Banking sector reforms in india and their impact on the economy

A Dissertation Report
On
The Banking Sector Reforms In India And Their Impact On The Economy
By
Mr. Rishi Kumar
Under the guidance of
Dr. Gauri Prabhu
Submitted to
Savitribai Phule Pune University
In partial fulfilment of the requirement for the award of the degree of Masters of Business
Administration (MBA) 2014-2016
Through
All India Shri Shivaji Memorial Society’s
Institute of Management
Pune 411001
Year 2015-16

DECLARATION
It gives me immense pleasure to declare that the project work undertaken by me is an
original and authentic work. This project is being submitted in partial fulfilment of
requirement for the award of Master of Business Administration from AISSMS Instititute
Of Management, affiliated to Savitribai Phule Pune University.

INDEX
SERIAL
NO.
TITLE PAGE NO.
1. INTRODUCTION 1
2. LITERATURE REVIEW 6
3. OBJECTIVE AND SCOPE OF THE STUDY 7
4. RESEARCH METHODOLOGY 8
5. DATA ANALYSIS AND INTETRPRETATION 9
6. FINDINGS OF THE STUDY 25
7. CONCLUSION 30
8. SUGGESTIONS 31
9. BIBLIOGRAPHY 32

1
1. INTRODUCTION TO THE STUDY
A retrospect of the events clearly indicates that the Indian banking sector has come far away
from the days of nationalization. The Narasimham Committee laid the foundation for the
reformation of the Indian banking sector. Constituted in 1991, the Committee submitted two
reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and
viability of the banking sector. As the international standards became prevalent, banks had to
unlearn their traditional operational methods of directed credit, directed investments and
fixed interest rates, all of which led to deterioration in the quality of loan portfolios,
inadequacy of capital and the erosion of profitability.
The recent international consensus on preserving the soundness of the banking system has
veered around certain core themes. These are: effective risk management systems, adequate
capital provision, sound practices of supervision and regulation, transparency of operation,
conducive public policy intervention and maintenance of macroeconomic stability in the
economy.
Until recently, the lack of competitiveness vis-à-vis global standards, low technological level
in operations, over staffing, high NPAs and low levels of motivation had shackled the
performance of the banking industry.
However, the banking sector reforms have provided the necessary platform for the Indian
banks to operate on the basis of operational flexibility and functional autonomy, thereby
enhancing efficiency, productivity and profitability. The reforms also brought about
structural changes in the financial sector and succeeded in easing external constraints on its
operation, i.e. reduction in CRR and SLR reserves, capital adequacy norms, restructuring and
recapitulating banks and enhancing the competitive element in the market through the entry
of new banks.
The reforms also include increase in the number of banks due to the entry of new private and
foreign banks, increase in the transparency of the banks’ balance sheets through the
introduction of prudential norms and increase in the role of the market forces due to the

2
deregulated interest rates. These have significantly affected the operational environment of
the Indian banking sector.
To encourage speedy recovery of Non-performing assets, the Narasimham committee laid
directions to introduce Special Tribunals and also lead to the creation of an Asset
Reconstruction Fund. For revival of weak banks, the Verma Committee recommendations
have laid the foundation. Lastly, to maintain macroeconomic stability, RBI has introduced
the Asset Liability Management System.
A LOOK AT PAST
The Indira Gandhi government had nationalised 14 commercial banks through the Banking
Companies (Acquisitions and Transfer of Undertakings) Ordinance in 1969. The 1970 and
1980 Acts brought about after the nationalisation of 14 and 6 banks respectively were first
amended in 1994 to allow government to reduce its equity in them to up to 49 per cent. The
20 nationalised banks became 19 subsequently after New Bank of India merged with Punjab
National Bank. Only six of these 19 banks have so far accessed the market and to gone for
public issues meet its additional capital needs. The government holds majority or entire
equity of 19 nationalized banks currently.
Till now, banks could reduce equity only up to 25 per cent of the paid up capital on the date
of nationalisation. Some banks like the Bank of Baroda have returned equity to the
government in the past, but that has been within the prescribed 25 per cent cap.
The Nationalisation Act provides that the PSU banks cannot sell a single share. This is the
reason why banks have been tapping the market to fund their expansion plans. Also the Act
originally provided that the government must mandatorily hold 100 per cent stake in banks.
The 1994 amendments brought it down to 51 per cent, to help induction of public as
shareholders.
At this stage, the government provided that all shares, excluding government shares could be
transferred. This was necessary to permit the transfer of shares when public shareholders sold
their stake in banks. The amendments remove restrictions on the transfer of government
shareholding.

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REFORMS IN BANKING SECTOR
As the real sector reforms began in 1992, the need was felt to restructure the Indian banking
industry. The reform measures necessitated the deregulation of the financial sector,
particularly the banking sector. The initiation of the financial sector reforms brought about a
paradigm shift in the banking industry. In 1991, the RBI had proposed to from the committee
chaired by M. Narasimham, former RBI Governor in order to review the Financial System
viz. aspects relating to the Structure, Organisations and Functioning of the financial system.
The Narasimham Committee report, submitted to the then finance minister, Manmohan
Singh, on the banking sector reforms highlighted the weaknesses in the Indian banking
system and suggested reform measures based on the Basle norms. The guidelines that were
issued subsequently laid the foundation for the reformation of Indian banking sector.
The main recommendations of the Committee were: -
i. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five
years
ii. Progressive reduction in Cash Reserve Ratio (CRR)
iii. Phasing out of directed credit programmes and redefinition of the priority sector
iv. Deregulation of interest rates so as to reflect emerging market conditions
v. 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
vi. Adoption of uniform accounting practices in regard to income recognition, asset
classification and provisioning against bad and doubtful debts
vii. Imparting transparency to bank balance sheets and making more disclosures
viii. Setting up of special tribunals to speed up the process of recovery of loans
ix. Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion
of their bad and doubtful advances at a discount

4
x. 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
xi. Abolition of branch licensing
xii. Liberalising the policy with regard to allowing foreign banks to open offices in India
xiii. Rationalisation of foreign operations of Indian banks
xiv. Giving freedom to individual banks to recruit officers
xv. Inspection by supervisory authorities based essentially on the internal audit and
inspection reports
xvi. Ending duality of control over banking system by Banking Division and RBI
xvii. A separate authority for supervision of banks and financial institutions which would
be a semi-autonomous body under RBI
xviii. Revised procedure for selection of Chief Executives and Directors of Boards of
public sector banks
xix. Obtaining resources from the market on competitive terms by DFIs
xx. Speedy liberalisation of capital market
xxi. Supervision of merchant banks, mutual funds, leasing companies etc., by a separate
agency to be set up by RBI and enactment of a separate legislation providing
appropriate legal framework for mutual funds and laying down prudential norms for
such institutions, etc.
Several recommendations have been accepted and are being implemented in a phased
manner. Among these are the reductions in SLR/CRR, adoption of prudential norms for asset
classification and provisions, introduction of capital adequacy norms, and deregulation of
most of the interest rates, allowing entry to new entrants in private sector banking sector, etc.
Keeping in view the need of further liberalisation the Narasimham Committee II on Banking
Sector reform was set up in 1997. This committee’s terms of reference included review of
progress in reforms in the banking sector over the past six years, charting of a programme of
banking sector reforms required to make the Indian banking system more robust and
internationally competitive and framing of detailed recommendations in regard to make the
Indian banking system more robust and internationally competitive.

5
This committee constituted submitted its report in April 1998. The major recommendations
are:
i. Capital adequacy requirements should take into account market risks also
ii. In the next three years, entire portfolio of Govt. securities should be marked to market
iii. Risk weight for a Govt. guaranteed account must be 100 percent
iv. CAR to be raised to 10% from the present 8%; 9% by 2000 and 10% by 2002
v. An asset should be classified as doubtful if it is in the sub-standard category for 18
months instead of the present 24 months
vi. Banks should avoid ever greening of their advances
vii. There should be no further re-capitalization by the Govt.
viii. NPA level should be brought down to 5% by 2000 and 3% by 2002.
ix. Banks having high NPA should transfer their doubtful and loss categories to ARCs
which would issue Govt. bonds representing the realisable value of the assets.
x. International practice of income recognition by introduction of the 90-day norm
instead of the present 180 days.
xi. A provision of 1% on standard assets is required.
xii. Govt. guaranteed accounts must also be categorized as NPAs under the usual norms
xiii. There is need to institute an independent loan review mechanism especially
for large borrowal accounts to identify potential NPAs.
xiv. Recruitment of skilled manpower directly from the market be given urgent
consideration
xv. To rationalize staff strengths, an appropriate VRS must be introduced.
xvi. A weak bank should be one whose accumulated losses and net NPAs exceed
its net worth or one whose operating profits less its income on recap bonds is negative
for 3 consecutive years.
To start with, it has assigned a 2.5 per cent risk-weightage on gilts by March 31, 2000 and
laid down rules for provisioning; shortened the life of sub-standard assets from 24 months to
18 months (by March 31, 2001); called for 0.25 per cent provisioning on standard assets
(from fiscal 2000); 100 per cent risk weightage on foreign exchange (March 31, 1999) and a
minimum capital adequacy ratio of 9 per cent as on March 31, 2000.

6
2. LITERATURE REVIEW
Joshi (1986) in his study of all scheduled commercial banks operating in India analyses the
profitability and profit planning relating to the period 1970-1982. The study discusses and
trends in profits and profitability of commercial banks nationalization. The factors leading to
the deterioration of profitability are highlighted.
Minakshi and Kaur (1990) attempted to measure quantitatively the impact of the various
instruments of monetary policy on the profitability of commercial banks. The study
empirically proves that pre-liberalization banking being highly regulated and controlled
industry, has suffered a lot so far as profitability concerned. The bank rates and reserve
requirements ratio has played a significant role in having a negative impact on the bank’s
profitability.
Ojha (1992) in his study attempts to measure the productivity of public sector commercial
banks in India. After identifying various measures of productivity like total assets per
employee, total credit per employee, total deposits per employee, pre-tax profits per
employee, net profit per employee, working funds per employee, ratio of establishment
expenses to working funds and net interest per employee, comparison is made with the banks
at the international level. The study concludes the Indian banks have very less productivity
ratio compared with western countries. Since in his study a comparison has been made of
Indian public sector banks, which have to perform other social functions unlike western
commercial banks.
Rao (2007) studies how these reforms would help the banks, specially the private sector ones.
He stated the following to conlude his study:
-The response of the banks to the reforms has been impressive. The banks have been
adjusting very well to the new environment though gradually. The reforms have not only
enhanced the opportunities for banks but at the same time through challenges as well.
As a result of entry of new generation private sector banks, the competitive pressures are
constantly on the increase.

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3. OBJECTIVE AND SCOPE OF THE STUDY
OBJECTIVE OF STUDY
The main objective of the research paper is to make a simple assessment of the banking
sector reforms in India. It has been more than 20 years of the start of the economic reform in
India and the financial sector reform was one of the important parts of the process. The study
will try to list the major reforms of the Indian baking sector and to find out the impacts of
these reform and the future prospects. The study will be confined to the impacts of reforms
upon credit delivery, share of market of banks, profitability and prudential regulations, and
the economy.
SCOPE OF THE STUDY
The study focuses on the banking sector as a whole. As the reforms are a general initiative
for all banks to follow, the study is a macro perspective research. The study also looks from a
macro level at the economy of India as the effects of the reforms are being checked on it.

8
4. RESEARCH METHODOLOGY
The term research methodology can be defined as a process used to collect data and
information for the purpose of making business decisions. The methodology may include
publication research, interviews, surveys and other techniques.
Data Collection:-
The type of data that is used in the study is stated here.
For this study, we have relied totally on research papers and various articles, thus the type of
data used here is SECONDARY data.

9
5. DATA ANALYSIS AND INTERPRETATION
The Narasimham Committee had argued for reductions in SLR on the grounds that the stated
government objective of reducing the fiscal deficits will obviate the need for a large portion
of the current SLR. Similarly, the need for the use of CRR to control secondary expansion of
credit would be lesser in a regime of smaller fiscal deficits. The committee offered the route
of Open Market Operations (OMO) to the Reserve Bank of India for further monetary control
beyond that provided by the (lowered) SLR and CRR reserves. Ultimately, the rule was
Reduction in the reserve requirements of banks, with the Statutory Liquidity Ratio (SLR)
being brought down to 25 per cent by 1996-97 in a period of 5 years.
The committee recommended a 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. Later, all banks required attaining the
capital adequacy norm of 8 per cent, as per the Basle Committee Recommendations, by
March 31, 1996.
To get a true picture of the profitability and efficiency of the Indian Banks, a code stating
adoption of uniform accounting practices in regard to income recognition, asset classification
and provisioning against bad and doubtful debts has been laid down by the Central Bank.
Close to 16 per cent of loans made by Indian banks were NPAs - very high compared to say
5 per cent in banking systems in advanced countries.
i. REDUCTION IN CRR & SLR
ii. MINIMUM CAPITAL ADEQUACY RATIO
iii. PRUDENTIAL NORMS

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iv. INCOME RECOGNITION
The regulation for income recognition states that the Income on NPAs cannot be booked.
Interest income should not be recognized until it is realized. An NPA is one where
interest is overdue for two quarters or more. In respect of NPAs, interest is not to be
recognized on accrual basis, but is to be treated as income only when actually received.
Income in respect of accounts coming under Health Code 5 to 8 should not be recognized
until it is realized. As regards to accounts classified in Health Code 4, RBI has advised the
banks to evolve a realistic system for income recognition based on the prospect of
realisability of the security. On non-performing accounts the banks should not charge or take
into account the interest.
v. ASSET CLASSIFICATION
Loans and advances account for around 40 per cent of the assets of SCBs. However,
delay/default in payment of interest and/or repayment of principal has rendered a significant
proportion of the loan assets non-performing. As per RBI’s prudential norms, a Non-
Performing Asset (NPA) is a credit facility in respect of which interest/installment has
remained unpaid for more than two quarters after it has become past due
Regulations for asset classification :
Standard Assets: It carries not more than the normal risk attached to the business and is not
an NPA.
Sub-standard Asset: An asset which remains as NPA for a period exceeding 24 months,
where the current net worth of the borrower, guarantor or the current market value of the
security charged to the bank is not enough to ensure recovery of the debt due to the bank in
full.

11
Doubtful Assets: An NPA which continued to be so for a period exceeding two years (18
months, with effect from March, 2001, as recommended by Narasimham Committee II,
1998).
Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection
as loss asset, but the amount has not yet been written off wholly or partly.
vi. PROVISIONING NORMS
Banks will be required to make provisions for bad and doubtful debts on a uniform and
consistent basis so that the balance sheets reflect a true picture of the financial status of the
bank. The Narasimham Committee has recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out standings for loss assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the
secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
Banks should disclose in balance sheets maturity pattern of advances, deposits, investments
and borrowings. Apart from this, banks are also required to give details of their exposure to
foreign currency assets and liabilities and movement of bad loans. These disclosures were to
be made for the year ending March 2000
In fact, the banks must be forced to make public the nature of NPAs being written off. This
should be done to ensure that the taxpayer’s money given to the banks as capital is not used
to write off private loans without adequate efforts and punishment of defaulters.
vii. DISCLOSURE NORMS

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Liberalizing the policy with regard to allowing foreign banks to open offices in India or
rather Deregulation of the entry norms for private sector banks and foreign sector.
Keeping in view the urgent need to revive the weak banks, the Reserve Bank of India set up a
Working Group in February, 1999 under the Chairmanship of Shri M.S. Verma to suggest
measures for the revival of weak public sector banks in India.
THE VERMA PRESCRIPTION
 Identification of weak banks by using benchmarks for 7 critical ratios
 Recapitalisation of 3 weak banks conditional on their achieving specified
milestones
 Five-year freeze on all wage-increases, including the 12.25% increase negotiated
by the IBA
 A 25% reduction in staff-strength, either through VRSs or through wage-cuts
 Branch rationalisation, including the closure of loss-making foreign branches
 Transfer of non-performing assets to an Asset Reconstruction Fund
 Reconstitution of bank boards to include professionals, industrialists and financial
experts
 Independent Financial Restructuring Authority to monitor implementation of
viii. RATIONALISATION OF FOREIGN OPERATIONS
ix. RECONSTRUCTION OF WEAK BANKS

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.ALM framework rests on three pillars
ALM Organisation:
The ALCO consisting of the banks senior management including CEO should be responsible
for adhering to the limits set by the board as well as for deciding the business strategy of the
bank in line with the banks budget and decided risk management objectives.
ALM Information System
ALM Information System for the collection of information accurately, adequately and
expeditiously. Information is the key to the ALM process. A good information system gives
the bank management a complete picture of the bank's balance sheet.
ALM Process
The basic ALM process involves identification, measurement and management of risk
parameters. The RBI in its guidelines has asked Indian banks to use traditional techniques
like Gap Analysis for monitoring interest rate and liquidity risk. However RBI is expecting
Indian banks to move towards sophisticated techniques like Duration, Simulation, VaR in the
future.
Banking is a business and not an extension of government. Banks must be self-reliant, lean
and competitive. The best way to achieve this is to privatise the banks and make the
managements accountable to real shareholders. If "privatisation" is a still a dirty word, a
good starting point for us is to restrict government stake to 33 per cent.
revival package
xi. REDUCTION OF GOVERNMENT STAKE IN PSBs
x. ASSET LIABILITY MANAGEMENT SYSTEM

14
The interest rate regime has also undergone a significant change. For long, an administered
structure of interest rate has been in vogue in India. The 1998 Narasimham Reforms
suggested deregulation of interest rates on term deposits beyond a period of 15 days. At
present, the Reserve Bank prescribes only two lending rates for small borrowers. Banks are
free to determine the interest rate on deposits and lending rates on all lendings above Rs.
200,000.
xii. DEREGULATION OF INTEREST RATES

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Income and Expenses Profile of Banks
Interest Income Interest Expenses
• Interest/discount on advances/bills
• Interest on investments
• Interest on balances with RBI and
other interbank funds
• Others
• Interest on deposits
• Interest on Refinance/interbank
borrowings
• Others
Other Income Operating Expenses
• Commission, Exchange and
Brokerage
• Profit on sale of investments
• Profit on revaluation of investments
• Profit on sale of land, building and
other assets
• Profit on exchange transactions
• Income earned by way of dividends,
etc.
• Miscellaneous
 Payments to and provisions for
employees
• Rent, taxes and lighting
• Printing and stationery
• Advertisement and publicity
• Depreciation on Bank’s property
• Director’/Auditor’s fees and expenses
• Law charges, Postage, etc.
• Repairs and Maintenance,
 Insurance.
• Other expenses

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 Till January 2015, RBI had kept the policy rates unchanged. As inflationary
conditions eased, RBI softened the monetary policy by cutting the Repo rates by
25 basis points in January 2015 (from 8% to 7.75%).
 The Reserve Bank of India (RBI) also adopted new Consumer Price Index
(combined) as the measure for nominal anchor (Headline CPI) for policy
communication.
 Banks being allowed to raise capital from the market to meet capital adequacy norms
by diluting the government’s stake up to 52 per cent.
 Pradhan Mantri Jan Dhan Yojana launched to provide universal access to banking
facilities with at least one basic banking account for every household.
 Tightened norms to Asset Reconstruction Companies, increasing the minimum
investment in security receipts to 15% from 5%.
 Currently 74% Foreign funding is allowed in private banking (49% through automatic
and the rest via govt route)
 In order to improve the Governance of Public Sector Banks, the
Government intends to set up an autonomous Bank Board Bureau
with professionals as its members. It would be responsible for search
and selection of heads of PSBs, as also for Non-Official Directors on
the Boards of Banks. This would be an interim step
towards moving in the direction of having a Bank Investment
Company.
RBI norms for consolidated PSU bank accounts
The Reserve Bank of India (RBI) has moved to get public sector banks to consolidate their
accounts with those of their subsidiaries and other outfits where they hold substantial stakes.
Major Reform Initiatives Undertaken by Government in the Banking Sector
(2014 onwards)

17
Towards this end, RBI has set up a working group recently under its Department of Banking
Operations and Development to come out with necessary guidelines on consolidated
accounts for banks. The move is aimed at providing the investor with a better insight into
viewing a bank's performance in totality, including all its branches and subsidiaries, and not
as isolated entities. According to a banker, earlier subsidiaries were floated as external
independent entities wherein the accounting details were not incorporated in the parent
bank's balance sheet, but at the same time it was assumed that the problems will be dealt with
by the parent.
This will be a path-breaking change to the existing norms wherein each bank conducts its
accounts without taking into consideration the disclosures of its subsidiaries and other
divisions for disclosure. As per the proposed new policy guidelines, the banks will be
required to consolidate their accounts including all its subsidiaries and other holding
companies for better transparency.
THE GOVT HAS ALSO INITIATED THE FOLLOWING TO STRENGTHEN THE
BANKING SECTOR:-
 The Government of India is looking to set up a special fund, as a part of National
Investment and Infrastructure Fund (NIIF), to deal with stressed assets of banks. The
special fund will potentially take over assets which are viable but don’t have
additional fresh equity from promoters coming in to complete the project.
 The Reserve Bank of India (RBI) plans to soon come out with guidelines, such as
common risk-based know-your-customer (KYC) norms, to reinforce protection for
consumers, especially since a large number of Indians have now been financially
included post the government’s massive drive to open a bank account for each
household.
 To provide relief to the state electricity distribution companies, Government of India
has proposed to their lenders that 75 per cent of their loans be converted to state
government bonds in two phases by March 2017. This will help several banks,

18
especially public sector banks, to offload credit to state electricity distribution
companies from their loan book, thereby improving their asset quality.
 The Reserve Bank of India (RBI), the Department of Industrial Policy & Promotion
(DIPP) and the Finance Ministry are planning to raise the Foreign Direct Investment
(FDI) limit in private banks sector to 100 per cent from 74 per cent.
 Government of India aims to extend insurance, pension and credit facilities to those
excluded from these benefits under the Pradhan Mantri Jan Dhan Yojana (PMJDY).<
 The Government of India announced a capital infusion of Rs 6,990 crore (US$ 1.05
billion) in nine state run banks, including State Bank of India (SBI) and Punjab
National Bank (PNB). However, the new efficiency parameters would include return
on assets and return on equity. According to the finance ministry, “This year, the
Government of India has adopted new criteria in which the banks which are more
efficient would only be rewarded with extra capital for their equity so that they can
further strengthen their position."
 To facilitate an easy access to finance by Micro and Small Enterprises (MSEs), the
Government/RBI has launched Credit Guarantee Fund Scheme to provide guarantee
cover for collateral free credit facilities extended to MSEs upto Rs 1 Crore (US$ 0.15
million). Moreover, Micro Units Development & Refinance Agency (MUDRA) Ltd.
was also established to refinance all Micro-finance Institutions (MFIs), which are in
the business of lending to micro / small business entities engaged in manufacturing,
trading and services activities upto Rs 10 lakh (US$ 0.015 million).
 The central government has come out with draft proposals to encourage electronic
transactions, including income tax benefits for payments made through debit or credit
cards.
 The Union cabinet has approved the establishment of the US$ 100 billion New
Development Bank (NDB) envisaged by the five-member BRICS group as well as the
BRICS “contingent reserve arrangement” (CRA).
 The government has plans to set up a fund that will provide surety to banks against
loans given to students for higher education.

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FOLLOWING ARE VARIOUS CHARTS TO SHOW THE CHANGES IN
THE BANKING SECTOR AS WELL AS THE ECONOMY DUE TO
THE REFORMS UNDERTAKEN:
Changes in INTEREST RATES:
The above graph shows how interest rates have been liberalised and are changed depending
upon the economical conditions. The RBI considers thr rate of INFLATION before changing
the interest rates.

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Changes in RATE OF INFLATION:
The above graph shows the rate of INFLATION on the wholesale rates. Also it shows
inflation for various necessary commodities. If a closer look is taken on both the above
graphs, we see that interest rates go down once inflation comes down and vice versa. This
has to do with higher payments due to interest plus the inflation over it. Thus, when inflation
goes down, so do the interest rates.
CREDIT OUTFLOW:
In the above graph, data for loans to various sectors is given. Though the percentages do not
vary much, the amount conversion is exponential.

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FINANCIAL INCLUSION:
The above graph shows the no. of accounts which were opened as part of the financial
inclusion scheme of PMJDY. The statistics stated are till 31st
march, 2016.
ALL figures in CRORE
GROSS DOMESTIC PRODUCT Rate:-
The above graph shows the changes in GDP growth in India. The data mostly states the GDP
rate on a quarter to quarter basis thus there are 4 bars for each year.

22
FOREX Reserves:
The above graph shows the change and growth in the FOREX reserves in India. The amounts
are in US$ millions. The latest reserves stand at US$ 355560 million at the end of the week
ending March 25th
, 2016.
Stock Markets:
NIFTY
The above graph shows the changes in NSE till April 2016.

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SENSEX
The above graph shows the changes in the BSE
From the above graphs and charts if we examine them, we see how changes in banking sector
has fuelled the economic rise in India. The GDP growth and the Stock Market growth is a
clear indication of the progress the country. With the current reforms underway, they are
projected to help the banking sector to become leaner and cleaner in terms of debt
restructuring and financing. This in turn would help India grow at a faster pace, which
according to the RBI would be 7.9% for the Financial Year 2016-17.
.

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As of 4 February 2016:
Indicator
Current
rate
Inflation 6.00%
Bank rate 7.75%
CRR 4.00%
SLR 21.50%
Repo rate 6.50%
Reverse repo rate 5.75%
Marginal Standing facility
rate
7.75%

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6. FINDINGS OF THE STUDY:
THE EFFECTS OF THE REFORMS ON THE ECONOMY
 Corporate governance: Capital markets have always had the potential to exercise
discipline over promoters and management alike, but it was the structural changes
created by economic reforms that effectively unleashed this power. Minority
investors can bring the discipline of capital markets to bear on companies by voting
with their wallets. They can vote with their wallets in the primary market by refusing
to subscribe to any fresh issues by the company. They can also sell their shares in the
secondary markets their by depressing the share price. Financial sector set in motion
several key forces that made these forces far more potent than in the past:
Deregulation: economic reforms have not only increased growth prospects, but they
have also made markets more competitive. This means that in order to survive
companies will need to invest continuously on large scale. The most powerful impact
of voting with the wallet is on companies with large growth opportunities that have a
constant need to approach the capital market for additional funds. Disintermediation:
meanwhile, financial sector reforms have made it imperative for firms to rely on
capital markets to a greater degree for their needs of additional capital. As long as
firms relied on directed credit, what mattered was the ability to manipulate
bureaucratic and political processes; the capital markets, however, demand
performance. Globalization: globalization of our financial markets has exposed
issuers, investors and intermediaries to the higher standards of disclosures and
corporate governance that prevail in more developed capital markets. Tax reforms:
tax reforms coupled with deregulation and competition have titled the balance away
from black money transaction. It is not often realized that when a company makes
profits in black money, it is cheating not only the government, but also the minority
shareholders. Black money profits do not enter the books of account of the company
at all, but usually go into the pockets of the promoters.

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 Risk management: In the days when interest rate were fixed by the government and
remained stable for long periods of time, interest rate risk was a relatively minor
problem. The deregulation of interest rate as a part of financial sector reforms has
changed all that and made interest rate highly volatile. For instance, the rate of
interest on short term commercial paper was about 7.75-8.50% at the end of 2008-
2009 dropped back 6.50-7.50% at the year of 2009- 2010 and constant by 7.00-8.50%
at the year of 2013-14 .Companies which borrow short term to fund their new
projects may face difficulties if interest rates go up[ sharply. It may turn out that at
the higher cost of finance, the project is not viable at all. Worse, companies may find
it difficult to refinance their borrowings at any price in times when money is tight.
Many companies which borrowed in inter corporate deposit (ICD) market in 2013-14
to finance acquisitions and expansion face this difficulty in 2013 and 2014 when the
ICD market dried up. Large scale defaults (euphemistically described as rollover)
took place during this time. In the post reform era, corporate have also been faced
with high volatility in foreign exchange rate. The rupee –dollar rate has on several
occasions moved up or down by several percentage points in a single days as
compared to the gradual, predictable changes of the eighties. Indian companies have
found their dismay that foreign currency borrowings which looked very cheap
because of low coupon rate of interest can suddenly become very expensive if the
rupee depreciates against the currency in which the bond is denominated.
 Capital stricter: At the beginning of the reforms process, the Indian corporate sector
found itself significantly over-levered. This was because of several reasons:
Subsidized institutional finance so attractive that it made sense for companies to avail
of as much of it as they could get away with. This usually meant the maximum debt-
equity ratios laid down by th government for various industries. In a protected
economy, operating (business) risk was lower and companies could therefore afford
to take more risks on the financing side. Mostly of debt was institutional and could
usually be rescheduled at little cost. Bond covenants: international bond covenants are
quite restrictive specially for companies whose credit worthiness is less than top
class. These covenants may restrict the investment and dividend policies of the

27
companies may mandate sinking funds, may include cross- default clauses and may
contain me- too clauses which restrict the future borrowing ability of the company.
Bonds covenants have typically been quite lacks in India. Moreover bond (and
debentures) trustees have been generally very lacks in the performance of their duties.
 Cash flow discipline: Equity has no fixed service cost and year to year fluctuations
in income are not very serious so long as over all enough is earned to provide a
decent return to the shareholder. Debt on the other hand has a fixed re payment
schedule and interest obligations. A company that is enabling to generate enough cash
flow to meet this debt service requirement faces in solvency or painful restructuring
of liability. Again, Indian companies have not experienced much of this discipline in
the past because much of their debt was owed to banks and institutions who have
historical been willing to re schedule loan quite generously. Institutions may be less
willing to do so in future. More importantly, rescheduled is not an easy option when
the debt is raised in the market from the public. Bonds are typically rescheduled only
a part of bankruptcy proceeding or a BIFR restructuring. As the next face of
economic reforms targets bankruptcy related laws, cash flow discipline can be
expected to become far more stringent.
 Group structure and business portfolio: Indian business groups have been doing
serious introspection about their business portfolio and about their group structure
under the influence of academic like C.K. Prahalad, Indian business groups which
have traditionally been involved in a wide range of business have been contemplating
a shift to a more focused strategy. At the same time, they have been trying to create a
group organizations structure that would enable the formulation and implementation
of a group wide corporate strategy. In many cases they have not gone beyond a
statement of intend
 Working capital management: Working capital management has been impacted by
a number of the developments discussed above –operational reforms in the area of
credit assessment and delivery, interest rate deregulation, change in the competitive

28
structure of the banking and credit system, and the emergency of the money and debt
markets. Cash management has become an important task with the facing out of the
cash credit system. Companies now have to decide on the optimal amount of cash and
near cash that they need to hold, and also on how to deploy the cash. Deployment in
tern involves decision about maturity, credit risk and liquidity. During the tight
money this policy of this period, some companies were left with to little liquidity
cash, while other found that their cash looked up in unrealizable or illiquid assets of
uncertain value.
 Investment by foreign companies into the economy increased and is going up due to
opening up and ease in FDI limits
 Inclusion of the deprived classes into the investment cycle due to the PMJDY,
through which more than 20 crore bank accounts have been opened thus helping not
just raise money but also include them in the money and credit cycle.
 A healthy competition has been built between various banks. Today, even private
banks are competing with the PSU banks as they are providing world class services.
This is beneficial to the economy as the banks try hard to operate in the sector and
compete for customers, both for raising deposits and giving loans.
 The monetary policy enacted has helped the Indian economy survive the 2008-09
global economic crisis, where India was the only country where not even a single
bank filed for bankruptcy due to the slowdown.

29
 Due to the reforms in the banking sector, debt recovery or avoidance of debt has
increased. There are fewer instances of bad debts which are needed to be written off
which are a healthy sign of the economy.
 The banking reforms have helped banks to venture into new businesses like the
capital markets and money markets. Here banks are now playing a positive role as
intermediaries and help raise funds for the investors who require money. This has
helped to ease the capital raising process in the securities market.
 Forex reserves have gone up dramatically in the past years.
 The financial inclusion programme of the RBI has helped rural parts to be better
equipped and be more integrated to the overall development of the economy.

30
7. CONCLUSION
Reforms should be an ongoing process. They help the sector in which they are implemented
to become robust and change as per the situations require. Banking sector is the most
important part of any economy. It acts as the arterial system of the economy which supplies
money wherever needed. Thus it should be reformed at regular intervals so that it doesn’t
become obsolete. The economy runs on money. It can only work properly if the banking
system is in perfect condition to fulfill the rising requirements that arise.
It is due to the reforms and policies that the Indian banks are known to be one of the most
financially sound institutions in the world even after surviving the 2008-09 global slowdown
and the 2015 slowdown.
Hence, reforms play an important part for any sector or country to be sound and strong.

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8. SUGGESTIONS
 A total restructuring of all the PSU banks is the need of the hour. It will not only cut
down the huge bad debt they have, but would also reduce the costs of staff and
operations. All the PSU’s should be clubbed under one big bank which would act as
the guardian bank.
 A streamlining of services needs to be done by the banks to raise the quality of the
services they provide.
 Better credit appraisal procedures need to be followed to avoid bad debts. Strict
CIBIL and appraisal norms should be implemented.
 Banks should tap more into the service sector to earn income thus depending less on
the interest income. This helps the banks to give more to the customers and save more
for investments. Services like issuance of more credit and debit cards, mutual funds
and provide more agency functions like trustee, trade credit, providing various loans
etc.

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9. BIBLIOGRAPHY
Magazine and Article:
-Business Today
-Banking Frontiers
-Reserve Bank of India bulletin
-Times of India
Web:
www.google.com
www.slideshare.com
www.scribd.com
www.rbi.org.in
www.wikipedia.org
www.indiatimes.com
www.thetimesofindia.com
RESEARCH PAPERS:
 Reforms In Indian Banking Sector - An Evaluative Study
of the Performance of Commercial Banks BY DR. Suryachandra Rao.
 BANKING SECTOR REFORMS AND IT’S IMPACT ON INDIAN ECONOMY;
AN OVER VIEW by DR. MAMANSHETTY

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