Banking Sector Reforms: Conception to Revolution

If there is one aspect in which we can confidentially assert that India is ahead of china, it is in robustness and soundness of our banking systemsaid by Dr Manmohan Singh, Prime Minister India Reforms: Why ? The need for financial reforms had arisen because the financial institutions and market were in a bad shape. The banking sector suffered from lack of competitions, low capital base, low productivity and high intermediation costs. The Role of technology was minimal, and the quality of services did not receive adequate attention. proper risk management system was not followed and prudential norms were weak. All these resulted in poor asset quality. The banks were running either at a loss or on very low profits and consequently were unable to provide adequately for loan defaults and build their capital, there had been organizational inadequacies, the weakening of management and control functions. The growth of restrictive practices, the erosion of work culture and flaws in credit management. The strain on the performance of the banks had emanated partly from the imposition of high cash reserve ratio (CRR),and SLR, and directed credit programs for the priority sectorsall at below market or concessional or subsidized interst rates. Further the functioning of the financial system and the credit delivery as well as recovery process had become politicized, which damage the quality of lending and culture of repaying loans. The widespread or across-the-board write-offs of the loans had seriously jeopardized the viability of banks. As a closure of sick industrial units was discouraged by government, banks had to continue to finance non-viable sick units, which further compromised their own viability. There were lacks of transparency in preparing statements of accounts by banks. So an alarming increase of sickness in the Indian financial system had required urgent remedial measures or reforms which were ultimately introduced in 1991

REFORMS :

In the words of C.H.BHABHA Banking is the kingpin of the chariot of economic progress as such its role in expanding economy like India can neither be underestimated nor overlooked . The success of our plan is dependent among other things, on the smooth and satisfactory performance of the role by banking industry of our country. Banking industry had problems of different kinds in different phases of development. In the past interdependence period the Indian banking has evolved through four phases. These are:---(a) Foundation phase: The foundation phase is the period up to first nationalization of banks. In this phase the role of the banking sector in the Indian economy was redefined. Earlier, it was catering to the needs of the government, individuals and select traders. Now its role was extended to meet the needs of entire economy. (b) Expansion phase : This is a phase of mass banking, a determined effort was to make banking services available to all masses. The network of branches was expanded at a rapid speed. The banks were forced to open branches in rural and semiurban areas. in this phase, banks were directed to meet the requirements of this sector at a concessional rates. (c) Consolidation Phase: This phase started in 1985, as a result of weakness that emerged during the expansion phase. The RBI started some initiatives in form of relaxation in control, slowed down branch expansion Programme, etc. The focus was made on house keeping, customer service, management productivity and profitability. The main objective of these relaxations was to overcome the weaknesses which emerged from fast expansion and strict control of Reserve Bank of India. (d) Reforms and Liberalization Phase : Indian faced a macro economic crisis in 1991; the economy was growing at a very low rate. This set the Govt. of India on a path of liberalization and globalization of Indian Economy. The hidden non performing assets were capable of triggering of a major financial crisis. The banks were no where near the international

norms regarding capital adequacy, accounting practices etc. So, Govt. of India appointed a high level committee headed by Shri M. Narasimham , a former Governor of the RBI to address the problems and the suggest the remedial measures. The recommendation of the committee became the basis of financial sector and banking sector reforms. M.Narasimham also headed the second committee. Another committee headed by Mr. Khan submitted its report on harmonization Objectives of Reforms: Remove financial repression that existed earlier. Create an efficient, productive and profitable financial sector industry. Enable price discovery, particularly by the market determination of interest rates that then helps in efficient allocation of resources. Provide operational and functional autonomy to institutions. Prepare the financial system for increasing international competition. Open the external sector in a calibrated fashion. Promote the maintenance of financial stability in a calibrated fashion. Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The pace of transformation has been more significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO prescriptions. Banks will have to gear up to meet stringent prudential capital adequacy norms under Basel I & II. In addition, the Free Trade Agreements (FTAs) such as with Singapore and Thailand may have an impact on the shape of the banking industry. Banks will also have to cope with challenges posed by technological innovations in banking.

Four trends change the banking industry world over, viz. :1) 2) 3) 4) Consolidation of players through mergers and acquisitions, Globalization of operations, Development of new technology and Universalisation of banking

Trends Changing the Banking Industry World Over

Consolidation of Players through Mergers and Acquisitions Globalization of Operations

Development of new Technology

Universalisation of Banking

Banking Reforms Interest rates on deposits and advances of all cooperative banks including urban co-operative banks deregulated. The state bank of India and other nationalized banks enabled to access the capital market for debt and equity. Prudential norms for income recognition, classification of assets and provisioning for bad debts for commercial banks, including regional rural banks and financial institutions introduced. They are required to adopt uniform and social accounting

practices in respect of these matters, and the valuation of investment. Banks are required to mark to market the securities held by them. The performance obligation and commitments (PO&C) obtained by RBI from each bank; they provide for essential quantifiable performance parameters which lay emphasis on increased but low-cost deposits, quality lending ,generation of more income and profits, compliance with priority sector and export lending requirements, improvement in the quality of investments , reduction in expenditure, and stepping up of staff productivity. Banks required to make the balance sheets fully transparent and make full disclosures in keeping with international accounts standards committee Banks given freedom to open, shift, and swap branches as also to open extension counters. The Perceived constraints on banks such as prior credit authorizations, inventory and receivables norms, obligatory consortium lending and curbs in respect of project finance relaxed. The budgetary support extended for recapitalization of weak public sectors banks. Banking ombudsman scheme 1995 introduced to appoint 15 ombudsmen by RBI to look into and resolve customers grievances in a quick and inexpensive manner. most of the recommendations of GOIPORIA COMMETTEE in connection with improving customer service by banks implemented. Banks set free to fix their own foreign exchange open position limit subject to RBI approval. Loan system introduced for delivery of bank credit. banks required to bifurcate the maximum permissible bank finance into loan component and cash credit component, and the policy of progressively increasing the share of the former introduced

IMPACT OF REFORMS The reform process appears to have yielded some positive results at least in the banking sector as reflected in (a) the relatively cleaner balance sheet of banks (b) reduction in non-performing assets in relative terms improvement in operating profits and (d) fairly good progress in attaining capital adequacy ratio and other prudential norms. In the last few years the performance of the Indian banking and financial system and especially of our public sector banks have shown a measure of improvement judge by the parameter of operating profits along with other indicators of soundness, such as enhancement of capital funds and a reduction in the percentage level of non-performing assets

the net profit of public sector banks as percentage of their total assets has been turned around negative to positive figure. Operating profits of public sector banks showed a marked increase. Reforms measures has positive impact also on gross and net NPAs of public sector banks. The growth rate of deposits and advances for public sector banks in the reform period are lightly lower as compared to those in pre reform period. There has been appreciable reduction in the proportion of bank credit going to priority sector. Reforms measures have helped to bring about some improvement in the operation of the banking sector The technological upgradation has been an important step forward. Introduction of internet and on-line credit is a significant step which will serve as a big push forward in trade and commerce and resource management. Banking sector reforms measures have made the public sector banks aware of their inefficiency, poor management, and profitability.

REFERENCES Paul,RR.,money banking and international trade. Chelliah,R.J towards sustainable growth:-essay in fiscal and financial sector reforms oxford university press. Sachs J.D ,varshney, A and BajpaniN, India in the era of economic reforms, oxford university press, oxfofd. Financial institution and markets- structure, growth and innovation by L.M Bhole. Financial institutions and markets by Shashi K Gupta,Nisha aggarwal, and Neeti gupta. Banking and insurance by R.K. sharma , J .singh, and shashi K gupta. Sharma,p.N., shanditya,& Anju kumari Banking and financial reforms Pande., M.C.Subodh kumar banking trend & practices Anamika publication, New delhi. Banerjee, Amlesh,Rudar Datte,Deep &deep publication new delhi. Contributed By :1. Vishal Kumar, Dean, Deptt. of Commerce and Business Management, D.C. Model Group of Institutions, Ferozepur City Email : vkfzr@rediffmail.com 2. Mrs. Savita, Lecturer in Commerce, Dev Samaj College for Women, Ferozepur City.