Financial and Banking Sector Reforms in India

Objectives of Financial sector reforms in India.

1. Reforms Financial repression that existed earlier

2. Create an efficient productive and profitable Financial sector industry

3. Enable price discovery particularly by the market determination of interest rates that then helps in efficient allocation of resources

4. Provide operational and function autonomy to institutions

5. Prepare the Financial system for increasing international Competition

6. Open the external sector in a calibrated fashion

Narasimham committee report 1991 &1998

The narasimham committee was set up in order to study the problems of the indian Financial system and to suggest some recommendations for improvement in the efficiency and productivity of the Financial institution

The committee had given the following major recommendations:

1. Reduction in SLR and CRR : The committee recommeded the Reduction of the higher proportion of the statutory liquidity ratio and cash reserve ratio . Both of these ratios were very high at that time. The SLR the was 38.5 percent and crr was 15 percent . This high percentage of SLR and CRR meant locking the bank resources for govt uses. SLR was recommeded to be from 38.5 to 25 percent and CRR from 15 percent and 3.5 percent

2. Phasing out of directed Credit programme : in india since Nationalization directed Credit programmes were adopted by the Government . The committee recommed Phasing out of this programme.  This programme compelled banks to earmark their Financial resources for the needy and poor sectors at concessional rates of interest

3. Interest rate determintaion: The committee felt that the interest rates in india were regulated and controlled by the authorities . The committee recommeded eliminating Government controls on interest rates and Phasing out the concessional interest rates for the priority sector.

4. Structural re organizations of the banking sector: The committee recommeded that the actual number of public sector banks need to be reduced. Three to four large banks including SBI should be developed as international banks. Eight to ten banks having nationwide presence should concerntrate in the National and unverisal banking services.

Local banks should concerntrate on region specific banking . Regarding RRBs it recommeded that they should focus on agr culture and rural financing

5. Establishment of the ARF and tribunal: The proporation of bad debts and non performing assets of the public banks and Development Financial institute was veey alarming in those days. The committee recommeded the Establishment of an assets reconstruction fund . This fund would take over the proporation of the bad and doubt ful debts from the banks and Financial institutes. It would help banks to get rid of bed debts.

6. Removal of dual control : The committee recommeded the stopping of this system.  it considered and recommeded that the RBI should be the only main agency to regulate banking in india

 7. Banking autonomy : The committee recommeded that the public sector banks should be free and autonomous. Banking technology upgradation would thus be easy.

Narasimham committee report II – 1998

In 1998 the Government appointed yet another committee under the chairmanship of Mrt.Narasimham. It better known as the banking sector committee. It was told to review the banking reform progress and design a programme for further strengthening the Financial system of india  the committee focused on various areas such as capital adequacy bank mergers bank legislation,

It submitted its report to the Government in April 1998 with the following recommendations:

1. Strengthening the banks in india

2. Narrow banking

3. Capital adequacy ratio

4. Bank owership

5. Review of banking laws

Apart from these major recommendations the committee has also recommended faster computerization , technology upgradation , training of staff, depoliticizing of banks, professionalism in banking , reviewing bank recruitment etc.