Page 181 - DCOM208_BANKING_THEORY_AND_PRACTICE

Tanima Dutta, Lovely Professional University
Banking Theory and Practice

Notes Unit 11: Banking Sector Reforms

CONTENTS
Objectives
Introduction

11.1 First Generation Reform
11.2 The Second Phase of Reforms
11.2.1 Narasimham Committee Report (ii)

11.3 Liberalization of Banking Sector
11.3.1 Three Features of Liberalization
11.4 Summary
11.5 Keywords
11.6 Review Questions

11.7 Further Readings

Objectives

After studying this unit, you will be able to:

Explain the first generation reforms
Explain the second phase of reforms
Discuss the recommendations given by Narsimham Committee (i) & (ii)
Elaborate on the liberalization of banking sector

Introduction

In the previous unit, we dealt with several negotiable instruments like bills of exchange,
promissory note, paying banker, collecting banker, cheques, etc. The unit also discussed about
the reasons for dishonour of cheques. This unit will help you to understand the liberalization of
banking sector and various reforms. The last ten years have seen major improvements in the
working of various financial market participants. The government and the regulatory authorities
have followed a step-by-step approach, not a big bang one. The entry of foreign players has
assisted in the introduction of international practices and systems. Technology developments
have improved customer service. Some gaps however remain for example, lack of an interbank
interest rate benchmark, an active corporate debt market and a developed derivatives market.

On the whole, the cumulative effect of the developments since 1991 has been quite encouraging.
An indication of the strength of the reformed Indian financial system can be seen from the way
India was not affected by the Southeast Asian crisis.
However, financial liberalization alone will not ensure stable economic growth. Some tough
decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The
fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the
case of financial institutions, the political and legal structures have to ensure that borrowers
repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt

176 LOVELY PROFESSIONAL UNIVERSITY