EARLY STAGES OF FINANCIAL REFORMS

 

Towards the end of the Eighties of the last century, Indian Banking System saw major crisis alongwith the crisis in the economy. The ill effects of nationalisation has started showing signs in the shape of poor health of Indian financial sector, specialy that of banking industry. Having been driven to walls, Government of India initiated financial system reforms.

The financial system reforms were aimed to enhance the efficiency, productivity and profitability of the financial institutions. However, the efforts aimed at banking reforms were intially slow to be taken and accepted by Banks. Since nationalisation, banks have been operating in non-competitive environment with lendings directly under the guidelines of RBI. Loan waivers and increasing non-performing assets had made banks to overlook all kinds of prudential lending. They found difficult to new reform culture with a stress on prudential norms.

The start of the reforms brought out number of skeletons and exposed the darker side of the banking industry. Some of these were :-

(a) Mind blowing size of the Non Performing Assets;

(b) Losses in number of banks

(c) Overstaffing in most of the public sector banks

(d) Scant respect for norms for income recognition and international standard accounting practices.

During 1992-95, RBI initiated number of direct steps with an objective to deregulate the over-guarded banking sector. Some of the steps taken by RBI were :-

(i) Inventory holding norms (Tandon Committee Norms) were liberalized. Banks were given the freedom to decide levels of holding of individual items of inventories and receivables

(ii) Ceiling on term loans was increasing to Rs 1000 crores for projects involving expansion / modernization of power generation capacities.

(iii) To start the deregulation of interest, banks were allowed to set their own interest rate on post-shipment export credit (in Rupees) for over 90 days. Moreover, interest rates on loans over Rs 2,00,000 against term deposits and on domestic deposits with maturity periods over two years were deregulated.

(iv) Banks were allowed to fix their own foreign exchange open position limits.(subject to RBI approval).

(v) New delivery system for bank credit was introduced whereby, banks were asked to bifurcate the maximum permissible bank finance of Rs 20 crores and above into loan component of 40% (short term working capital loan) and cash credit component of 60%.

The first major milestone on the road to financial reforms was the Report of 1st Narsimham Committee. The Committee submitted its report in November, 1991 and the focus was the reform in the Banking sector. Some of the recommendations of the Committee and their present status is given below :-

 

Recommendation	Present Status
Phasing out of statutory pre-emption i.e. reduction in the requirements for maintenance of SLR & CRR	SLR reduced from peak level of 38.5% and CRR also reduced from peak of 15%.  [Click here to know the Latest CRR, SLR, Bank Rate, MSF, repo, reverse repo rate etc.)
Interest Rate on CRR Balances to be related to banks's average cost of deposits	With effect from 1st April, 2003, interest on the eligible balance is paid
Deregulation of Interest Rate	All deposits and advance interest rate have been deregulated.  Even in October 2011 even Saving Bank deposits interest rates have been deregulated.  Now only DRI loans and certain other government schemes is regulated.
Prudential norms to be followed by the Banks	Income recognition, asset classification and provisioning norms have been introduced for the banking industry. The provisioning norms are more prudent, objective, transparent, uniform and designed to avoid subjectivity.
Capital Adequacy Norms laid down	RBI has already asked all banks are conform to BASEL II and III norms in this respect
New norms for asset classification - introduction of NPAs	RBI has already issued new guidelines and norms for NPAs have been tightened in last few years
Loan Recovery - New steps are required to be initiated so that quick recovery process is made available to Banks	In 1993, Govt passed an Act for creation of Debt Recovery Tribunals. However, it was only partially successful. In 2003, Securitisation & Reconstruction of Financial Assets and Enforcement of Securities Act has been passed.
Restructuring of the Banks	Some banks have been merged with strong banks.
Allowing new private banks	A number of new banks like UTI Bank, Kotak Mahindra Bank Ltd., HDFC Bank, ICICI Banks have been opened in the private sector.