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Unit 11: Banking Sector Reforms

Reviving Co-operative Banking Notes
Co-operative banks have for long been the back bone of rural banking. Since their inception,
they have been doing excellent work in the field of rural and co-operative banking. The
recent scams in co-operative banks have been a jolt to co-operative banking system. Many
analysts have suggested that co-operative banks should be brought under the complete
control of RBI ending the dual control by the State governments and RBI-NABARD.
According to N. Patel, Vice-Chairman of Gujarat Urban co-operative Banks Federation,
control by a single authority will ensure smooth governance of co-operative banks. Some
analysts also feel that interference from the registrar of co-operatives should be minimized.
Question
Write down the case fact related to the scams in the urban co-operative banks.

Source: http://www.icmrindia.org/casestudies/catalogue/
11.4 Summary

After the first nationalisation 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.

The first phase of banking sector reform which began during 1992-93 was based on twin
principles of “Operational Flexibility” and “Functional autonomy”.
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 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.

In 1998 the government appointed yet another committee under the chairmanship of Mr.
Narsimham. It is better known as the Banking Sector Committee.

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 privatization of public sector banks.
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 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.
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.
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.

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