AMITY LAW SCHOOL
ECONOMICS
ASSIGNMENT ECONOMIC REFORM:
SUBMITTED TO,
BANKING
Dr. Sanjiv Singh Bhadauria
SUBMITTED BY,
Samiksha Gupta
Priya Sharma
B.A.LL.B.(H)
V Semester
INTRODUCTION
The strategy of reforms introduced in India in July 1991 presented a mixture of macroeconomic
stabilization and structural adjustment. It was guided by short-term and long-term objectives.
Stabilization was necessary in the short run to restore balance of payments equilibrium and to
control inflation. At the same time changing the structure of institutions themselves through
reforms was equally important from long term point of view.
The new government moved urgently to implement a programme of macroeconomic stabilization
through fiscal correction. Besides this, structural reforms were initiated in the field of trade,
industry and the public sector.
ECONOMIC REFORM - BANKING
HISTORY
According to Banking companies act 1949-
Banking is defined as , accepting for the purpose of lending or investment of deposit money from the public ,
repayable on demand or otherwise and withdrawable by cheque , draft , order or otherwise.
It also defines Bank as an institution dealing in money and credit.
Banking Sector was developed during the British era. British East India Company established 3 Banks-
Bank of Bengal – 1809
Bank of Bombay – 1840
Bank of Madras – 1843
These 3 banks were later amalgamated and called Imperial Bank, which was taken over by SBI in 1955.
The Reserve Bank of India was established in 1935, followed by Punjab National Bank, Bank of India, Canara
Bank and Indian Bank. They have been the pallbearers in the History of Banking in India.
Characteristics of a Bank / Features of Banking
•It may be an Individual/Firm/Company.
•It is a profit and service oriented institution.
•It acts as a connecting link between borrowers and lenders.
•It deals with money.
•It accepts deposits from public.
•It provides Advances/Loans/Credit to customers.
Economic Reforms of the Banking Sector In
India
Indian banking sector has undergone major changes and reforms during economic
reforms. Though it was a part of overall economic reforms, it has changed the very
functioning of Indian banks. This reform have not only influenced the productivity
and efficiency of many of the Indian Banks, but has left everlasting footprints on the
working of the banking sector in India.
Reforms in the banking sector were introduced on the basis of
the recommendations of different committees:
(i) The first Narasimhan Committee (1991),
(ii) The Verma Committee (1996),
(iii) The Khan Committee (1997), and
(iv) The Second Narasimhan Committee (1998).
Features of banking Sector Reform in India
Recalling some features of financial sector reforms in India would be in order, before narrating the
processes.
· First, financial sector reform was undertaken early in the reform-cycle in India.
· Second, the financial sector was not driven by any crisis and the reforms have not been an
outcome of multilateral aid.
· Third, the design and detail of the reform were evolved by domestic expertise, though
international experience is always kept in view.
· Fourth, the Government preferred that public sector banks manage the over-hang problems
of the past rather than cleanup the balance sheets with support of the Government.
· Fifth, it was felt that there is enough room for growth and healthy competition for public and
private sector banks as well as foreign and domestic banks. The twin governing principles are
non-disruptive progress and consultative process.
The important reforms in the banking sector in India.
Reduced CRR and SLR : The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are
gradually reduced during the economic reforms period in India. By Law in India the CRR remains between 3-15%
of the Net Demand and Time Liabilities. It is reduced from the earlier high level of 15% plus incremental CRR of
10% to current 4% level. Similarly, the SLR Is also reduced from early 38.5% to current minimum of 25% level.
This has left more loanable funds with commercial banks, solving the liquidity problem.
Deregulation of Interest Rate : During the economics reforms period, interest rates of commercial
banks were deregulated. Banks now enjoy freedom of fixing the lower and upper limit of interest on deposits.
Interest rate slabs are reduced from Rs.20 Lakhs to just Rs. 2 Lakhs. Interest rates on the bank loans above Rs.2
lakhs are full decontrolled. These measures have resulted in more freedom to commercial banks in interest rate
regime.
Fixing prudential Norms : In order to induce professionalism in its operations, the RBI
fixed prudential norms for commercial banks. It includes recognition of income sources.
Classification of assets, provisions for bad debts, maintaining international standards in accounting
practices, etc. It helped banks in reducing and restructuring Non-performing assets (NPAs).
Introduction of CRAR : Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. It
resulted in an improvement in the capital position of commercial banks, all most all the banks in India has
reached the Capital Adequacy Ratio (CAR) above the statutory level of 9%.
Operational Autonomy : During the reforms period commercial banks enjoyed the operational
freedom. If a bank satisfies the CAR then it gets freedom in opening new branches, upgrading the extension
counters, closing down existing branches and they get liberal lending norms.
Banking Diversification : The Indian banking sector was well diversified, during the economic
reforms period. Many of the banks have stared new services and new products. Some of them have established
subsidiaries in merchant banking, mutual funds, insurance, venture capital, etc which has led to diversified
sources of income of them.
IMPACT OF BANKING SECTOR REFORMS
An assessment of the banking sector shows that banks have experienced strong balance sheet growth in
the post-reform period in an environment of operational flexibility. Improvement in the financial health
of banks, reflected in significant improvement in capital adequacy and improved asset quality, is
distinctly visible. It is noteworthy that this progress has been achieved despite the adoption of
international best practices in prudential norms. Competitiveness and productivity gains have also been
enabled by proactive technological deepening and flexible human resource management. These
significant gains have been achieved even while renewing our goals of social banking viz. maintaining
the wide reach of the banking system and directing credit towards important but disadvantaged sectors
of society. A brief discussion on the performance of the banking sector under the reform process is
given below.
CONCLUSION
In the current scenario, banks are constantly pushing the frontiers of risk management.
Compulsions arising out of increasing competition, as well as agency problems
between management, owners and other stakeholders are inducing banks to look at
newer avenues to augment revenues, while trimming costs. Consolidation, competition
and risk management are no doubt critical to the future of banking but I believe that
governance and financial inclusion would also emerge as the key issues for a country
like India, at this stage of socio-economic development.
