Download - Financial sector reforms
FINANCIAL SECTOR REFORMS
Deficiencies in the System2
� Decline in productivity and effeciency
� Erosion of profitability
� Directed lending – depleting profits
� SLR and CRR hindered income earning capability� SLR and CRR hindered income earning capability
� Political and administrative interference
� Technological backwardness
� Low capital adequacy ratio
� Delinked from sound international banking
Objectives 3
� Policy framework – rate of interest, directed credit
� Prudential norms – recapitalisation and restructuring of weaker banks
� Financial structure relating to supervision, audit, technology and legal frameworktechnology and legal framework
� Upgrading level of managerial competence and quality of human resources
Financial Sector Reforms (1st Phase)1st Narasimham Committee (Nov 1991)
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� Reduction of SLR (25%) and CRR (10%)
� Interest rate on CRR Balances – at Bank rate
� Phasing out of priority lending – 10% (However Govthas not reduced it from 40%)
� Interest rate deregulation – Market driven
� Capital adequacy norms – minimum 9%
� Asset Classification
FSR (Contd)5
� Transparency – Balance sheet and profit and loss account
� Loan recovery – Debt Recovery Tribunal 1993 (29 tribunals and 5 appellate tribunal)
Tackling Doubtful debts – Asset Reconstruction � Tackling Doubtful debts – Asset Reconstruction Fund
� Restructuring of Banks – 3-4 large banks which would become international; 8-10 national banks ( no progress here – New bank of India has been merged with Punjab National Bank)
FSR (2nd Phase) Focus of Banks6
� Specialisation – retail, agriculture, export, SSI, corporate sector
� Non-fund business – advisory, consultancy services, guarantees, custody services
� Overlap in product coverage of commercial banks and non-bank financial intermediariesnon-bank financial intermediaries
� Financial intermediation in large companies� Management of credit risk and NPAs� Work in deregulated interest rate system� Mergers and consolidation� Collaboration with other banks – remittance, foreign exchange, cash management
2nd Narasimham Committee ( April 23, 1998)
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� Capital adequacy requirements to take into account market risks besides credit risk
� 5% risk weight for portfolio of govt securities (2.5% implemented)
� Capital to risk assets ratio raised to 10%� Capital to risk assets ratio raised to 10%
� Doubtful asset if the asset is NPA for 18 months
� Even govt guaranteed assets must be treated as NPA if so
� Banks to reduce Net NPA level to below 5% by 2000 and 3% by 2002
� Asset Reconstruction company (ARC)
2nd FSR (contd)8
� Introduction of the 90 day norm
� 0.25% provision for standard assets
� Asset liability management – to cover liquidity and interest rate risks
� Statistical risk management techniques like value-at-� Statistical risk management techniques like value-at-risk ; forex rate volatility and interest rate changes
� Independent loan review mechanism especially for large borrowal accounts and systems to identify potential NPAs
� Voluntary Retirement System
2nd FSR (Contd)9
� DFIs to convert themselves into banks (initiated)
� Minimum shareholding by govt/RBI in nationalisedbanks to 33% (Govt introduced a bill in 2000, no progress so far)
� Minimum net worth of NBFCs to be enhanced to Rs. 200 LakhsMinimum net worth of NBFCs to be enhanced to Rs. 200 Lakhs
� Inter-bank call and notice money market and inter-bank term money market should be restricted strictly to banks and primary dealers
� The RRBs and Co-operative Banks should reach a minimum of 8% capital to risk weighted assets over 5 years