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Banking Sector Reforms

Pre-Reform Era
Prior to reforms, the Indian banking Sector was
characterised by:

 Administered interest rate structure


 Quantitative restrictions on credit flows
 High Reserve Requirements
 Imposition of stringent regulations by RBI
 Low productivity / efficiency in PSU banks
 Deteriorating portfolio quality/ increasing NPAs
Pre-Reform Era

7. Inferior work technology


8. Poor quality of customer service
9. Inability to face competition

It was in the above circumstances that


the first Narasimham Committee was
set up.
Narasimham Committee

The first Narasimham Committee was set up


in 1991 to suggest remedial measures for
strengthening the banking system
encompassing:
1. Banking Policy
2. Institutional Structure
3. Supervisory System
4. Legislative and technological changes
Thrust of reforms
The main thrust of economic reforms was on:

1. Removal of structural bottlenecks


2. Introduction of new players and instruments
3. Introduction of free pricing of financial assets
4. Relaxation of quantitative restrictions
5. Improvement in trading, clearing and
settlement practices
6. Promotion of institutional infrastructure
7. Ensuring of technological upgradation.
First Phase of Banking Sector Reforms
included the following:

1. Reduction in SLR and CRR to 25% and 10%


respectively
2. De-regulation of interest rates on deposits and
advances
3. Transparent guidelines for private sector
reforms
4. Modification of bank balance sheet and P&L a/c
to disclose more information
First Phase of Banking Sector Reforms
included the following:

5 Direct access to capital markets for PSU banks


6 Liberalised branch licensing policy and more
licenses for private sector banks
7 Setting up of Debt Recovery Tribunals to ensure
quick recovery of debts
8 Prudential norms for income recognition, asset
classification and provisioning of bad debts
9 Capital adequacy norms –BIS norms on capital
adequacy to be followed.
Non Performing Assets (NPA)

The Narasimham Committee (1991) identified NPAs


as one of the possible causes / effects of the
malfunctioning of PSU banks.

NPAs are those categories of assets (advances ,


bills disc, cash credit, etc) which cease to generate
income for the bank.
Basis of treating an asset
(credit facility) as NPA

1. Where the interest and installments remain


overdue for a period exceeding 90 days

2. Any bill which remain overdue for a period of 90


days
3. Any amount due on any other loan which
remain overdue for a period exceeding 90 days

4. Any Cash Credit / overdraft facility which


remains out of order for a period exceeding 90
days
Asset Classification

1. Standard asset
2. Sub Standard Asset
3. Doubtful asset
4. Loss asset
Standard Asset

is one which does not carry


more than normal risk
attached to the business and
which does not disclose any
problems.
Sub Standard Asset

is one which has been


classified as NPA for a
period not exceeding 12
months.
Doubtful Asset

is one which has been


classified as NPA for a period
exceeding 12 months.
Loss Asset

Loss Asset is one where loss has


been identified by the bank or
internal or external auditors or
RBI Inspectors , but the amount
has not been written off.