BANKING SECTOR REFORMS |ECONOMY

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Banking Sector Reforms |rlearn

In 1991, the country was caught into a deep crisis. The government decided to introduce comprehensive economic reforms.
Hence, the financial sector reforms started in 1991. It helped the banking sector in the country to operate more efficiently and to increase its profitability and productivity.
In 1991, the government appointed a committee on financial system reforms under the chairmanship of M. Narasimham.

Narasimham Committee-l (1991): The aim of this Committee was to bring about ‘operational flexibility’ and functional autonomy’ to enhance efficiency, productivity and profitability of banks.

The Committee submitted its report with the following recommendations:
✹Reduction in SLR, cash reserve ratio (CRR), interest rates in CRR balances.

✹Redefining the priority sector.
✹Deregulation of interest rates.
✹Set up asset reconstruction company.
✹Asset classification and defining the non-performing assets.
✹Tribunals for recovery of loans.
✹ Improve transparency in the banking system.
✹Restructuring the banks.
✹Tackling doubtful assets.

Narasimham Committee-II (1998):

The 1998 report of the committee to the government of India made the following
recommendations:
✹Autonomy in banking.
✹Reform in the role of RBI.
✹Entry of foreign banks.
✹Capital adequacy and tightening of provisioning norms.
✹Concept of narrow banking.
✹Public ownership and autonomy
Review and update of banking laws.

Following recommendations were implemented:
✹ The SLR on incremental domestic liabilities of commercial banks was reduced.
✹The SLR on aggregate domestic liabilities of commercial banks was reduced.

✹The CRR was also reduced from 15 per cent of aggregate domestic liabilities to 14 percent.

Further, based on the reports of the Narsimhamn committee, following actions were taken:

1. The GOI decided to allow SBI and other nationalised banks to approach the capital market to raise fresh equity to meet their shortfall in capital requirements over the next three years.

2. The government decided to set up Special Tribunals to expedite legal actions by the banks to enforce recoveries.

3. Bank branch licensing norms have been liberalised giving freedom to the banks to close down unviable branches.

4. RBI announced guidelines for setting up of private banks as public limited companies.