SlideShare a Scribd company logo
1 of 13
Download to read offline
Impact of
Banking
Sector
Reforms In
India
Gangadharam Siddili
Kaushik Nagarajan
Ashwin Paldano
Leoprabhu Ekambaram
Table of Contents
1. Introduction to Banking and Pre-reform era...........................................2
2. Necessity for Banking sector Reforms.....................................................2
3. First Phase of Reforms(Narasimhan committee, 1991)........................3
Recommendations of Narasimhan Committee...........................................3
Banking reforms brought in by the Government and their impact........3
4. Second phase of reforms (Narasimhan committee, 1998)....................5
Recommendations of Narasimhan Committee...........................................5
Banking reforms brought in by the Government and their impact........6
5. Impact of Banking sector reforms.............................................................8
Productivity of Commercial Banks...............................................................8
Profitability of Commercial Banks................................................................9
Asset Quality....................................................................................................9
Customer Services........................................................................................10
6. Impact on Corporate Sector:....................................................................10
7. Conclusion and Recommendation...........................................................12
8. References..................................................................................................12
1. Introduction to Banking and Pre-reform era
A bank is an institution, which provides fundamental financial
transactions such as accepting the deposits and providing loans. Basically,
banks are a subset of the Financial Services Industry. After a series of
reforms in the Indian banking industry, the Indian banks were able to
compete with the modern banks of the world.
Banking in India originated in 18th
century with the establishment of The
General Bank of India and Bank of Hindustan in 1786. The East India
Company then established three presidency banks in India namely The
Bank of Bengal (1809), The Bank of Bombay (1840) and The Bank of
Madras (1843). These three banks were amalgamated in 1921 to form
The Imperial Bank of India (IBI) under the Imperial Bank of India Act,
1920 –which is now “The State Bank of India”.
Until 1935, all the banks were set up by individuals and/or industrial
houses. Though consolidation in banking was building trust among
investors yet a central regulatory and authority was much needed. The
establishment of The Reserve Bank of India in 1935 brought an end to the
quasi-central bank role of Imperial Bank of India and transformed it into a
purely commercial bank over a period of time.
Before reforms the Indian banking sector was characterised by high
reserve requirements, low productivity/ efficiency in PSU banks, stringent
regulations by RBI, quantitative restrictions on credit flows and an ever
increasing Non Performing Assets, Inferior work technology and poor
customer service. The Indian Banks were not in a position to handle the
stiff competition from Foreign Banks. The private banks were not fulfilling
the social and developing goals of banking.
2. Necessity for Banking sector Reforms
In 1991, India faced a severe macroeconomic crisis. This crisis opened the
chinks in the armour of the Indian Banking Sector. The foreign exchange
reserves were at a seemingly low level. The country faced the risk of
defaulting with payments and the economic growth was at very low rate.
This called for the government to bring measures on the paths of
liberalization and globalization in the economy. A series of reforms had to
be brought about in the Financial Sector. Between 1947 and 1990, there
was a tremendous expansion of our banking system which played a major
part in the development of the Financial Sector. However, by the end of
1990 it was felt that banking system wasn’t as developed and robust as it
should have been. Some of the Public Sector banks had become loss
making entities with its high level of nonperforming Assets. The hidden
NPA’s had the potential to trigger a huge financial crisis. Compared to
International Banks, Indian Banks were nowhere near with respect to
capital adequacy and accounting standards etc. This served as a great
threat to the progress of Indian economy.
3. First Phase of Reforms(Narasimhan committee, 1991)
To overcome the 1991 financial crisis, the Government of India appointed
a special committee headed by Shri. M. Narasimhan, ex-governor of the
RBI to address the problem and to suggest corrective measures. The
recommendations of this committee became the basis for the financial
and banking sector reforms.
Recommendations of Narasimhan Committee
 A new 4 tier hierarchy was to be established by the incorporation
of a couple of large banks to be at the top level and a number of
rural service providers to handle the activities pertaining to
agriculture.
 The monitoring of the financial institutions and banks by separate
entities that were set up by the RBI.
 Proposed phases of reduction in the SLR rate.
 A target level of 8% in terms of the Capital Adequacy Ratio.
 Elimination of the License raj.
 Full account disclosure and the correct organization of the bank’s
assets and financial entities.
 Lower levels of regulation on Interest rates.
Directing the lending activities of the IDBI to a separate corporate
body.
Banking reforms brought in by the Government and their impact
Since 1991 the Narasimhan committee had recommended a series of
measures which were incorporated by the Indian government
Lowering SLR and CRR
The reduction in the levels of SLR and CRR impacted the profits of the
banks. The SLR was brought down to 25% from 38.5%. This helped in
increased funding to the industry & Trading, agriculture. The Cash Reserve
Ratio was reduced to 4.1% from the earlier rates of 15%. The primary
reason behind the move was to liquidate the funds that were locked with
the RBI.It is in use till date and serves as toll for regulating the monetary
policy.
Prudential Norms
RBI had launched prudential norms for commercial banks. The primary
motive behind this was the disclosure of the asset classification, bad debts
provisioning, income to make that the financial records reflected the
accurate data with respect to its financial position. It was necessary for
the banks to ensure a 100% provisioning for all the NPAs which are at
international standards.
Capital Adequacy Norms
RBI had placed a slab for CAN at 8% and this was achieved the public
sector banks by 1996.
Deregulation of Interest rates
The Narasimhan Committee proposed the interest rates to be decided by
the market forces.
 Scheduled Commercial banks were permitted to determine the fix
the interest rates depending on the deposits taking into
consideration the maximum ceiling rates & the minimum floor rates.
 The interest rates of termed domestic deposit was controlled.
 SBI along with the other players in the market had reduced the
lending rates for advances that were more than 2 lakhs
 For the loans that were in excess of Rs. 2 lakhs the Interest rates
were deregulated.
 The interest rates for the Co-operative banks for advances and
deposits we reduced to a minimum level of 13%.
Recovery of Debts
“Recovery of debts due to Banks and Financial Institutions Act 1993” was
passed by the government to facilitate the speeding up of the recovery of
debts by the banks and financial institutions.6 special recovery tribunals
and an Appellate Tribunal was set up in the city of Mumbai.
Competition from new private sector Banks
Banking was opened up to bring in private sector players and many
private sector banks began operations. The new entrants were permitted
to raise capital to the extent of up to 20% from the FIIs and about 40%
from NRIs, which brought in high levels of competition. The new market
players were armoured with the latest technology and services that had
increased the expectations of the customers.
Phasing out of Direct Credit
The committee proposed the reduction in the credit target from 40% to
10% for the primary sectors. The task was however hectic for the
government as those sectors involved powerful lobbies.
Access to Capital Market
The Banking Companies Act was reviewed to enable the banks to raise
capital through issues. This however came with a clause that the central
government’s stake of the paid up capital would not fall below 51%.
4. Second phase of reforms (Narasimhan committee, 1998)
A committee was again appointed by the government of India, as a part of
the second phase of reforms, to make the banking sector of the country
stronger under the guidance of Mr. M. Narasimhan. The
report/recommendations were submitted to the Government on April,
1998. The major focus and objective of the committee was to improve the
principles of disclosure and the levels of transparency.
Below are the recommendations and corresponding measures by
government.
Recommendations of Narasimhan Committee
 The committee suggested a resolute banking system entirely in
the context of CAC (Capital Account Convertibility). The
committee provided warning against the merging of small and
weak banks with the strong players, as this might bring in a
negative effect on the performance of stronger banks.
 The committee suggested that 2-3 large banks be given
international positioning and global character.
 Capital inadequacy was tackled with new improved norms.
 It recommended the formation of an Asset Reconstruction Fund
to take possession of bad debts of the banks and financial
institutions.
 The committee suggested a Board for Financial Regulation and
Supervision (BFRS) to organize the achievements of financial
institutions and banks.
 To be at par with the current demands of the industry, there is an
urgent need to evaluate and alter the provisions of the RBI Act,
Banking Regulation Act, etc.
 By 2002,Net NPAs of all the banks to be reduced to 3%.
 The rearrangement of bank branches and staffs was
emphasised. The committee was willing to continue with the
licensing policy of new private banks.
 Foreign banks were permitted to set up their joint ventures and
subsidiaries.
Banking reforms brought in by the Government and their impact
New Instruments
New instruments were introduced to facilitate better risk management
and greater flexibility. The new instruments were interest swaps, cross
currency forward contracts, forward rate agreements, Liquidity
Adjustment Facility(LAF) for meeting everyday liquidity mismatch.
Risk Management
Banks created dedicated committees to measure, monitor and track the
various risks. These committees upgrade their skills and systems on a
regular basis in order to sustain the risk management.
Strengthening the technology
New and advanced technology was introduced across banks to strengthen
the payment and settlement systems through centralized fund
management system, core banking solutions, electronic funds transfer,
etc.
Increased Foreign Direct Investment (FDI) Limit
Foreign Direct Investment(FDI) cap in private banks was raised to 74%
from 49%.
Increased inflow of Credit
Flow of credit to priority sector was improved by giving more importance
to Self Help and Micro Credit groups.
Adoption of Global Standards
RBI has introduced Risk Based Supervision of banks. The best
international practices are being adopted in accounting systems, payment
and settlement systems, corporate governance, etc.
Information Technology
Over the counter banking was replaced with the introduction of E-banking,
telephonic banking etc. Focus was on the delivery of banking services
through electronic medium.
Management of NPAs
Non-performing Assets had been the major cause of trouble for the Indian
Banking Sector. The committee wanted a robust system to identify and
classify NPAs. Asset Reconstruction Company or Asset Reconstruction
Funds were created to take possession of the bad debt of banks. These
recommendations led to the introduction of a new legislation which was
subsequently implemented as the SARFAESAI(Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
Act), 2002 and came into effect from 21 June 2002.
Mergers and Amalgamation
In May 2005,RBI issued procedures for merger and acquisition of private
banks.
Anti-Money Laundering guidelines
KYC(Know Your Customer) norms were reformed to prevent money
laundering. Huge attention has been given to prevent money laundering
in international financial relationships in recent times.
Revamping the rural credit system
To bridge the gap between demand and supply of agricultural credit.
Managerial Autonomy
From February 2005, public sector banks were given greater managerial
autonomy to provide them equal opportunity to compete with private
sector banks and international banks. This was achieved by
 Bringing recruitment process, training and remuneration policies of
public sector banks in line with the private and international banks.
 Reducing GOI equity to 33% in nationalized banks.
Customer Service
RBI has introduced many new facilities such as Credit Cards, settlement of
claims of deceased depositors, banking ombudsman etc. to improve the
customer service.
Base Rate System for fixing Interest Rates
The Benchmark Prime Lending Rate (BPLR) introduced in 2003, fell short
of its purpose to bring transparency to lending rates. The main reason for
this was that under the BPLR system, banks had the freedom to lend
below BPLR. To overcome this failure of BPLR, RBI introduced the system
of Base Rate. This new system is in use from July 2010.The base rate is
nothing but the minimum interest rate for all loans.
5. Impact of Banking sector reforms
The performance of both public and private sector banks improved in
terms of profit per employee, productivity per employee, assets value etc.
The improvement in the performance can be explained in the below 5
categories.
i. Productivity of Commercial Banks
ii. Profitability of Commercial Banks
iii. Asset Quality
iv. Customer Services
Productivity of Commercial Banks
Analyses in terms of profit per employee, business per employee, and
business per branch provides the improvement in the productivity of
Commercial Banks.
Business per employee
The business per employee for Public Sector Banks, Private Sector
Banks and Foreign Banks are tabulated below, though the business per
employee for Public sector banks is very low compared to New Private
sector banks and foreign banks it had increased rapidly compared to
others. A growth rate of 216% was witnessed in Public Sector Banks. By
the year
Business per employee (in lakhs)
Year
Public Sector
Banks
New Private Sector
Banks
Foreign
Banks
1997-98 88.5 785.9 529.4
2005-06 324.1 728.9 1012.8
2012-13 1274.7 930.3 2173.3
Profit per employee
Between the period 1997-98 and 2005-06, the profit per employee of
Public sector banks had a increased by 314%, whereas the New private
sector banks and Foreign banks had increased their profit by 350% and
489% respectively. The absolute value of profit per employee is tabulated,
Profit per employee In lakhs)
Year
Public Sector
banks
New Private Sector
Banks
Foreign
Banks
1997-98 0.7 1.4 4.5
2005-06 2.9 6.3 26.5
2012-13 6.3 11.8 45.6
Business per Branch
The Business per Branch had an average growth rate 14% when our
economic growth rate was 6.2% between 1999-2000 and 2004-05, During
this period the Foreign banks had increased their business per branch by
109% followed by nationalised bank and new private sector banks with
their business per branch increased by 97% and 44% respectively,
Business per Branch (in Lakhs)
Year
Nationalized
Banks
New Sector Private
banks
Foreign
Banks
1999-2000 2152 14989 54800
2004-05 4242 21656 114768
Profitability of Commercial Banks
Profitability of Commercial banks can be shown using below indicators.
a. Net/Spread interest margin
Net/Spread interest rate is the difference between the interest income
generated by bank to the interest paid by bank in relation to the amount
of their assets. For public sector, private sector banks and foreign banks
the spread interest margin was 2.9%, 2.1% and 3.6% respectively in 2000-
01. In the year 2012-13 it was 2.78%, 3.24% and 3.89% for public, private
and foreign banks respectively.
b. Return on Assets(ROA)
The ROA of all banks has been risen after reforms. For public and private
sector banks, it increased from 0.4%, 0.8%in 2000-01 to 0.88% and 1.22%
in 2009-2010 and by the year 2012-13 it is 0.78% and 1.74% respectively.
For foreign banks, the rise has been from 0.9% to 1.09% and 1.94% for
the same period.
Asset Quality
Asset quality of a bank in the terms of Non-performing Assets (NPA) have
been increased
Average NPA in % 1997-2001 2009-2013
GNPA 12.8 2.6
NNPA 8.4 1.2
The NPA raised initially after reforms during early 1990’s however it
declined by mid 90’s due to increased risk management, abundant
liquidity condition, increased write off and increased restructuring.
Customer Services
After the banking reforms, the Indian banks have begun to offer different
kind of services to the clients/customers. Core Banking Solutions (CBS)
has increased very fast. Under CBS, there are many services that has
been provided to the customers/clients such as anywhere banking,
“everywhere access” and quick and effecting fund transfer at reasonable
cost. The number of branches implemented the CBS has increased from
79.4% in March 2009 to 90% at the end of March 2010.
6. Impact on Corporate Sector:
Corporate governance
Capital markets always had the prospective to implement discipline
among the marketers and management .However, it was the structural
changes constituted by the financial reforms that unleashed this power.
Smaller stakeholders would be able to carry out the discipline of
capital markets by polling with their wallets. They have the powers vested
on them to vote in the primary market and to reject the subscription to
new issues by a firm. They would also be able to trade their stocks in the
secondary markets by decreasing the stock price.
Deregulation
Financial reforms not only helped in increasing the development visions,
but they have also made the markets more competitive. This forced
companies to invest on a large scale continuously, to survive. The
essential impact of the voting on companies is that the need to approach
the market for the additional funds.
Disintermediation
The financial sector reforms made it vital for the firms to depend on the
capital markets more for their needs of additional capital. As long as the
companies were dependant on the direct credit, the ability to handle
administrative and political process was all that mattered. This implied
that the capital markets demanded performance.
Globalization
Globalization of the Indian Financial markets has showed the issuers,
shareholders and intermediaries the higher standards of disclosures and
corporate governance that succeed in more developed capital markets.
Tax reforms
The tax reforms together with deregulation and competition have made
the market free from black money transaction. It is not often realized that
when an organization makes profits in black money, it is cheating not only
the government, but also the smaller investors. Profits made by black
money do not enter the accounts of the organization at all, but will go into
the pockets of the promoters.
Risk management
Unlike the stable interest rate before banking sector reforms during
1980’s, interest rate are highly volatile post reform, which made the
short term funding new projects very difficult to Corporates. Several
companies that borrowed for acquisitions and expansion defaulted.
Capital stricter
At the earlier stage after reform the corporates were increasing their
debt to equity ratio due to the availability of the subsidized institution
finance, the corporates were able to take more financial risks as there
were less business risk in the protected economy before liberalisation
Cash flow discipline:
The equity has no fixed service cost and the fluctuations in income
every year don’t have much impact as long as overall enough is earned
to provide a decent return to the investor. On the other hand, the debt
has a fixed repayment schedule and interest irrespective of the
fluctuations. A company which enables the generation of enough cash
flow to meet the requirement faces a painful reformation of liability.
Bonds are rescheduled typically only as a part of insolvency proceeding
or a BIFR reform.
Group Structure:
Indian business groups have been into serious self-assessment about
their business portfolio and group structure. Under the guidance of
many academicians, business groups which are involved in to an array
of business are anticipating a move to a more intensive approach. Also,
they are trying to create a structure of organizations which would enable
the construction and execution of group wide corporate strategy.
Working capital management:
Numerous developments discussed above, reforms in the areas of credit
assessment and delivery, interest deregulation, and transformation in
the competitive structure have impacted the working capital
management.
In the cash credit system, the cast management has played key role.
The companies should now decide on the optimum amount of cash they
have to hold and should know about the ways to organise the cash,
which corresponds to the decisions on maturity and credit risk liquidity.
7. Conclusion and Recommendation
 Since the reforms in the financial sector in 1991, there had been
significant changes to India’s Banking sector. This paper tries to assess
the impact of reforms in our economy.
 It is understood that the reforms have had a positive impact to an
extent in terms of reducing the concentration of the banking sector and by
improving performance.
 The empirical estimation also gave us an estimation which reveals
that the reforms reduced profitability and decreased the efficiency of
public-sector banks during the initial phase, However the decline
overturned to accommodate a new environment
 Further reduction in the SLR rate could serve as a motivation for
non-traditional activities and would make our banking sector resilient to
adverse shocks.
 To maintain a steady growth of the economy it is imperative that the
reforms continue to serve as a critical factor.
 The banking sector’s response to the reforms has been significant
and the sectors has adjusted well to the new environment
8. References
1. www.ijmra.us/project%20doc/IJMT-234.pdf
2. www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1876052
3. www.wikipedia.com
4. www.study-material4u.blogspot.in
5. www.smsvaranasi.com

More Related Content

What's hot

Reserve bank of india
Reserve bank of indiaReserve bank of india
Reserve bank of indiaISHA JAISWAL
 
Central bank of india and its functions
Central bank of india and its functionsCentral bank of india and its functions
Central bank of india and its functionsRouf Naik
 
Foreign Exchange Instruments
Foreign Exchange InstrumentsForeign Exchange Instruments
Foreign Exchange Instrumentssandeepjalebar
 
Cross exchange rate - International Business
Cross exchange rate - International BusinessCross exchange rate - International Business
Cross exchange rate - International BusinessSHAMILABOOBACKER
 
Reserve Bank Of India : Role ,Functions Structure and Management
Reserve Bank Of India : Role ,Functions Structure and ManagementReserve Bank Of India : Role ,Functions Structure and Management
Reserve Bank Of India : Role ,Functions Structure and ManagementBinto Mathachan
 
Indian money market and role of rbi
Indian money market and role of rbiIndian money market and role of rbi
Indian money market and role of rbiPrateek Chauhan
 
RBI and Monetary Policy of RBI
RBI and Monetary Policy of RBIRBI and Monetary Policy of RBI
RBI and Monetary Policy of RBIMufaddal Nullwala
 
RBI AND FUNCTIONS
RBI AND FUNCTIONSRBI AND FUNCTIONS
RBI AND FUNCTIONSravisc
 
Balance Sheet of Commercial bank
Balance Sheet of Commercial bank Balance Sheet of Commercial bank
Balance Sheet of Commercial bank AbdulShihaab
 
Principles of Sound lending.pptx
Principles of Sound lending.pptxPrinciples of Sound lending.pptx
Principles of Sound lending.pptxinfantemiliya
 
Principles of bank lending
Principles of bank lendingPrinciples of bank lending
Principles of bank lendingDevang Sadrani
 

What's hot (20)

Reserve bank of india
Reserve bank of indiaReserve bank of india
Reserve bank of india
 
Central bank of india and its functions
Central bank of india and its functionsCentral bank of india and its functions
Central bank of india and its functions
 
Supply of money
Supply of money Supply of money
Supply of money
 
Foreign Exchange Instruments
Foreign Exchange InstrumentsForeign Exchange Instruments
Foreign Exchange Instruments
 
Credit control method
Credit control methodCredit control method
Credit control method
 
Functions of rbi
Functions of rbiFunctions of rbi
Functions of rbi
 
money functions
money functionsmoney functions
money functions
 
Development banks
Development banksDevelopment banks
Development banks
 
Cross exchange rate - International Business
Cross exchange rate - International BusinessCross exchange rate - International Business
Cross exchange rate - International Business
 
Reserve Bank Of India : Role ,Functions Structure and Management
Reserve Bank Of India : Role ,Functions Structure and ManagementReserve Bank Of India : Role ,Functions Structure and Management
Reserve Bank Of India : Role ,Functions Structure and Management
 
Indian money market and role of rbi
Indian money market and role of rbiIndian money market and role of rbi
Indian money market and role of rbi
 
Basel norms
Basel normsBasel norms
Basel norms
 
RBI and Monetary Policy of RBI
RBI and Monetary Policy of RBIRBI and Monetary Policy of RBI
RBI and Monetary Policy of RBI
 
RBI AND FUNCTIONS
RBI AND FUNCTIONSRBI AND FUNCTIONS
RBI AND FUNCTIONS
 
Balance Sheet of Commercial bank
Balance Sheet of Commercial bank Balance Sheet of Commercial bank
Balance Sheet of Commercial bank
 
Narasimham Committee
Narasimham Committee Narasimham Committee
Narasimham Committee
 
Principles of Sound lending.pptx
Principles of Sound lending.pptxPrinciples of Sound lending.pptx
Principles of Sound lending.pptx
 
Principles of bank lending
Principles of bank lendingPrinciples of bank lending
Principles of bank lending
 
Banking regulation act.
Banking regulation act.Banking regulation act.
Banking regulation act.
 
Functions of Reserve Bank of India
Functions of Reserve Bank of IndiaFunctions of Reserve Bank of India
Functions of Reserve Bank of India
 

Similar to 270477006-Banking-Sector-Reforms-in-India-Final.pdf

M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdf
M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdfM naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdf
M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdfShwetanshu Gupta
 
Banking sector reforms post economic liberalization period
Banking sector reforms post economic liberalization periodBanking sector reforms post economic liberalization period
Banking sector reforms post economic liberalization periodKumar Nirmal Prasad
 
reforms in banking sector of india
reforms in banking sector of indiareforms in banking sector of india
reforms in banking sector of indiaShreya Pathak
 
Banking sector reforms in india after 1991
Banking sector reforms in india after 1991Banking sector reforms in india after 1991
Banking sector reforms in india after 1991Bikram Pradhan
 
Financial liberalization, Reforms carried out in India and their impact on fi...
Financial liberalization, Reforms carried out in India and their impact on fi...Financial liberalization, Reforms carried out in India and their impact on fi...
Financial liberalization, Reforms carried out in India and their impact on fi...Simrankaur1022
 
Banking industry reforms in india
Banking industry reforms in india Banking industry reforms in india
Banking industry reforms in india Ketan Rai
 
Indian banking sector reforms a glimpse
Indian banking sector reforms a glimpseIndian banking sector reforms a glimpse
Indian banking sector reforms a glimpseMallikarjun Bali
 
Narsimha committe, & Financial sector Reforms presentation
Narsimha committe, & Financial sector Reforms presentation Narsimha committe, & Financial sector Reforms presentation
Narsimha committe, & Financial sector Reforms presentation Ojas Maheshwari
 
Indian banking-sector-reforms
Indian banking-sector-reformsIndian banking-sector-reforms
Indian banking-sector-reformsAvinash Roy
 
Banking sector reforms in india and their impact on the economy
Banking sector reforms in india and their impact on the economyBanking sector reforms in india and their impact on the economy
Banking sector reforms in india and their impact on the economyRishi Kumar
 
risk analysis
risk analysisrisk analysis
risk analysispeehhuu
 
Trend analysis of hdfc ltd.
Trend analysis of hdfc ltd.Trend analysis of hdfc ltd.
Trend analysis of hdfc ltd.Monika Kadam
 
Impact of Liberalization on Rural Banking in India
Impact of Liberalization on Rural Banking in IndiaImpact of Liberalization on Rural Banking in India
Impact of Liberalization on Rural Banking in IndiaNimit Jain
 
Indian Banking sector reforms
Indian Banking sector reformsIndian Banking sector reforms
Indian Banking sector reformsGeorgi Mathew
 
Banking sector reforms and Basel norms 1 & 2
Banking sector reforms and Basel norms 1 & 2Banking sector reforms and Basel norms 1 & 2
Banking sector reforms and Basel norms 1 & 2NayanaUK
 
Current banking scenario and Job opportunities in banking
Current banking scenario and Job opportunities in bankingCurrent banking scenario and Job opportunities in banking
Current banking scenario and Job opportunities in bankingLipika Sharma Shrivastava
 

Similar to 270477006-Banking-Sector-Reforms-in-India-Final.pdf (20)

M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdf
M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdfM naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdf
M naraSIMHAM COMMITEE ON FINANCIAL AND BANKING SECTOR REFORM pdf
 
Reforms In Money Market
Reforms In Money MarketReforms In Money Market
Reforms In Money Market
 
Reforms In Money Market
Reforms In Money MarketReforms In Money Market
Reforms In Money Market
 
Banking sector reforms post economic liberalization period
Banking sector reforms post economic liberalization periodBanking sector reforms post economic liberalization period
Banking sector reforms post economic liberalization period
 
reforms in banking sector of india
reforms in banking sector of indiareforms in banking sector of india
reforms in banking sector of india
 
banking reforms.pptx
banking reforms.pptxbanking reforms.pptx
banking reforms.pptx
 
Banking sector reforms in india after 1991
Banking sector reforms in india after 1991Banking sector reforms in india after 1991
Banking sector reforms in india after 1991
 
Financial liberalization, Reforms carried out in India and their impact on fi...
Financial liberalization, Reforms carried out in India and their impact on fi...Financial liberalization, Reforms carried out in India and their impact on fi...
Financial liberalization, Reforms carried out in India and their impact on fi...
 
Banking industry reforms in india
Banking industry reforms in india Banking industry reforms in india
Banking industry reforms in india
 
Indian banking sector reforms a glimpse
Indian banking sector reforms a glimpseIndian banking sector reforms a glimpse
Indian banking sector reforms a glimpse
 
SARFAESI Act
SARFAESI ActSARFAESI Act
SARFAESI Act
 
Narsimha committe, & Financial sector Reforms presentation
Narsimha committe, & Financial sector Reforms presentation Narsimha committe, & Financial sector Reforms presentation
Narsimha committe, & Financial sector Reforms presentation
 
Indian banking-sector-reforms
Indian banking-sector-reformsIndian banking-sector-reforms
Indian banking-sector-reforms
 
Banking sector reforms in india and their impact on the economy
Banking sector reforms in india and their impact on the economyBanking sector reforms in india and their impact on the economy
Banking sector reforms in india and their impact on the economy
 
risk analysis
risk analysisrisk analysis
risk analysis
 
Trend analysis of hdfc ltd.
Trend analysis of hdfc ltd.Trend analysis of hdfc ltd.
Trend analysis of hdfc ltd.
 
Impact of Liberalization on Rural Banking in India
Impact of Liberalization on Rural Banking in IndiaImpact of Liberalization on Rural Banking in India
Impact of Liberalization on Rural Banking in India
 
Indian Banking sector reforms
Indian Banking sector reformsIndian Banking sector reforms
Indian Banking sector reforms
 
Banking sector reforms and Basel norms 1 & 2
Banking sector reforms and Basel norms 1 & 2Banking sector reforms and Basel norms 1 & 2
Banking sector reforms and Basel norms 1 & 2
 
Current banking scenario and Job opportunities in banking
Current banking scenario and Job opportunities in bankingCurrent banking scenario and Job opportunities in banking
Current banking scenario and Job opportunities in banking
 

Recently uploaded

8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR
8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR
8447779800, Low rate Call girls in Shivaji Enclave Delhi NCRashishs7044
 
International Business Environments and Operations 16th Global Edition test b...
International Business Environments and Operations 16th Global Edition test b...International Business Environments and Operations 16th Global Edition test b...
International Business Environments and Operations 16th Global Edition test b...ssuserf63bd7
 
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607(Best) ENJOY Call Girls in Faridabad Ex | 8377087607
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607dollysharma2066
 
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City GurgaonCall Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaoncallgirls2057
 
Annual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesAnnual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesKeppelCorporation
 
8447779800, Low rate Call girls in Uttam Nagar Delhi NCR
8447779800, Low rate Call girls in Uttam Nagar Delhi NCR8447779800, Low rate Call girls in Uttam Nagar Delhi NCR
8447779800, Low rate Call girls in Uttam Nagar Delhi NCRashishs7044
 
Islamabad Escorts | Call 03070433345 | Escort Service in Islamabad
Islamabad Escorts | Call 03070433345 | Escort Service in IslamabadIslamabad Escorts | Call 03070433345 | Escort Service in Islamabad
Islamabad Escorts | Call 03070433345 | Escort Service in IslamabadAyesha Khan
 
Future Of Sample Report 2024 | Redacted Version
Future Of Sample Report 2024 | Redacted VersionFuture Of Sample Report 2024 | Redacted Version
Future Of Sample Report 2024 | Redacted VersionMintel Group
 
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCRashishs7044
 
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncr
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / NcrCall Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncr
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncrdollysharma2066
 
Global Scenario On Sustainable and Resilient Coconut Industry by Dr. Jelfina...
Global Scenario On Sustainable  and Resilient Coconut Industry by Dr. Jelfina...Global Scenario On Sustainable  and Resilient Coconut Industry by Dr. Jelfina...
Global Scenario On Sustainable and Resilient Coconut Industry by Dr. Jelfina...ictsugar
 
MAHA Global and IPR: Do Actions Speak Louder Than Words?
MAHA Global and IPR: Do Actions Speak Louder Than Words?MAHA Global and IPR: Do Actions Speak Louder Than Words?
MAHA Global and IPR: Do Actions Speak Louder Than Words?Olivia Kresic
 
APRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfAPRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfRbc Rbcua
 
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptxContemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptxMarkAnthonyAurellano
 
Market Sizes Sample Report - 2024 Edition
Market Sizes Sample Report - 2024 EditionMarket Sizes Sample Report - 2024 Edition
Market Sizes Sample Report - 2024 EditionMintel Group
 
PSCC - Capability Statement Presentation
PSCC - Capability Statement PresentationPSCC - Capability Statement Presentation
PSCC - Capability Statement PresentationAnamaria Contreras
 
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCRashishs7044
 
Kenya Coconut Production Presentation by Dr. Lalith Perera
Kenya Coconut Production Presentation by Dr. Lalith PereraKenya Coconut Production Presentation by Dr. Lalith Perera
Kenya Coconut Production Presentation by Dr. Lalith Pereraictsugar
 

Recently uploaded (20)

8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR
8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR
8447779800, Low rate Call girls in Shivaji Enclave Delhi NCR
 
International Business Environments and Operations 16th Global Edition test b...
International Business Environments and Operations 16th Global Edition test b...International Business Environments and Operations 16th Global Edition test b...
International Business Environments and Operations 16th Global Edition test b...
 
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607(Best) ENJOY Call Girls in Faridabad Ex | 8377087607
(Best) ENJOY Call Girls in Faridabad Ex | 8377087607
 
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City GurgaonCall Us 📲8800102216📞 Call Girls In DLF City Gurgaon
Call Us 📲8800102216📞 Call Girls In DLF City Gurgaon
 
Annual General Meeting Presentation Slides
Annual General Meeting Presentation SlidesAnnual General Meeting Presentation Slides
Annual General Meeting Presentation Slides
 
8447779800, Low rate Call girls in Uttam Nagar Delhi NCR
8447779800, Low rate Call girls in Uttam Nagar Delhi NCR8447779800, Low rate Call girls in Uttam Nagar Delhi NCR
8447779800, Low rate Call girls in Uttam Nagar Delhi NCR
 
Islamabad Escorts | Call 03070433345 | Escort Service in Islamabad
Islamabad Escorts | Call 03070433345 | Escort Service in IslamabadIslamabad Escorts | Call 03070433345 | Escort Service in Islamabad
Islamabad Escorts | Call 03070433345 | Escort Service in Islamabad
 
Future Of Sample Report 2024 | Redacted Version
Future Of Sample Report 2024 | Redacted VersionFuture Of Sample Report 2024 | Redacted Version
Future Of Sample Report 2024 | Redacted Version
 
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR
8447779800, Low rate Call girls in Kotla Mubarakpur Delhi NCR
 
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncr
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / NcrCall Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncr
Call Girls in DELHI Cantt, ( Call Me )-8377877756-Female Escort- In Delhi / Ncr
 
Global Scenario On Sustainable and Resilient Coconut Industry by Dr. Jelfina...
Global Scenario On Sustainable  and Resilient Coconut Industry by Dr. Jelfina...Global Scenario On Sustainable  and Resilient Coconut Industry by Dr. Jelfina...
Global Scenario On Sustainable and Resilient Coconut Industry by Dr. Jelfina...
 
MAHA Global and IPR: Do Actions Speak Louder Than Words?
MAHA Global and IPR: Do Actions Speak Louder Than Words?MAHA Global and IPR: Do Actions Speak Louder Than Words?
MAHA Global and IPR: Do Actions Speak Louder Than Words?
 
APRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdfAPRIL2024_UKRAINE_xml_0000000000000 .pdf
APRIL2024_UKRAINE_xml_0000000000000 .pdf
 
Call Us ➥9319373153▻Call Girls In North Goa
Call Us ➥9319373153▻Call Girls In North GoaCall Us ➥9319373153▻Call Girls In North Goa
Call Us ➥9319373153▻Call Girls In North Goa
 
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptxContemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
Contemporary Economic Issues Facing the Filipino Entrepreneur (1).pptx
 
Market Sizes Sample Report - 2024 Edition
Market Sizes Sample Report - 2024 EditionMarket Sizes Sample Report - 2024 Edition
Market Sizes Sample Report - 2024 Edition
 
PSCC - Capability Statement Presentation
PSCC - Capability Statement PresentationPSCC - Capability Statement Presentation
PSCC - Capability Statement Presentation
 
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR
8447779800, Low rate Call girls in New Ashok Nagar Delhi NCR
 
Kenya Coconut Production Presentation by Dr. Lalith Perera
Kenya Coconut Production Presentation by Dr. Lalith PereraKenya Coconut Production Presentation by Dr. Lalith Perera
Kenya Coconut Production Presentation by Dr. Lalith Perera
 
Japan IT Week 2024 Brochure by 47Billion (English)
Japan IT Week 2024 Brochure by 47Billion (English)Japan IT Week 2024 Brochure by 47Billion (English)
Japan IT Week 2024 Brochure by 47Billion (English)
 

270477006-Banking-Sector-Reforms-in-India-Final.pdf

  • 1. Impact of Banking Sector Reforms In India Gangadharam Siddili Kaushik Nagarajan Ashwin Paldano Leoprabhu Ekambaram
  • 2. Table of Contents 1. Introduction to Banking and Pre-reform era...........................................2 2. Necessity for Banking sector Reforms.....................................................2 3. First Phase of Reforms(Narasimhan committee, 1991)........................3 Recommendations of Narasimhan Committee...........................................3 Banking reforms brought in by the Government and their impact........3 4. Second phase of reforms (Narasimhan committee, 1998)....................5 Recommendations of Narasimhan Committee...........................................5 Banking reforms brought in by the Government and their impact........6 5. Impact of Banking sector reforms.............................................................8 Productivity of Commercial Banks...............................................................8 Profitability of Commercial Banks................................................................9 Asset Quality....................................................................................................9 Customer Services........................................................................................10 6. Impact on Corporate Sector:....................................................................10 7. Conclusion and Recommendation...........................................................12 8. References..................................................................................................12
  • 3. 1. Introduction to Banking and Pre-reform era A bank is an institution, which provides fundamental financial transactions such as accepting the deposits and providing loans. Basically, banks are a subset of the Financial Services Industry. After a series of reforms in the Indian banking industry, the Indian banks were able to compete with the modern banks of the world. Banking in India originated in 18th century with the establishment of The General Bank of India and Bank of Hindustan in 1786. The East India Company then established three presidency banks in India namely The Bank of Bengal (1809), The Bank of Bombay (1840) and The Bank of Madras (1843). These three banks were amalgamated in 1921 to form The Imperial Bank of India (IBI) under the Imperial Bank of India Act, 1920 –which is now “The State Bank of India”. Until 1935, all the banks were set up by individuals and/or industrial houses. Though consolidation in banking was building trust among investors yet a central regulatory and authority was much needed. The establishment of The Reserve Bank of India in 1935 brought an end to the quasi-central bank role of Imperial Bank of India and transformed it into a purely commercial bank over a period of time. Before reforms the Indian banking sector was characterised by high reserve requirements, low productivity/ efficiency in PSU banks, stringent regulations by RBI, quantitative restrictions on credit flows and an ever increasing Non Performing Assets, Inferior work technology and poor customer service. The Indian Banks were not in a position to handle the stiff competition from Foreign Banks. The private banks were not fulfilling the social and developing goals of banking. 2. Necessity for Banking sector Reforms In 1991, India faced a severe macroeconomic crisis. This crisis opened the chinks in the armour of the Indian Banking Sector. The foreign exchange reserves were at a seemingly low level. The country faced the risk of defaulting with payments and the economic growth was at very low rate. This called for the government to bring measures on the paths of liberalization and globalization in the economy. A series of reforms had to be brought about in the Financial Sector. Between 1947 and 1990, there was a tremendous expansion of our banking system which played a major part in the development of the Financial Sector. However, by the end of 1990 it was felt that banking system wasn’t as developed and robust as it should have been. Some of the Public Sector banks had become loss making entities with its high level of nonperforming Assets. The hidden NPA’s had the potential to trigger a huge financial crisis. Compared to International Banks, Indian Banks were nowhere near with respect to
  • 4. capital adequacy and accounting standards etc. This served as a great threat to the progress of Indian economy. 3. First Phase of Reforms(Narasimhan committee, 1991) To overcome the 1991 financial crisis, the Government of India appointed a special committee headed by Shri. M. Narasimhan, ex-governor of the RBI to address the problem and to suggest corrective measures. The recommendations of this committee became the basis for the financial and banking sector reforms. Recommendations of Narasimhan Committee  A new 4 tier hierarchy was to be established by the incorporation of a couple of large banks to be at the top level and a number of rural service providers to handle the activities pertaining to agriculture.  The monitoring of the financial institutions and banks by separate entities that were set up by the RBI.  Proposed phases of reduction in the SLR rate.  A target level of 8% in terms of the Capital Adequacy Ratio.  Elimination of the License raj.  Full account disclosure and the correct organization of the bank’s assets and financial entities.  Lower levels of regulation on Interest rates. Directing the lending activities of the IDBI to a separate corporate body. Banking reforms brought in by the Government and their impact Since 1991 the Narasimhan committee had recommended a series of measures which were incorporated by the Indian government Lowering SLR and CRR The reduction in the levels of SLR and CRR impacted the profits of the banks. The SLR was brought down to 25% from 38.5%. This helped in increased funding to the industry & Trading, agriculture. The Cash Reserve Ratio was reduced to 4.1% from the earlier rates of 15%. The primary reason behind the move was to liquidate the funds that were locked with the RBI.It is in use till date and serves as toll for regulating the monetary policy.
  • 5. Prudential Norms RBI had launched prudential norms for commercial banks. The primary motive behind this was the disclosure of the asset classification, bad debts provisioning, income to make that the financial records reflected the accurate data with respect to its financial position. It was necessary for the banks to ensure a 100% provisioning for all the NPAs which are at international standards. Capital Adequacy Norms RBI had placed a slab for CAN at 8% and this was achieved the public sector banks by 1996. Deregulation of Interest rates The Narasimhan Committee proposed the interest rates to be decided by the market forces.  Scheduled Commercial banks were permitted to determine the fix the interest rates depending on the deposits taking into consideration the maximum ceiling rates & the minimum floor rates.  The interest rates of termed domestic deposit was controlled.  SBI along with the other players in the market had reduced the lending rates for advances that were more than 2 lakhs  For the loans that were in excess of Rs. 2 lakhs the Interest rates were deregulated.  The interest rates for the Co-operative banks for advances and deposits we reduced to a minimum level of 13%. Recovery of Debts “Recovery of debts due to Banks and Financial Institutions Act 1993” was passed by the government to facilitate the speeding up of the recovery of debts by the banks and financial institutions.6 special recovery tribunals and an Appellate Tribunal was set up in the city of Mumbai. Competition from new private sector Banks Banking was opened up to bring in private sector players and many private sector banks began operations. The new entrants were permitted to raise capital to the extent of up to 20% from the FIIs and about 40% from NRIs, which brought in high levels of competition. The new market players were armoured with the latest technology and services that had increased the expectations of the customers.
  • 6. Phasing out of Direct Credit The committee proposed the reduction in the credit target from 40% to 10% for the primary sectors. The task was however hectic for the government as those sectors involved powerful lobbies. Access to Capital Market The Banking Companies Act was reviewed to enable the banks to raise capital through issues. This however came with a clause that the central government’s stake of the paid up capital would not fall below 51%. 4. Second phase of reforms (Narasimhan committee, 1998) A committee was again appointed by the government of India, as a part of the second phase of reforms, to make the banking sector of the country stronger under the guidance of Mr. M. Narasimhan. The report/recommendations were submitted to the Government on April, 1998. The major focus and objective of the committee was to improve the principles of disclosure and the levels of transparency. Below are the recommendations and corresponding measures by government. Recommendations of Narasimhan Committee  The committee suggested a resolute banking system entirely in the context of CAC (Capital Account Convertibility). The committee provided warning against the merging of small and weak banks with the strong players, as this might bring in a negative effect on the performance of stronger banks.  The committee suggested that 2-3 large banks be given international positioning and global character.  Capital inadequacy was tackled with new improved norms.  It recommended the formation of an Asset Reconstruction Fund to take possession of bad debts of the banks and financial institutions.  The committee suggested a Board for Financial Regulation and Supervision (BFRS) to organize the achievements of financial institutions and banks.
  • 7.  To be at par with the current demands of the industry, there is an urgent need to evaluate and alter the provisions of the RBI Act, Banking Regulation Act, etc.  By 2002,Net NPAs of all the banks to be reduced to 3%.  The rearrangement of bank branches and staffs was emphasised. The committee was willing to continue with the licensing policy of new private banks.  Foreign banks were permitted to set up their joint ventures and subsidiaries. Banking reforms brought in by the Government and their impact New Instruments New instruments were introduced to facilitate better risk management and greater flexibility. The new instruments were interest swaps, cross currency forward contracts, forward rate agreements, Liquidity Adjustment Facility(LAF) for meeting everyday liquidity mismatch. Risk Management Banks created dedicated committees to measure, monitor and track the various risks. These committees upgrade their skills and systems on a regular basis in order to sustain the risk management. Strengthening the technology New and advanced technology was introduced across banks to strengthen the payment and settlement systems through centralized fund management system, core banking solutions, electronic funds transfer, etc. Increased Foreign Direct Investment (FDI) Limit Foreign Direct Investment(FDI) cap in private banks was raised to 74% from 49%. Increased inflow of Credit Flow of credit to priority sector was improved by giving more importance to Self Help and Micro Credit groups.
  • 8. Adoption of Global Standards RBI has introduced Risk Based Supervision of banks. The best international practices are being adopted in accounting systems, payment and settlement systems, corporate governance, etc. Information Technology Over the counter banking was replaced with the introduction of E-banking, telephonic banking etc. Focus was on the delivery of banking services through electronic medium. Management of NPAs Non-performing Assets had been the major cause of trouble for the Indian Banking Sector. The committee wanted a robust system to identify and classify NPAs. Asset Reconstruction Company or Asset Reconstruction Funds were created to take possession of the bad debt of banks. These recommendations led to the introduction of a new legislation which was subsequently implemented as the SARFAESAI(Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), 2002 and came into effect from 21 June 2002. Mergers and Amalgamation In May 2005,RBI issued procedures for merger and acquisition of private banks. Anti-Money Laundering guidelines KYC(Know Your Customer) norms were reformed to prevent money laundering. Huge attention has been given to prevent money laundering in international financial relationships in recent times. Revamping the rural credit system To bridge the gap between demand and supply of agricultural credit. Managerial Autonomy From February 2005, public sector banks were given greater managerial autonomy to provide them equal opportunity to compete with private sector banks and international banks. This was achieved by
  • 9.  Bringing recruitment process, training and remuneration policies of public sector banks in line with the private and international banks.  Reducing GOI equity to 33% in nationalized banks. Customer Service RBI has introduced many new facilities such as Credit Cards, settlement of claims of deceased depositors, banking ombudsman etc. to improve the customer service. Base Rate System for fixing Interest Rates The Benchmark Prime Lending Rate (BPLR) introduced in 2003, fell short of its purpose to bring transparency to lending rates. The main reason for this was that under the BPLR system, banks had the freedom to lend below BPLR. To overcome this failure of BPLR, RBI introduced the system of Base Rate. This new system is in use from July 2010.The base rate is nothing but the minimum interest rate for all loans. 5. Impact of Banking sector reforms The performance of both public and private sector banks improved in terms of profit per employee, productivity per employee, assets value etc. The improvement in the performance can be explained in the below 5 categories. i. Productivity of Commercial Banks ii. Profitability of Commercial Banks iii. Asset Quality iv. Customer Services Productivity of Commercial Banks Analyses in terms of profit per employee, business per employee, and business per branch provides the improvement in the productivity of Commercial Banks. Business per employee The business per employee for Public Sector Banks, Private Sector Banks and Foreign Banks are tabulated below, though the business per employee for Public sector banks is very low compared to New Private sector banks and foreign banks it had increased rapidly compared to others. A growth rate of 216% was witnessed in Public Sector Banks. By the year Business per employee (in lakhs)
  • 10. Year Public Sector Banks New Private Sector Banks Foreign Banks 1997-98 88.5 785.9 529.4 2005-06 324.1 728.9 1012.8 2012-13 1274.7 930.3 2173.3 Profit per employee Between the period 1997-98 and 2005-06, the profit per employee of Public sector banks had a increased by 314%, whereas the New private sector banks and Foreign banks had increased their profit by 350% and 489% respectively. The absolute value of profit per employee is tabulated, Profit per employee In lakhs) Year Public Sector banks New Private Sector Banks Foreign Banks 1997-98 0.7 1.4 4.5 2005-06 2.9 6.3 26.5 2012-13 6.3 11.8 45.6 Business per Branch The Business per Branch had an average growth rate 14% when our economic growth rate was 6.2% between 1999-2000 and 2004-05, During this period the Foreign banks had increased their business per branch by 109% followed by nationalised bank and new private sector banks with their business per branch increased by 97% and 44% respectively, Business per Branch (in Lakhs) Year Nationalized Banks New Sector Private banks Foreign Banks 1999-2000 2152 14989 54800 2004-05 4242 21656 114768 Profitability of Commercial Banks Profitability of Commercial banks can be shown using below indicators. a. Net/Spread interest margin Net/Spread interest rate is the difference between the interest income generated by bank to the interest paid by bank in relation to the amount of their assets. For public sector, private sector banks and foreign banks the spread interest margin was 2.9%, 2.1% and 3.6% respectively in 2000- 01. In the year 2012-13 it was 2.78%, 3.24% and 3.89% for public, private and foreign banks respectively. b. Return on Assets(ROA) The ROA of all banks has been risen after reforms. For public and private sector banks, it increased from 0.4%, 0.8%in 2000-01 to 0.88% and 1.22%
  • 11. in 2009-2010 and by the year 2012-13 it is 0.78% and 1.74% respectively. For foreign banks, the rise has been from 0.9% to 1.09% and 1.94% for the same period. Asset Quality Asset quality of a bank in the terms of Non-performing Assets (NPA) have been increased Average NPA in % 1997-2001 2009-2013 GNPA 12.8 2.6 NNPA 8.4 1.2 The NPA raised initially after reforms during early 1990’s however it declined by mid 90’s due to increased risk management, abundant liquidity condition, increased write off and increased restructuring. Customer Services After the banking reforms, the Indian banks have begun to offer different kind of services to the clients/customers. Core Banking Solutions (CBS) has increased very fast. Under CBS, there are many services that has been provided to the customers/clients such as anywhere banking, “everywhere access” and quick and effecting fund transfer at reasonable cost. The number of branches implemented the CBS has increased from 79.4% in March 2009 to 90% at the end of March 2010. 6. Impact on Corporate Sector: Corporate governance Capital markets always had the prospective to implement discipline among the marketers and management .However, it was the structural changes constituted by the financial reforms that unleashed this power. Smaller stakeholders would be able to carry out the discipline of capital markets by polling with their wallets. They have the powers vested on them to vote in the primary market and to reject the subscription to new issues by a firm. They would also be able to trade their stocks in the secondary markets by decreasing the stock price. Deregulation Financial reforms not only helped in increasing the development visions, but they have also made the markets more competitive. This forced companies to invest on a large scale continuously, to survive. The essential impact of the voting on companies is that the need to approach the market for the additional funds.
  • 12. Disintermediation The financial sector reforms made it vital for the firms to depend on the capital markets more for their needs of additional capital. As long as the companies were dependant on the direct credit, the ability to handle administrative and political process was all that mattered. This implied that the capital markets demanded performance. Globalization Globalization of the Indian Financial markets has showed the issuers, shareholders and intermediaries the higher standards of disclosures and corporate governance that succeed in more developed capital markets. Tax reforms The tax reforms together with deregulation and competition have made the market free from black money transaction. It is not often realized that when an organization makes profits in black money, it is cheating not only the government, but also the smaller investors. Profits made by black money do not enter the accounts of the organization at all, but will go into the pockets of the promoters. Risk management Unlike the stable interest rate before banking sector reforms during 1980’s, interest rate are highly volatile post reform, which made the short term funding new projects very difficult to Corporates. Several companies that borrowed for acquisitions and expansion defaulted. Capital stricter At the earlier stage after reform the corporates were increasing their debt to equity ratio due to the availability of the subsidized institution finance, the corporates were able to take more financial risks as there were less business risk in the protected economy before liberalisation Cash flow discipline: The equity has no fixed service cost and the fluctuations in income every year don’t have much impact as long as overall enough is earned to provide a decent return to the investor. On the other hand, the debt has a fixed repayment schedule and interest irrespective of the fluctuations. A company which enables the generation of enough cash flow to meet the requirement faces a painful reformation of liability. Bonds are rescheduled typically only as a part of insolvency proceeding or a BIFR reform. Group Structure: Indian business groups have been into serious self-assessment about their business portfolio and group structure. Under the guidance of
  • 13. many academicians, business groups which are involved in to an array of business are anticipating a move to a more intensive approach. Also, they are trying to create a structure of organizations which would enable the construction and execution of group wide corporate strategy. Working capital management: Numerous developments discussed above, reforms in the areas of credit assessment and delivery, interest deregulation, and transformation in the competitive structure have impacted the working capital management. In the cash credit system, the cast management has played key role. The companies should now decide on the optimum amount of cash they have to hold and should know about the ways to organise the cash, which corresponds to the decisions on maturity and credit risk liquidity. 7. Conclusion and Recommendation  Since the reforms in the financial sector in 1991, there had been significant changes to India’s Banking sector. This paper tries to assess the impact of reforms in our economy.  It is understood that the reforms have had a positive impact to an extent in terms of reducing the concentration of the banking sector and by improving performance.  The empirical estimation also gave us an estimation which reveals that the reforms reduced profitability and decreased the efficiency of public-sector banks during the initial phase, However the decline overturned to accommodate a new environment  Further reduction in the SLR rate could serve as a motivation for non-traditional activities and would make our banking sector resilient to adverse shocks.  To maintain a steady growth of the economy it is imperative that the reforms continue to serve as a critical factor.  The banking sector’s response to the reforms has been significant and the sectors has adjusted well to the new environment 8. References 1. www.ijmra.us/project%20doc/IJMT-234.pdf 2. www.papers.ssrn.com/sol3/papers.cfm?abstract_id=1876052 3. www.wikipedia.com 4. www.study-material4u.blogspot.in 5. www.smsvaranasi.com