'Banking Sector Reform Essay\r'

'From the 1991 India frugalalal crisis to its status of third monumentalst economy in the reality by 2011, India has grown signifi mickletly in ground of economical becomement. So has its savings banking domain. During this period, recognizing the evolving needs of the sphere of influence, the pay Ministry of organization of India (GOI) set up various missions with the task of analyzing India’s banking sector and proposeing legislation and regulations to slay it more utile, agonistical and efficient.[1] Two such expert commissionings were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the nineties in reports widely known as the Narasimham commission-I (1991) report and the Narasimham commission-II (1998) Report.\r\nThese recommendations non plainly helped unleash the po tential of banking in India, they are alike recognized as a factor towards minimizing the usurpation of spheric fiscal crisis starting in 2007. irrelevant the socialist-democratic era of the 1960s to 1980s, India is no longer insulated from the global economy and yet its banks survived the 2008 monetary crisis relatively unscathed, a feat due in part to theseNarasimham Committees.[2] content [hide] * 1 Background * 2 Recommendations of the Committee * 2.1 self-direction in bank buildinging * 2.2 Reform in the billet of run batted in * 2.3 Stronger banking system * 2.4 Non-performing assets * 2.5 Capital adequateness and tightening of provisioning norms * 2.6 immersion of foreign cusss * 3 Implementation of recommendations * 4 reproval\r\nBackground\r\nDuring the decades of the 60s and the 70s, India nationalised most of its banks. This culminated with the balance of payments crisis of the Indian economy where India had to airlift g older to foreign M sensationtary Fund (IMF) to add bills to reach its financial obligations. This event c exclusivelyed into interrogative mood the previous banking policies of India and triggered the era of economic liberalisation in India in 1991. Given that rigidities and weaknesses had made good inroads into the Indian banking system by the late 1980s, the organisation of India (GOI), post-crisis, took several(prenominal) steps to remodel the bucolic’s financial system. (Some claim that these tames were influenced by the IMF and the World Bank as part of their bestow conditionality to India in 1991).[3] The banking sector, handling 80% of the lessen of funds in the economy, needed serious reforms to make it internationally reputable, accelerate the pace of reforms and develop it into a constructive usher of an efficient, vibrant and hawkish economy by adequately supporting the country’s financial needs.[4]\r\nIn the light of these requirements, ii expert Committees were set up in 1990s under the chairmanship of M. Narasimham (an ex- rbi ( earn Bank of India) g all oernor) which are widely attribute for spearheading the fina ncial sector reform in India.[3] The number 1 Narasimhan Committee (Committee on the Financial System †CFS) was name by Manmohan Singh as India’s Finance parson on 14 August 1991,[1][5] and the second one (Committee on Banking Sector Reforms)[6] was appointed by P.Chidambaram[7] as Finance Minister in December 1997.[8] Subsequently, the low one widely came to be known as the Narasimham Committee-I (1991)and the second one as Narasimham-II Committee(1998).[9][10] This article is virtually the recommendations of the Second Narasimham Committee, the Committee on Banking Sector Reforms.\r\nThe aspiration of the Narasimham-I Committee was to study all aspects relating to the structure, organization, pop offs and procedures of the financial systems and to recommend improvements in their efficiency and productivity. The Committee submitted its report to the Finance Minister in November 1991 which was tabled in Parliament on 17 December 1991.[6] The Narasimham-II Committe e was tasked with the progress reexamination of the fulfilation of the banking reforms since 1992 with the aim of elevate specializationening the financial understructures of India.[4]It focussed on issues like size of banks and neat sufficiency ratio among separate things.[9] M. Narasimham, Chairman, submitted the report of the Committee on Banking Sector Reforms (Committee-II) to the Finance Minister Yashwant Sinha in April 1998.[4][9]\r\nRecommendations of the Committee\r\nThe 1998 report of the Committee to the GOI made the pursuance major(ip) recommendations:\r\nAutonomy in Banking\r\nGreater self-reliance was proposed for the public sector banks in order for them to function with equivalent professionalism as their international counterparts.[11] For this the panel recommended that enlisting procedures, training and remuneration policies of public sector banks be brought in line with the best-market-practices of professional bank management.[4][6] Secondly, the mis sion recommended GOI equity in nationalized banks be lessen to 33% for increased autonomy.[4][12][13] It likewise recommended the rbi relinquish its set on the board of directors of these banks. The perpetration further added that given up that the judicature nominees to the board of banks are a wide deal members of parliament, politicians, bureaucrats, etc., they often interfere in the day-to-day operations of the bank in the form of the behest-lending.[4]\r\nAs such the committee recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through preparedness of corporate strategy and reduction of goernment equity.[11] To execute this, criteria for autonomous status was identified by environ 1999 (among other capital punishment measures) and 17 banks were considered eligible for autonomy.[14] notwithstanding(prenominal) if nearly recommendations like reduction in Government’s equity to 33%,[13][15] the issue of greater professionalism and independence of the board of directors of public sector banks is unbosom awaiting Government follow-through and implementation.[16]\r\nReform in the determination of run batted in\r\nFirst, the committee recommended that the RBI withdraw from the 91-day treasury bills market and that interbank call money and term money markets be restricted to banks and primary dealers.[6][14] Second, the Committee proposed a segregation of the roles of RBI as a regulator of banks and owner of bank.[17] It observed that â€Å"The take for Bank as a regulator of the monetary system should not be the owner of a bank in view of a possible conflict of busy”. As such, it highlighted that RBI’s role of outletive supervision was not adequate and wanted it to foray its holdings in banks and financial mental institutions. Pursuant to the recommendations, the RBI introduced a Liquidity Adjustment Facility (LAF) operated through repo and quash r epos in order to set a corridor for money market interest group rates.\r\nTo begin with, in April 1999, an retardation Liquidity Adjustment Facility (ILAF) was introduced pending further upgradation in technology and legal/procedural changes to press forward electronic maneuver.[18]As for the second recommendation, the RBI persistent to transfer its respective shareholdings of public banks like State Bank of India (SBI), National Housing Bank (NHB) and National Bank for Agriculture and Rural Development (NABARD) to GOI. Subsequently, in 2007-08, GOI decided to acquire entire stake of RBI in SBI, NHB and NABARD. Of these, the terms of sale for SBI were finalised in 2007-08 itself.[19]\r\nStronger banking system\r\nThe Committee recommended for merger of large Indian banks to make them upstanding enough for supporting international trade.[11] It recommended a troika tier banking structure in India through proof of three large banks with international presence, eight to ten nat ional banks and a large number of regional and local banks.[4][9][11] This proposal had been severely criticized by the RBI employees union.[20] The Committee recommended the use of mergers to build the size and strength of operations for each bank.[12] However, it cautioned that large banks should merge only with banks of equivalent size and not with weaker banks, which should be unappealing down if unable to revitalize themselves.[6] Given the large percentage of non-performing assets for weaker banks, several(prenominal) as high as 20% of their total assets, the concept of â€Å"narrow banking” was proposed to take care in their rehabilitation.[11] There were a string of mergers in banks of India during the late 90s and early 2000s, encouraged strongly by the Government of India|GOI in line with the Committee’s recommendations.[21]However, the recommended degree of consolidation is slake awaiting sufficient government impetus.[16]\r\nNon-performing assets\r\nNon -performing assets had been the single largest cause of irritation of the banking sector of India.[4] earliest the Narasimham Committee-I had broadly concluded that the main reason for the reduced profitability of the commercial banks in India was the priority sector lending. The committee had highlighted that ‘priority sector lending’ was tether to the build up of non-performing assets of the banks and thus it recommended it to be phased out.[10] Subsequently, the Narasimham Committee-II to a fault highlighted the need for ‘zero’ non-performing assets for all Indian banks with International presence.[10] The 1998 report further blamed poor credence decisions, behest-lending and cyclical economic factors among other reasons for the build up of the non-performing assets of these banks to uncomfortably high levels.\r\nThe Committee recommended creation of plus reconstruction Funds or Asset reconstructive memory Companies to take over the bad debts of ban ks, allowing them to start on a clean-slate.[4][22][23] The option of recapitalization through budgetary provender was ruled out. Overall the committee wanted a proper system to identify and classify NPAs,[6] NPAs to be brought down to 3% by 2002[4] and for an independent loan review meachnism for improved management of loan portfolios.[6] The committee’s recommendations let to introduction of a immature legislation which was subsequently employ as the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and came into force with effect from 21 June 2002.[24][25][26]\r\nCapital adequacy and tightening of provisioning norms\r\nIn order to improve the inherent strength of the Indian banking system the committee recommended that the Government should raise the prescribe capital adequacy norms.[9] This would also improve their danger taking ability.[11] The committee targeted raising the capital adequacy ratio to 9% by 2000 and 10% by 2002 and ingest penal provisions for banks that fail to meet these requirements.[4][6] For asset miscellany, the Committee recommended a mandatory 1% in case of standard assets and for the accrual of interest income to be done e precise 90 courses instead of 180 days.[14]\r\nTo implement these recommendations, the RBI in Oct 1998, initiated the second phase of financial sector reforms by raising the banks’ capital adequacy ratio by 1% and tightening the prudential norms for provisioning and asset classification in a phased manner on the lines of the Narasimham Committee-II report.[27] The RBI targeted to bring the capital adequacy ratio to 9% by March 2001.[28] The mid-term Review of the Monetary and reference work Policy of RBI announced another serial of reforms, in line with the recommendations with the Committee, in October 1999.[14]\r\nEntry of Foreign Banks\r\nThe committee suggested that the foreign banks seeking to set up business in India should concur a token(prenominal) start-up capital of $25 million as against the subsisting requirement of $10 million. It said that foreign banks can be allowed to set up subsidiaries and joint ventures that should be treated on a par with mysterious banks.[4]\r\nImplementation of recommendations\r\nIn 1998, RBI regulator Bimal Jalan conscious the banks that the RBI had a three to four year perspective on the implementation of the Committee’s recommendations.[27] Based on the other recommendations of the committee, the concept of a universal bank was discussed by the RBI and at long last ICICI bank became the first universal bank of India.[18][29][30] The RBI published an â€Å"Actions Taken on the Recommendations” report on 31 October 2001 on its own website. Most of the recommendations of the Committee puddle been acted upon (as discussed above) although some major recommendations are still awaiting do from the Government of India.[31]\r\nCriticism\r\nThere were protests by employee unions of banks in India against the report. The Union of RBI employees made a strong protest against the Narasimham II Report.[20] There were other plans by the United Forum of Bank Unions (UFBU), representing or so 1.3 million bank employees in India, to meet in Delhi and to work out a plan of action in the wake of the Narasimham Committee report on banking reforms. The committee was also criticized in some lodge as â€Å"anti-poor”. According to some, the committees failed to recommend measures for faster rest period of poverty in India by generating new employment.[3] This caused some suffering to nonaged borrowers ( twain individuals and businesses in tiny, micro and small sectors).\r\nReception\r\nInitially, the recommendations were well received in all quarters, including the Planning Commission of India leading to in(predicate) implementation of most of its recommendations.[32] Then it turned out that during the 2008 economic crisis of major economies w orldwide, performance of Indian banking sector was furthermost better than their international counterparts. This was also credited to the successful implementation of the recommendations of the Narasimham Committee-II with particular reference to the capital adequacy norms and the recapitalization of the public sector banks.[2] The impact of the two committees has been so significant that elite politicians and financial sectors professionals have been discussing these reports for more than a decade since their first submission applauding their cocksure contribution Prime Minister’s comprehend at RBI atomic number 78 Jubilee Celebrations| The Prime Minister, Dr. Manmohan Singh consultation the Platinum Jubilee celebrations of the Reserve Bank of India in Mumbai today. pastime is the text of the Prime Minister’s address on the occasion:\r\nâ€Å"It is indeed a great pleasure to be here in Mumbai for the Platinum Jubilee celebrations of the Reserve Bank of India. F or me, this is also a very special moment of nostalgia. I spent some very memorable years in this institution as its Governor. My wife and I cherish the memories of legion(predicate) new enduring friendships that we made during those memorable days. I also recall with deep appreciation the role played by the Reserve Bank in helping the Government of India in the implementation of the docket for economic reforms when I was the Finance Minister of India at a very difficult time in our country’s economic history. To return as Prime Minister for the Platinum Jubilee of this great institution is indeed an emotionally moving experience for me.\r\nWhen I took over as Finance Minister in 1991, I was convinced that the economic liberalisation and reforms could only succeed if complemented by broad based reform in the banking and financial sectors. I turned to my old friend and former RBI Governor Shri M Narasimham to Chair a Committee to make recommendations on this very important i ssue. The Report of the Narasimham Committee outline a comprehensive agenda of reform which served as a blue print of what we needed to do in subsequent years.\r\nIt would have been difficult to implement those reforms had they not received enthusiastic support, as they did, from the Governor of the day, Shri S. Venkitaramanan and Dr. Rangrajan. Subsequently as Venitramanan’s successor Dr C. Rangarajan took the financial reform agenda further forward in many critical battlegrounds, including especially the ending of machine-controlled monetisation of the government’s deficit.\r\nAs with economic reforms in general, financial sector reforms in India were implemented at a gradual pace. We were often criticised for our incremental approach which critics often complained was far too slow. nevertheless few would deny that we have accomplished a great deal over the years and Reserve Bank has made important contribution towards this. We have success amply eliminated stifl ing controls on industry and investiture. We have opened the economy to foreign trade, lowered tariffs and switched over to a market determined exchange rate. We have liberalised capital controls enabling the economy to absorb meaning(a) inflows of capital in the form of both FDI and FII flows into the fall market. In recent years, foreign investment has also become a two way flow as many Indian companies have effected a presence abroad through investment or acquisition.\r\nAll of this has been achieved without experiencing a serious big economic crisis or severe inflation over an extended period. Most importantly, the real economy has clearly prospered. The rate of growth of GDP has increased steadily over the past two decades, culminating in an peculiar 9 percent growth per year in the four year period just onwards the global financial crisis. Poverty too, has declined steadily, though this is an area where much more remains to be done.\r\nThe Reserve Bank of India has pl ayed a major role in this transformation. It has been a lead player in banking and financial sector reforms and has acted as a undercover adviser to the Government on many other issues relevant to the complex task of macro economic management in an increasingly open and liberalised economic environment. Indeed, it is one of our great institutions of which we can all be truly proud.\r\nThe past two years have been difficult years for governments and central banks all over the world. Excessive credit expansion and asset bell inflation both fuelled by so-called â€Å"financial innovations” of dubious value, and a lax regulatory environment led to an accumulation of risk that was not adequately understood and ultimately produced a severe crisis.\r\nIndia was relatively insulated from these developments because our financial system was much less integrated with the global system. However, the RBI deserves credit for having been prescient just about the dangers posed by proper ty bubbles. The action interpreted by Governor Reddy, who is present here, well to begin with the crisis to tighten bank credit against real estate, express mail bank exposure on this account.\r\nWhen the crisis exploded in September 2008, the RBI rapidly reversed its precedent tightening of credit to meet the new and changed circumstances. The CRR and the repo and reverse repo rates were rapidly lowered in a series of quick steps. Some initiatives were also taken to enhance access to bank credit by Non Banking Finance Companies. Signs of panic withdrawals from some private sector banks in the initial weeks of the crisis were met with strong reassurances by both the Government and the RBI that our banks were sound and would be fully supported.\r\nEnsuring that the Indian financial system remained stable in these very difficult times was a major achievement in financial and economic management. I would like to compliment Governor Subbarao and his team at the RBI for the role the y played in this period.\r\n'