banking sector reforms 123

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Need for banking sector

reforms

Phenomenal increase in the geographical coverageof our banking and financial institutions.

Despite impressive quantitative achievement- low efficiency

and productivity, bad portfolios performance, anderoded profitability.

Several public sector banks and financial institutions wereincurring losses year after year .

Thus certain reforms were taken place in the banking system.


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BANKING SECTOR REFORMS

With effect from 1st ferbruary,1969,thegovernment imposed social control onbanks.

Soon after nationalization, the govtwanted to examine the banking system. Thus owing to the1991 crisis of balance of

payments, the government appointed thenarasimhan committee on 14th august,1991

Review- aspects relating to theStructure, Organization, Procedures andFunctioning of the banking system.


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TOPICS TO BE DISCUSSED :-

NARASIMHAM COMMITTEE-I

NARASIMHAM COMMITTEE-II

VERMA COMMITTEE REPORT

GHOSH COMMITTEE REPORT

SARKAR COMMITTEE REPORT

KANNAN COMMITTEE REPORT

R.V.GUPTA COMMITTEE REPORT

STUDY GROUP UNDER B.D NARANG

NARESH CHANDRA COMMITTEE REPORT


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THE NARASIMHAM

COMMITTEE

The first phase of banking sector reforms began during 1992-1993

The committee was appointed by then finance minister , Mr.ManmohanSingh. Constituted in 1991, the Committee submitted two reports, in1992 and 1998, which laid significant thrust on enhancing the efficiency

and viability of the banking sector.

The committee was headed by Mr. M.Narasimham (X-RBI governor)

The report was submitted on on 16th November ,1991.

The Narasimhan Committee laid the foundation for the reformation ofthe Indian banking sector.


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PROBLEMS IDENTIFIED IN

NARASIMHAM COMMITTEE

REPORT-I

Higher rates of CRR and SLR

Directed credit programmes Political and Administrative

interference

Subsidizing of credit Mounting expenditures of government


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MAIN RECOMMENDATIONS

OF THE COMMITEE

SLR was recommended to reduce from 38.5% to 25%.

Progressive reduction in Cash Reserve Ratio from 15% to 3%-5%(CRR)

Phasing out of directed credit programmes and redefinition of priority sector

Stipulation of minimum capital adequacy ratio of 8 per cent by March(Capital adequacyratios ("CAR") are a measure of the amount of a bank's capital expressed as apercentage of its risk weighted credit exposures.)

Adoption of uniform accounting practices in regard to income recognition, asset

classification and provisioning against bad and doubtful debts


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RECOMMENDATIONS.

Setting up of special tribunals to speed up the recovery process of loans

Set up of Asset Reconstruction Funds (ARFs) to take over from banks a portion oftheir bad and doubtful advances at a discount portion

Abolition of branch licensing

Liberalizing the policy with regard to allowing foreign banks to open offices in India

Giving freedom to individual banks to recruit officers

Revised procedure for selection of Chief Executives and Directors of Boards of publicsector banks

Speedy liberalization of capital market

Enactment of a separate legislation providing appropriate legal framework for mutualfunds and laying down prudential norms for such institutions, etc.


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NARASIMHAM COMMITTEE-II

1998- Finance minister appointed Mr. Narasimhan aschairman of one more committee.

This committee was asked to review the progress ofbanking sector reforms to date and a programme on

financial sector reforms to strengthen India's financialsystem and make it reforms to strengthen India'sfinancial system and make it internationally competitive.

The committee submitted its report to the government in

April1998..

The report covered issues like- capital adequacy,bank mergers, recasting bank board, and creation of globalsized mergers.


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Need for stronger banking system

Setting up of small local banks

Concept of narrow banking

Capital Adequacy Ratio

Review and update banking laws.


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VERMA COMMITTEE REPORT

The Reserve Bank of India set up the VermaCommittee to identify and examine the problems ofweak banks on the basis of certain criteria and tosuggest a plan of restructuring.

The panel went further than the NarasimhanCommittee in introducing seven additional criteriafor examining solvency

o capital adequacy ratio, coverage ratio,o earning capacity (return on assets, net interest

margin)o profitability (ratios of, operating profits to average

working funds, cost to income and of staff cost tonet interest income plus all other income)


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Major recommendations of

Verma committee Cut staff strength by 25% through VRS

If VRS scheme fails cut wages across the board

Close down of subsidiaries of banks and selling out of foreign

branches.

Rationalize branch network

Reconstruct bank board

CMD should have a long tenure

RBI should set up a special wing to supervise weak banks


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Major recommendations of

verma committee

Nodal body to monitor progress of weakbanks

Set up of Debt recovery tribunals


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PARAMETERS TO IDENTIFY BANKS

STRENGTH/WEAKNESS

8% OR MORE

MEDIAN LEVEL

1.CAPITAL ADEQUACY RATIO

2.NET INTT MARGIN

0.50% OR MORE

MEDIAN LEVEL

3.COVERAGE RATIO

4. PROFIT/WORKING FUND

Median level

Median level

5.RETURN ON ASSETS

6.BANK & STAFF COST/INCOME


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WEAK BANKS IDENTIFIED

UCO BANK

INDIAN BANK

UNITED BANKOF INDIA


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GHOSH COMMITEE

The committee was appointed by RBI atthe instance of government of Indiaunder the chairmanship of Mr. A Ghosh,the then Dy.gov of RBI.

Committee was set up to enquire variousaspects of frauds and malpractices in

banks.


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Recommendations of the ghosh

committee

Obtaining photographs of depositors atthe time of opening of accounts

Paper used for cheques /drafts should be

such that any use of chemicals for makingmaterial alterations in the instrumentsshould be visible to the naked eyes.

Desk cards for staff to be prepared. Banks to designate one of the seniors

officers as a compliance officer.


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Recommendations of the ghosh

committee

Cash and other valuables must kept in jointcustody ,currency chest transactions wouldbe reported to RBI on the same day

No official should exceed his delegatedauthority except in every emergentcircumstances.

Cash should not be received other than inthe cash department and cashier shouldnot be allowed to make entries in passbook.


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KANNAN COMMITTEE

REPORT Too much emphasis on security by the banks

directed the flow of credit to affluent section ofsociety with the result that economic resources ofthe country were concentrated in a few hands

With the nationalization of the banks an entirelynew breed of entrepreneurs made a demand onbank credit.

This resulted in an unexpected demand on lendablefunds of banks and naturally called for a reform in

the policies of banks to orient them to the newdevelopmental role assigned to the bankingindustry.


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THE KANNAN COMMITTEE

RECOMMENDATIONS

Cash credit should be replaced by system of loans for working capital

Banks should dispose off all loan applications within 2-8 weeks

A credit information bureau be floated independently by bank.

Maximum permissible bank finance should be abolished and banks should have their own

borrowing limits for corporate

Corporate borrowers may be allowed to issue short term working capital debentures of 12-18months maturity and banks may subscribe to these debentures

Banks should be allowed to decide policy norms for issue of commercial paper

Banks should try out syndicate form of lending

The benchmark current ratio of 1.33:1 and the debt equity ratio should be left to the discretion of the banks.


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RV GUPTA COMMITEE

The Reserve Bank of India appointed aone-man Committee of Shri R. V. Gupta,then Dy. Governor of RBI in December

1997 to suggest measures for the removalof the constraints faced by theCommercial Banks in increasing flow ofcredit to agriculture.

The Report of the Committee wassubmitted to Reserve Bank of India on 21April 1998


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RECOMMENDATIONS.

INTEREST RATES ON AGRICULTURAL LOANS TO BEFIXED BY BANKS

DELEGATION OF POWERS TO BRABCH MANAGERS TODISPOSE OF 90% OF APPLICATIONS

INDICATE ANNUAL INCREASE IN CREDIT FLOW TOAGRICULTURE

EXTENTION OF COMPOSITE CASH CREDIT LIMIT TOINCLUDE FARM CREDIT.

SIMPLIFICATION OF PROCEDURES IN MATTERSRELATING TO DOCUMENTATION AND APPLICATION.


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RECOMMENDATIONS.

Commercial Banks to be made free to fixthe rates of interest for small loan amounts

as has been done in the case of Co-operative and RRBS

Discourage additional collateral by way ofguarantors where the land has already been

mortgaged

Security and collateral requirements not tobe prescribed by RBI or any other agency.Existing guidelines to continue for small

loans up to Rs.10, 000.


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THE STUDY GROUP UNDER THE

CHAIRMANSHIP OF SH.B.D.NARANG .

This study group was set up in 1998

It submitted its report in march,1999This group studied fraud reports bycommercial banks from 1995 to 1997.

The group confined itself to those areas

which led to weakening of the internalcontrol system for prevention anddetection of frauds.


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NARESH CHANDRA COMMITTEE

ON CORPORATE GOVERNANCE

This committee has recommended on :

The poor structure and composition ofthe board of directors of Indiancompanies.

Scant fiduciary responsibility

Poor disclosure & responsibilityInadequate accounting & auditingetc..


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RECOMMENDATIONS.

.Disclosure in plain English

.Steps relating to Replacement of auditors

Audit firm to file a certificate of independence

Empowering the audit committee

.Certificate of financial reports by CEO & CFO in review of balance sheet/laccounts, cash flow statements, directors report.

Accountability in respect of transfer of money by way of inter-corporate

deposits ,or deposits of any kind from listed company to any other company. Consolidated financial statements should be made mandatory for companies

having subsidiaries.


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SARKAR COMMITTEE ON ANTI-

MONEY LAUNDERING GUIDELINES

FOR BANK OF INDIA

A study group set up by Indian banking

association under chairman ship of P KSarkar .

Set up study on anti-money laundering

practices and KYC guidelines followed inother countries.


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MAJOR

RECOMMENDATIONS.

Urgent need to adopt anti-moneylaundering policy and each bank must haveits own such policy

Adoption of KYC guidelines by banksFull disclosure of financial status of the

customer ,his source of income in the bankaccount opening form.

Fund transfers should be closelymonitored.

Suspicious activities should be reported tothe Money Laundering Reporting Officer


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banking sector reforms 123

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