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Banking Sector ReformsBanking Sector Reforms
Pre-Reform EraPre-Reform Era
Prior to reforms, the Indian banking Sector was Prior to reforms, the Indian banking Sector was
characterised by:characterised by:
Administered interest rate structureAdministered interest rate structure Quantitative restrictions on credit flowsQuantitative restrictions on credit flows High Reserve RequirementsHigh Reserve Requirements Imposition of stringent regulations by RBIImposition of stringent regulations by RBI Low productivity / efficiency in PSU banksLow productivity / efficiency in PSU banks Deteriorating portfolio quality/ increasing NPAsDeteriorating portfolio quality/ increasing NPAs
Pre-Reform EraPre-Reform Era
7.7. Inferior work technologyInferior work technology8.8. Poor quality of customer servicePoor quality of customer service9.9. Inability to face competitionInability to face competition
It was in the above circumstances that It was in the above circumstances that the first Narasimham Committee was the first Narasimham Committee was set up.set up.
Narasimham CommitteeNarasimham Committee
The first Narasimham Committee was set up The first Narasimham Committee was set up in 1991 to suggest remedial measures for in 1991 to suggest remedial measures for strengthening the banking system strengthening the banking system encompassing:encompassing:
1.1. Banking PolicyBanking Policy2.2. Institutional StructureInstitutional Structure3.3. Supervisory SystemSupervisory System4.4. Legislative and technological changesLegislative and technological changes
Thrust of reformsThrust of reforms
The main thrust of economic reforms was on:The main thrust of economic reforms was on:
1.1. Removal of structural bottlenecksRemoval of structural bottlenecks2.2. Introduction of new players and instrumentsIntroduction of new players and instruments3.3. Introduction of free pricing of financial assetsIntroduction of free pricing of financial assets4.4. Relaxation of quantitative restrictionsRelaxation of quantitative restrictions5.5. Improvement in trading, clearing and Improvement in trading, clearing and
settlement practicessettlement practices6.6. Promotion of institutional infrastructurePromotion of institutional infrastructure7.7. Ensuring of technological upgradation.Ensuring of technological upgradation.
First Phase of Banking Sector ReformsFirst Phase of Banking Sector Reforms
included the following:included the following:
1.1. Reduction in SLR and CRR to 25% and 10% Reduction in SLR and CRR to 25% and 10% respectivelyrespectively
2.2. De-regulation of interest rates on deposits and De-regulation of interest rates on deposits and advancesadvances
3.3. Transparent guidelines for private sector Transparent guidelines for private sector reformsreforms
4.4. Modification of bank balance sheet and P&L a/c Modification of bank balance sheet and P&L a/c to disclose more informationto disclose more information
First Phase of Banking Sector ReformsFirst Phase of Banking Sector Reforms
included the following:included the following:
55 Direct access to capital markets for PSU banksDirect access to capital markets for PSU banks66 Liberalised branch licensing policy and more Liberalised branch licensing policy and more
licenses for private sector bankslicenses for private sector banks77 Setting up of Debt Recovery Tribunals to ensure Setting up of Debt Recovery Tribunals to ensure
quick recovery of debtsquick recovery of debts88 Prudential norms for income recognition, asset Prudential norms for income recognition, asset
classification and provisioning of bad debtsclassification and provisioning of bad debts99 Capital adequacy norms –BIS norms on capital Capital adequacy norms –BIS norms on capital
adequacy to be followed.adequacy to be followed.
Non Performing Assets (NPA)Non Performing Assets (NPA)
The Narasimham Committee (1991) identified NPAs The Narasimham Committee (1991) identified NPAs
as one of the possible causes / effects of the as one of the possible causes / effects of the
malfunctioning of PSU banks.malfunctioning of PSU banks.
NPAs are those categories of assets (advances , NPAs are those categories of assets (advances ,
bills disc, cash credit, etc) which cease to generate bills disc, cash credit, etc) which cease to generate
income for the bankincome for the bank..
Basis of treating an asset Basis of treating an asset (credit facility) as NPA(credit facility) as NPA
1.1. Where the interest and installments Where the interest and installments remain overdue for a period exceeding 90 daysremain overdue for a period exceeding 90 days
2.2. Any bill which remain overdue for a period of 90 Any bill which remain overdue for a period of 90 daysdays
3.3. Any amount due on any other loan which Any amount due on any other loan which remain overdue for a period exceeding 90 daysremain overdue for a period exceeding 90 days
4.4. Any Cash Credit / overdraft facility which Any Cash Credit / overdraft facility which remains remains out of order out of order for a period exceeding 90 for a period exceeding 90 daysdays
Asset ClassificationAsset Classification
1.1. Standard assetStandard asset
2.2. Sub Standard AssetSub Standard Asset
3.3. Doubtful assetDoubtful asset
4.4. Loss assetLoss asset
Standard AssetStandard Asset
is one which does not carry is one which does not carry more than normal risk more than normal risk attached to the business and attached to the business and which does not disclose any which does not disclose any problems.problems.
Sub Standard AssetSub Standard Asset
is one which has been is one which has been classified as NPA for a classified as NPA for a period not exceeding 12 period not exceeding 12 months.months.
Doubtful AssetDoubtful Asset
is one which has been is one which has been classified as NPA for a period classified as NPA for a period exceeding 12 monthsexceeding 12 months..
Loss AssetLoss Asset
Loss Asset is one where loss has Loss Asset is one where loss has been identified by the bank or been identified by the bank or internal or external auditors or internal or external auditors or RBI Inspectors , but the amount RBI Inspectors , but the amount has not been written off.has not been written off.