Page 185 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes SBI’s associate banks should be constituted on the lines of Nationalised Banks with CMD
and two whole time directors. No need for SBI Chairman to be ex-officio Chairman of
these banks.
The startup requirements of ` 100 crore for new private sector banks should be hiked.
Restriction on promoters voting right (at present 10%) should be done away with provided
the promoter group does not hold more than 14% of equity.

Assessment of the Financial Sector Reforms

Financial Sector Reforms can be assessed as follows:
While India’s financial reforms have been comprehensive and in line with global trends,
one unique feature is that, unlike with other planned economies, the Indian Government
did not engage in a drastic privatisation of public sector banks. Rather it chose a gradual
approach towards restructuring these banks by enhancing competition through entry
deregulation of foreign and domestic banks. This reflects the view of the Narasimham
Committee that ensuring the integrity and autonomy of public sector banks is the more
relevant issue and they could improve profitability and efficiency without changing their
ownership if competition were enhanced.
An another interesting feature of India’s banking sector is that the Reserve Bank of India
has permitted commercial banks to engage in diverse activities such as securities related
transactions, (for example underwriting , dealing and brokerage) foreign exchange
transactions and leasing activities. The 1991 reforms lowered the CRR and SLR enabling
banks to diversify their activities.
The reforms have contributed to the good performance of some major banks in the country
post reform period, for instance State Bank of India, Punjab National Bank, etc. This could
be attributed to (a) import of better risk management skills, (b) intensified competition,
(c) the diversification of business, (d) reorganization (for example, mergers and
acquisitions), and (e) goodwill of the bank concerned.

!

Caution Due to virtual absence of an exit policy excepting the voluntary retirement scheme
announced by a few banks in the year 2000, mergers and acquisitions among problematic
banks have so far not occurred, which in reality is the need of the hour.
The government’s commitment on restructuring the highly regulated banking appears
strong despite lack of arithmetic of the government in the parliament to push through the
agenda of reforms in an effective manner. Since financial reforms were launched in 1991,
post-Narasimham precisely and particularly when the entry of new banks was permitted
in the year 1993, public sector banks appear to have become more conscious of the need for
greater profitability and efficiency suggesting that the reform has had a favourable impact
on country’s financial market.

The apex monetary authority’s encouragement to enhance the appetite of the banks to do
more non-traditional activities like novel schemes in the credit front.

Example: Reverse merger, advance against future lease rental has contributed to the
improved profitability and cost earnings efficiency of the whole banking sector, including state
owned public sector banks.

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