The document discusses financial sector reforms in India. It outlines deficiencies in the existing system including declining productivity and profitability. The objectives of reform are to establish prudent regulatory norms, upgrade managerial competence, and reform the financial structure. The first phase of reforms in the early 1990s focused on reducing reserve requirements, interest rate deregulation, and establishing capital adequacy norms. The second phase emphasized specialization among banks, risk management, and consolidation in the banking sector.

1. FINANCIAL SECTOR
REFORMS

2. Deficiencies in the System
2
Decline in productivity and effeciency
Erosion of profitability
Directed lending – depleting profits
SLR and CRR hindered income eeaarrnniinngg ccaappaabbiilliittyy
Political and administrative interference
Technological backwardness
Low capital adequacy ratio
Delinked from sound international banking

3. Objectives
3
Policy framework – rate of interest, directed credit
Prudential norms – recapitalisation and
restructuring of weaker banks
Financial structure relating to supervision, audit,
technology aanndd lleeggaall ffrraammeewwoorrkk
Upgrading level of managerial competence and
quality of human resources

4. Financial Sector Reforms (1st Phase)
1st Narasimham Committee (Nov 1991)
4
Reduction of SLR (25%) and CRR (10%)
Interest rate on CRR Balances – at Bank rate
Phasing out of priority lending – 10% (However Govt
has not reduced it from 40%)
Interest rate deregulation – Market driven
Capital adequacy norms – minimum 9%
Asset Classification

5. FSR (Contd)
5
Transparency – Balance sheet and profit and loss
account
Loan recovery – Debt Recovery Tribunal 1993 (29
tribunals and 5 appellate tribunal)
Tackling Doubtful debts – Asset RReeccoonnssttrruuccttiioonn
Fund
Restructuring of Banks – 3-4 large banks which
would become international; 8-10 national banks (
no progress here – New bank of India has been
merged with Punjab National Bank)

6. FSR (2nd Phase) Focus of Banks
6
Specialisation – retail, agriculture, export, SSI, corporate
sector
Non-fund business – advisory, consultancy services,
guarantees, custody services
Overlap in product coverage of commercial banks and
non-bank financial iinntteerrmmeeddiiaarriieess
Financial intermediation in large companies
Management of credit risk and NPAs
Work in deregulated interest rate system
Mergers and consolidation
Collaboration with other banks – remittance, foreign
exchange, cash management

7. 2nd Narasimham Committee ( April 23, 1998)
7
Capital adequacy requirements to take into account
market risks besides credit risk
5% risk weight for portfolio of govt securities (2.5%
implemented)
Capital to risk assets rraattiioo rraaiisseedd ttoo 1100%%
Doubtful asset if the asset is NPA for 18 months
Even govt guaranteed assets must be treated as NPA if so
Banks to reduce Net NPA level to below 5% by 2000 and
3% by 2002
Asset Reconstruction company (ARC)

8. 2nd FSR (contd)
8
Introduction of the 90 day norm
0.25% provision for standard assets
Asset liability management – to cover liquidity and
interest rate risks
Statistical risk management techniques lliikkee vvaalluuee--aatt--
risk ; forex rate volatility and interest rate changes
Independent loan review mechanism especially for
large borrowal accounts and systems to identify
potential NPAs
Voluntary Retirement System

9. 2nd FSR (Contd)
9
DFIs to convert themselves into banks (initiated)
Minimum shareholding by govt/RBI in nationalised
banks to 33% (Govt introduced a bill in 2000, no
progress so far)
Minimum net worth of NBFCs to be enhanced to Rs. 200
Lakhs
Inter-bank call and notice money market and inter-bank
term money market should be restricted strictly to banks
and primary dealers
The RRBs and Co-operative Banks should reach a
minimum of 8% capital to risk weighted assets over 5
years