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Banking Sector Reforms


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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


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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.


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Narasimham Committee

The first Narasimham Committee was set up

in 1991 to suggest remedial measures for

strengthening the banking systemencompassing:

1. Banking Policy

2. Institutional Structure3. Supervisory System

4. Legislative and technological changes


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Thrust of reforms

The main thrust of economic reforms was on:

1. Removal of structural bottlenecks

2. Introduction of new players and instruments3. Introduction of free pricing of financial assets

4. Relaxation of quantitative restrictions

5. Improvement in trading, clearing and

settlement practices6. Promotion of institutional infrastructure

7. Ensuring of technological upgradation.


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First Phase of Banking Sector Reforms

included the following:

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

respectively2. De-regulation of interest rates on deposits andadvances

3. Transparent guidelines for private sector

reforms4. Modification of bank balance sheet and P&L a/c

to disclose more information


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First Phase of Banking Sector Reforms

included the following:

5 Direct access to capital markets for PSU banks

6 Liberalised branch licensing policy and morelicenses for private sector banks

7 Setting up of Debt Recovery Tribunals to ensurequick recovery of debts

8 Prudential norms for income recognition, asset

classification and provisioning of bad debts9 Capital adequacy norms BIS norms on capital

adequacy to be followed.


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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.


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Basis of treating an asset

(credit facility) as NPA

1. Where the interest and installments remainoverdue for a period exceeding 90 days

2. Any bill which remain overdue for a period of90 days

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

4. Any Cash Credit / overdraft facility whichremains out of order for a period exceeding 90days


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Asset Classification

1.Standard asset

2.Sub Standard Asset

3.Doubtful asset

4.Loss asset


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Standard Asset

is one which does not carry

more than normal riskattached to the business andwhich does not disclose any

problems.


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Sub Standard Asset

is one which has been

classified as NPA for aperiod not exceeding 12

months.


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Doubtful Asset

is one which has beenclassified as NPA for a period

exceeding 12 months.


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Loss Asset

Loss Asset is one where loss hasbeen identified by the bank orinternal or external auditors orRBI Inspectors , but the amounthas not been written off.

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