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Unit 11: Banking Sector Reforms

RBI Act 1934 to be amended to allow the banks to perform all types of banking Notes
business.

Self Assessment

Fill in the blanks:

1. More foreign banks should be allowed to open ……………….. in India.
2. A portion of the posts in different cadres should be filled up from the open market in view
of the need for special ………………………

3. Banking Regulation Act to be amended to give effect to ……………………… and
…………………………
4. The first phase of banking sector reform which began during 1992-93 was based on twin
principles of “Operational Flexibility” and “……………………… autonomy”.

11.2 The Second Phase of Reforms

The second phase of reforms envisaged greater autonomy to priority sector banks with respect
to recruitment and promotion of staff, better asset liability management, lesser external
intervention and pressures etc. The focus of the banks will, therefore, be on profit maximisation,
NPA recovery management and diversification through merger, acquisition and participation
with peers in the market.

11.2.1 Narasimham Committee Report (ii)

In 1998 the government appointed yet another committee under the chairmanship of Mr.
Narsimham. It is better known as the Banking Sector Committee. It was told to review the
banking reform progress and design a programme for further strengthening of financial system
of India. The committee focused on various areas such as capital adequacy, bank mergers, bank
legislation, etc. The main points that were highlighted in the report were:

RBI should withdraw from 91 days T Bill market. Inter-bank and call money and term
money markets should be restricted only to banks and primary dealers.

Minimum shareholding by the government/RBI in the equity of nationalised banks and
SBI should be brought down to 33%. RBI directors should be withdrawn from bank boards.
5% risk weight is considered for market risk for government and approved securities.
Government guaranteed advances, that have turned sticky, should be treated as NPAs.

Banks should attain a minimum CRR of 9% by 2000 AD and 10% by 2002 AD.
Accrual of interest for income recognition should be done in 90 days instead of 180 days.

Minimum startup capital needs for foreign banks should be raised from US $10 million to
US $25 million. This capital should be brought in one go and not in phases. Foreign banks
should be allowed to set up subsidiaries or joint ventures in India and these should be
treated on par with other private banks.
Bank Chairman should be given a minimum of three years at the helm. Need to de-link
salaries of bank and FIs chiefs and whole-time directors from the civil services pay scale.
All loans in doubtful/loss category should be identified and their realisable value
determined. These assets could be transferred to an asset reconstruction company which
would issue NPA swap bond to the banks.

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