up study on anti-money laundering practices and KYC guidelines followed in other countries.

MAJOR RECOMMENDATIONS.
Urgent need to adopt anti-money laundering policy and each bank must have its own such policy Adoption of KYC guidelines by banks Full disclosure of financial status of the customer ,his source of income in the bank account opening form. Fund transfers should be closely monitored. Suspicious activities should be reported to the Money Laundering Reporting Officer