Critique on Indian Banking Reforms in 1991

Topics: Bank, Private banking, Fractional-reserve banking Pages: 8 (2770 words) Published: January 23, 2013
1. Critique on banking sector reforms in post 1991 period
The Future of Banking Reform
Prior to the economic reforms, the financial sector of India was on the crossroads. To improve the performance of the Indian commercial banks, first phase of banking sector reforms were introduced in 1991 and after its success; government gave much importance to the second phase of the reforms in 1998. Uppal (2011) analyzes the ongoing banking sector reforms and their efficacy with the help of some ratios and concludes the efficacy of all the bank groups have increased but new private sector and foreign banks have edge over our public sector bank. The efficient, dynamic and effective banking sector plays a decisive role in accelerating the rate of economic growth in any economy. In the wake of contemporary economic changes in the world economy and other domestic crises like adverse balance of payments problem, increasing fiscal deficits etc., our country too embarked upon economic reforms. The govt. of India introduced economic and financial sector reforms in 1991 and banking sector reforms were part and parcel of financial sector reforms. These were initiated in 1991 to make Indian banking sector more efficient, strong and dynamic.

The main recommendations of the Committee were: -
•Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years •Progressive reduction in Cash Reserve Ratio (CRR)
•Phasing out of directed credit programmes and redefinition of the priority sector •Deregulation of interest rates so as to reflect emerging market conditions •Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993, 8 per cent by March 1996, and 8 per cent by those banks having international operations by March 1994 •Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts •Imparting transparency to bank balance sheets and making more disclosures. •

Setting up of special tribunals to speed up the process of recovery of loans •
Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount •
Restructuring of the banking system, so as to have 3 or 4 large banks, which could become international in character, 8 to 10 national banks and local banks confined to specific regions. Rural banks, including RRBs, confined to rural areas •

Abolition of branch licensing
•Liberalizing the policy with regard to allowing foreign banks to open offices in India •Rationalization of foreign operations of Indian banks
•Giving freedom to individual banks to recruit officers
•Inspection by supervisory authorities based essentially on the internal audit and inspection reports •Ending duality of control over banking system by Banking Division and RBI •A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI •Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks •Obtaining resources from the market on competitive terms by DFIs •Speedy liberalization of capital market

Rationale of Banking Sector Reforms
To cope up with the changing economic environment, banking sector needs some dose to improve its performance. Since 1991, the banking sector was faced with the problems such as tight control of RBI, eroded productivity and efficiency of public sector banks, continuous losses by public sector banks year after year, increasing NPAs, deteriorated portfolio quality, poor customer service, obsolete work technology and unable to meet competitive environment. Therefore, Narasimham Committee was appointed in 1991 and it submitted its report in November 1991, with detailed measures to improve the adverse situation of the banking industry (Uppal; 2011. p. 69). The main motive of the reforms was to improve the operational efficiency of...
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