Recent Banking Reforms

Since of nationalisation of 14 commercial banks in1969, the Indian banking system has made tremendous progress both in terms of deposite mobilisation and branch expansion. Aggregate deposit of all banks rose from about 15 % of is 1969 to 79.8% in 2003. The total number of bank branches went up from 8262 to 66514 over the period of these about 50% were in rural areas in 2003 as against less than 25% in 1969. Besides performing ordinary banking services. Indian banks also started innovative banking thereby diversifying their activities in new directions.

       Despite all this they failed to provide reliable efficient and low cost services. Both productivity and profitability of banks declined and especially the public sector banks become a burden on excheques to overcome the defects of the made a number of suggestions same of them have been implemented from 1991-1992 onwards. They are enumerated as under

(1) Capital Adequacy Norms: To avoid risk the RBI laid down capital adequacy norms in April 1992 to be complied by banks by March 1996. All banks in India were acquired to achieve a risk weighted capital adequacy ratio of 4% by 31March 1993 of 3% by 31march 1996. Foreign banks operating in India and Indian banks with branches abroad were to attain 8% by March 1993. This has been raised to 9% from March 2000 for all banks.

(2) Recapitalisation: In order to enable the public sector banks to meet the prescribed adequacy ratio the government of India has been contributing to the capital of such banks. During 1993-1994 the government provided Rs 5700 crores towards Recapitalisation of 19 nationalised banks during 1994-1995 Rs 5293 crores to 13 banks Rs 850 crores to 6 banks, during 1995-1996 and Rs 909 crores to 4 banks during 1996-1997 and Rs 297 crores to one bank in 1994-2000.

(3) Partial Privatisation on public sector banks:

But recapitalisation is not a permanent solution of the problem. As the government resources are limited, banks have been allowed to mobiluse equity resources from the public 1st , The state bank of India Act was commended to enable the banks to have access to the capital maker. The RBI share holding in SBI has been reduce to 67%. Similarly by the banking companies ( Acquisition and Transfer of underbankings ammendment Act 1994, the governments shares in the paid up capital sector banks had been reduced to 51% with another commendement in 2000, it has reduced to 33%.

(4) Prudential accounting norms: 

The RBI has introduced prudential accounting norms for banks since 1992-1993. A credit facility is required to be treated as non performing assets (NPA) if interest or instalment of principal are in arrears for any 2 quarters in the accounting year. Provisioning requirement of NPAs with balance of less than Rs 25000 was increased to 10% of the aggregate amount outstanding for the year ended March 1995 from 7.5% a year ago. For substandered and doubtful advance of Rs 25000 and above, they are required to make 100% provision with regard to loss assets.

(5) Recovery of Debts: Indian banks suffer from large debt arrears which adversely affect their current cash flow position and reduce profit. To recover Debts a new act known as the " Recovery of Debts due to banks of FIs act, 1993 has been possed to set up debt recovery tribunals. Such tribunals have been set up at major centres.

(6) Freedom about bank branches:  Banks have been given freedom to open new branches and upgrade extension counters or attaining capital adequacy norms of 8% net profit for last 3 consecutive years, NPAs of less than 15% and minimum owned funds of Rs 110 crores. They can also permitted to close non viable branches expect in rural and semi urban areas.

(7) Entry of Private sector banks: To introduce greater competition in banking so as improve banking services to customers, private banks have been allowed entry as per RBI guidelines. Approval has been given to a few proposals for setting up new private sector banks. Private banks have been allowed to raise capital from institutional investors upto 20% and from NRI up to 40%. Ten new private sector banks have been established since 1994. It has also been made clear by the RBI that existing private sector banks will be allowed to expand without fear of nationalisation.

(8) Department of supervision: A Department of supervision has been set up in the RBI w.e.f. 22 Dec 1993 to supervise the working of commercial banks. It undertake inspection, surveillance and special investigation including those concerned with froude and appointment of statutory auditors.

(9) Boards of financial Supervision (BPS) : The BPS has been set up within the RBI in November 1994. The board ensures implementation of regulations in the area of credit management, asset classification, income recognition, provisioning, capital adequacy and treasury operations.

(10) Disclosures of defaulting borrowers:

To enforce payment discipline among borrowers, a scheme for disclosure of info regarding defaulting borrowers of banks with outstanding aggregative to Rs 1 crore and above as on 31st March and 30th September every year has been in operation since April 1994.

(11) Banking ombudsman scheme: The BOS has been started from June 1995for speedy and in expensive settlement of customer complaints about the deficiencies in banking services. The ombudsman are functioning at in the country.

(12) Central Board of bank frouds: The Finance ministry has set up the central board of bank frouds in Jab 1997 to advise it on the merits of the causes being pursued by the CBI against bank officials upto the level of the general manager. The board is to scretinise banking transaction reperred to it and give its opinion within 3 months as to whether there is sufficient basis for proceeding with criminal investigations against the officials.

(13) Consortium Arrangements: To encourage competition and slow down dissintermediation, lending restrictions on banks have been reduced large borrowers above a specified credit limit have been allowed to borrow through a consortium of scheduled commercial banks headed by a lead bank. The threshold unit for such consortium arrangement was raised from Rs 5 Crores to Rs 50 Crores from oct 1993. The number of borrowers accounts subject to the this procedure has been fixed at 76. Borrowers beyond this limit are permitted to induct new banks into a consurtium banks have been permitted to leave the consortium after 2 years of joining it.

(14) Leading norms liberalised: Bank lending norms have been liberalised subject to the observance of prescribed prudential norm and quarterly reporting requirements as laid down by the RBI. They are free to decide levels of holding of individual items of inventory and receivable to be permitted to borrowers. They are also free to decide about the quantium of and period of adhor credit limits without charging additional interest.

(15) Measure to streamline working of banks: A number of measure has been adopted by the RBI to improve the quality of performance and MIS and the internal credit, control mechanism, computerisation of banking operations, prudential norms for income recognition assets, etc. 

(16) Liberal credit control measures: A number of steps have been taken to reduce control and distortions in the working of banks. Statutory liquidity ratio (SLR) on incremental net demand and time liabilities (NDTL) has been reduced to 25% SLR on total NDTL has been brought down to 25% only by 1996. The banks have been allowed freedom to fix their shares, debentures and units of mutual funds, not exceeding 5% of their o/s abundances effective March 2001. They can also buy shares and debentures of the company from the secondary market.

(17) Entry of banks into insurance: All banks have been allowed to enter into insurance business subject to having a minimum net worth of Rs 500 Crore and satisfying other criteria in regard in regard in capital adequacy, profitability, etc.