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Unit 11: Banking Sector Reforms

companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. Notes
However, punishment has to follow crime, which is often not the case in India.

11.1 First Generation Reform

With effect from 1st February 1969, the government imposed “social control” on banks. Soon
after the first nationalization of 14 major banks on 19th July 1969, the government appointed the
Saraiya Commission in 1969, to examine the banking system and recommended ways to make
it efficient in working in coordination with government policies for national economic
development. One of the main recommendations of the committee was related to the
reconstruction of the banking system into 8 or 9 banks, consisting of 3 all-India banks, SBI and 2
of the nationalized banks plus 5 or 6 regional banks with overlapping jurisdiction over the
neighbouring areas, this was not accepted. However, almost all the recommendations of the
commission regarding bank’s operations so as to simplify the credit procedure and rationalize
the internal control system and organisational management were accepted. Accordingly, Section
19 of the Banking Regulation Act 1949 was amended to allow the banks to form subsidiaries.

Owing to 1991 crisis of balance of payment, the government appointed the Narsimham
Committee on 14th August, 1991. It submitted its report, known as its first report, on 16th
November 1991. The first phase of banking sector reform which began during 1992-93 was based
on twin principles of “Operational Flexibility” and “Functional autonomy”.

Narsimham Committee Report (I)

The Government of India constituted a Committee under the Chairmanship of Sh. M. Narasimham,
former governor, Reserve Bank of India to examine the structure and functioning of the existing
financial system of India and suggest suitable reforms. The main recommendations were as
follows:
SLR & CRR:
SLR to be brought down to 25% over a period of 5 years.
The interest of SLR securities should be market oriented.

CRR to be reduced progressively and interest rate on CRR to be fixed at the level of
bank’s one-year deposit.
Priority Sector Lending:
The target of priority sector lending to be reduced to 10% of total credit.

Priority sector credit to be redefined, and subsidy in development programmes
may be withdrawn
Interest Rates:
Interest rates on Govt. securities to be in line with market rates.

Capital Adequacy: Banks to achieve Capital Adequacy Norms as under:
Foreign banks to achieve 8% norm by March 1993.
Indian Banks having branches abroad to achieve 8% by March 1994.
Other Indian Banks to reach 4% by March 1993 and 8% by March 1996.

Accounting Policies:
Investment portfolio to be bifurcated into permanent and current category and full
provisions must be made for depreciation in case of current category.

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