Page 186 - DCOM208_BANKING_THEORY_AND_PRACTICE

Unit 11: Banking Sector Reforms

There are almost 15 reform processes that have been floated by Reserve Bank of India. But Notes
nothing has been done in the front of closure of unviable bank branches and reduction in
the number of employees to double productivity, may be due to lack of arithmetic in
political front. Given that the public sector banks have scale advantages, the current
approach of improving their performance without rationalizing them may not produce
further benefits for Indian banking sector. On the contrary, the government should muster
courage to go in for greater mergers and acquisitions which in the long run shall make the
sector viable and safe.

Self Assessment

Fill in the blanks:
5. Accrual of interest for ………………….. recognition should be done in 90 days instead of
180 days.
6. The government’s commitment on ………………………….. 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.

7. The government should muster courage to go in for greater …………………… and
………………………… which in the long run shall make the sector viable and safe.

11.3 Liberalization of Banking Sector

In India, the banking sector has been dominated by public sector banks till recently. With the
acceptance of LPG (Liberalization, Privatization, Globalization) model of development by the
Congress government in the early 1990s has acted as a watershed for the Indian economy as a
whole. This model supported the growth and development of the foreign capital of India.

Did u know? After the LPG model has been adopted foreign direct investment and foreign
institutional investments are permitted in the form of foreign capital in nearly all the
sectors of the economy.
Proportionate to this new growth, FDI has been allowed to the extent of 74% (raised from 49%
to 74% in March 2004) in private banks and 20% in Public sector banks. Besides, in keeping with
India’s responsibility World Trade Organization, foreign banks have also been granted license
to operate in India.

Thus, post-liberalization, foreign banks and private banks, increasingly gained acceptability in
popular parlance and imagination, till now, rather than obscuring terms. RBI issued its regulation
regime for both foreign banks and private banks. Initially, the guidelines for licensing of new
banks in the private sector were issued by the RBI in January 1993 but the revised guidelines that
are effective till date were issued in January 2001. As per these guidelines, initial paid up capital
in private banks was upto ` 200 crores which is to be increased to ` 300 crores within three years
of the commencement of business. The apex bank also issued comprehensive guidelines on
governance and ownership in private sector banks. They aim at ensuring diversity in the ultimate
control and ownership of banks in the private sector.

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