1. Indian Banking Sector Reforms – A Glimpse
By -
Prof. Mallikarjun Bali
BLDEA’s VP Dr. P G Halakatti College of Engg & Tech.,
Bijapur

2.  Today, 60% of India’s population does not
have a bank account
 About 90% of small business houses have no
link with formal lending institutions
 Gross NPA’s of banking sector crossed 4% of
total advances. If re-structured loan is
considered, it may cross 10% of total
advances. In absolute terms, it is around 10
lakhs crore

3.  The country has 87 scheduled commercial
banks as on 31st May 2013. Of this, 26 are
PSB’s, 20 are Private banks and 41 are Foreign
banks.
 Only 41 banks are listed with stock exchanges
 Share of PSB’s in deposit is around 78%, and in
advances is about 76%.
 None of the Indian banks figured in the top 50
Global banks
 China has 4 banks in the top 10 banks of the
world.

4.  Country has 30 state & 370 District Co-
Operative banks
 PSB’s account for 82% of the total number of
bank branches in the country.

5. 88,562
72,661
15,569
332
No. of Branches As at March 2013
Scheduled Commercial
Banks
Public Sector Banks
Private Sector Banks
Foreign Banks

6. 114,014
69,652
43,101
1261
No. of ATMs As at March 2013
Scheduled Commercial Banks
Public Sector Banks
Private Sector Banks
Foreign Banks

7. State Bank Group
(As at March 2013)
20,181
32,591
Branches
ATMs

8. Return on Assets of Bank for selected
Countries
Source: Compiled from Financial Soundness Indicators. IMF

9.  County had faced Macro - economic crisis in
1991.
 Forex reserve touched very low level, not
even sufficient to pay 1 week import bill.
 Economy was growing at less than 2%
 Majority of banks were incurring losses
 The banks were no where near the
international norms regarding capital
adequacy, prudential norms etc.

10. 0%
5%
10%
15%
20%
25%
30%
35%
40%
CRR SLR Repo Reverse Repo
15%
38.50%
7.50% 7.50%
4%
23%
8% 7.00%
1991
2013-14
Bank Rates

11. 1.40%
4.50%
GDP Rate
1991-92
2013-14
$5.83
$304.82
Foreign Exchange Reserves
(billion)
1991-92
2010-11

13. These above factors led for the formation of
high level committee headed by
Mr. M Narasimham, a former Governor of RBI
to address the problems & suggest the
remedial measures.
The committee submitted its report in the
Month of Nov, 1991

14.  The Govt should reduce its stake from
existing 100% to 51%
 Reduction of Statutory Liquidity Ratio (SLR)
from 38.5% to 23% over a period of 5 years
 Progressive reduction in Cash Reserve Ratio
(CRR)
 Phasing out of directed credit prorammes
 Deregulation of interest rate
 Prescribed minimum capital adequacy ratio
of 4% to Risk Weighted Assets (RWA) by
March, 1993 and 8% by March, 1996.

15.  Adoption of uniform accounting practices
regarding income recognition, assets
classification & provisions against bad &
doubtful debt.
 Setting up of special tribunal to speed up the
process of recovery of loans.
 Setting up of Asset Re-construction Companies
(ARC’s)
 Abolition of branch licensing
 Giving freedom to Individual bank to recruit
officers.

16. The Govt appointed a second high level
committee on banking sector reforms under
the chairmanship of Mr. Narasimham to
review the progress of banking sector
reforms to-date and suggest new measures
to strengthen Indian financial system & make
it internationally competitive one.
The committee submitted its report in the
month of April 1998.

17. Recommendation of the Committee – II are
broadly classified as below
I. Strengthening Banking System
II. Asset Quality
III. Prudential Norms and Disclosure
Requirements
IV. Systems and Methods in Banks
V. Structural Issues.

18.  Minimum Capital to Risk Asset Ratio (CRAR)
be increased from existing 8% to 10%, an
intermediate minimum target of 9% be
achieved by 2000 & the ratio of 10% by 2002.
 The Govt should reduce its stake to 33% from
the existing 51%.
 Risk weight on Govt guaranteed advances
should be the same as for other advances.

19.  An asset be classified as doubtful if it is in the
substandard category for 18 months in the first
instance and eventually for 12 months, there
after it will become loss.
 For banks with high NPA, the committee advises
to determine realisable value of bad loan & such
asset could be transferred to ARC’s.
 The interest subsidy element in credit for the
priority sector should be totally eliminated and
interest rate on loans under Rs. 2 lakhs should
be deregulated for scheduled commercial banks
as has been done in the case of Regional Rural
Bans and Co-operative credit institutions.

20.  Bank should stops recognizing income on
assets (loans) where the interest & principle is
not paid for 3 months.
 Bank should make 1% provision on standard
loans.
 Provisioning made against bad loan should be
tax deductible one.

21.  There should be an independent loan review
mechanism and a system to monitor the loan.
 Banks should have a system of recruiting
skilled man power.
 Public sector bank should be given flexibility
in determining managerial remuneration
keeping in mind market trend

22.  Mergers of public sector banks should
emanate from the management of the banks
with the Government as the common
shareholders playing a supportive role.
Merger should not be seen as a means of
bailing out weak banks.
 “Weak banks” may be nurtured into healthy
units by slowing down on
expansion, eschewing (refraining) high cost
funds / borrowings etc

23. Why PSB’s have failed ?
Comparative Performance of Public Sector & Private
Sector Banks

24.  The banks have been asked to carry out
independent & objective credit appraisal in all
the cases. Further it says that banks should
not depend on the credit appraisal report
prepared by outside consultant.
 They have been asked to make enquiry about
the source & quality of the equity capital
brought in by the promoter.

25.  The banks required to see whether the names
of any director is appeared in the list of
defaulters.
 The banks are also required to classify the
borrowers as non co-operative borrowers.
 The RBI has also brought advocates & assets
valuers within its radar.
 It also advises the banks to ensure a higher
degree of monitoring in respect of advances
already given.

26.  Banks have now been mandated to create a
new sub asset category called as “Special
Mention Account” (SMA)
SMA has been further categorised into
SMA-NF, SMA-1, SMA-2
A loan can be potentially categorised as
SMA-NF if any one of the following signals
are noticed.
1. A delay of 90 days or more in the
submission of stock statements.
2. Non co-operation for conduct of stock audit
3. Return of 3 or more cheques in the last 30
days on account of non availability of funds.

27. SMA – I represents a category where the
principal & interest payment is overdue
between 31 & 60 days.
SMA – II represents a category where the
principal & interest payment is overdue
between 61 & 90 days.
 The RBI proposes to set-up a Central
Repository of Information on Large Credit
(CRILC) that will collects, store & disseminate
credit data.

28. Other day, while addressing gathering at the
Institute of International Finance in Washington
DC, said that he has five plans to reform the
Indian banking sector. They are;
1. Plan I Revising & Strengthening Monetary Policy
framework.
2. Plan II Reform Indian’s Banking System.
3. Plan III Financial Inclusion.
4. Plan IV Liberalizing Indian Market.
5. Plan V Dealing with Financial Distress.

29. A panel under Deputy Governor Sri Urjit Patel
was constituted, to look into ways of revising &
strengthening monetary policy framework & the
committee submitted its report on 21-1-2014.
Major recommendations of the committee are as
follows;
 The committee suggest that inflation shall be the
target for the monetary policy framework.
 The RBI should, while framing the monetary
policy framework, focus on Consumer Price Index
(CPI) & not on the Whole Sale Price Index (WPI).

30.  The Govt bring down the rate of inflation to
6% in two years form the exiting 10%. The
target for medium term would be an inflation
rate 4% +/- 2%.
 The Govt should reduce Fiscal Deficit to 3% of
GDP by 2016-17.
 The Govt should form a committee called as
Monetary Policy Committee (MPC) comprising
Governor, The Deputy Governor & Executive
Director in charge of Monetary Policy & two
external full-time member.

31.  RBI Constituted a committee under the
chairmanship of Dr Bhimal Jalan a former
Governor of RBI to suggest on the issue of
Banking Licenses. The committee has
submitted the report on 25th Feb, 2014. And
this committee has recommended for issue of
licenses in a phased manner.
 The RBI has received 25 applications seeking
license for starting new banks.

32.  A committee under the Chairmanship of
Nachiket Mor was constituted to suggest
ways and means to extend banking services
to millions of unbanked people.
The following are the key recommendations;
 Govt should provide banking facility to every
resident Indian by 2016.
 The Govt should set up two banks one is
payment bank and other one is whole sale bank

33.  The initial capital of the bank should be 50cr,
which is one-tenth of capital required for a
fully serviced commercial bank.
 Payment bank will only accept deposit and
will not do any lending business.
 The maximum amount of deposit to be
accepted is Rs. 50,000.
 Whole Sale bank will do both lending and
accepting deposit. It will accept deposit of
not less then 5cr

34. Apex Bank wants to broaden and deepen the
Indian capital market to enhance the liquidity
and also risk sustaining capacity of market.

35. In this connection The Apex Bank suggests
the following measures;
 Setting up of more and more Corporate Debt
Tribunals (CDT)
 Setting up separate bench for speedy disposal
of NPA related cases.
 Appointment of Special Cadre of Officers.

36.  Indian rupee is gained by 8.4% from the day
he assumed his office.
 New rules of limiting bad loan.
 Branch licensing has been liberalized.
 He allowed cash settlement of Interest Rate
Futures.
 He wants to create a central repository to
collect, store and disseminate information
on large corporate borrowing.
 Various committees to strengthen monetary
policy, widen banking facilities etc., have
been formed.