Since 1991 what have commercial banks succeeded in?
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Answer:
The Indian government decided to amend new economic reforms. Earlier, the banking industry was highly dominated by the public sector. This lead to profitability and poor asset quality. The country was undergoing deep economic crisis. The main aim of the banking sector reforms was to build a diversified, efficient and competitive financial system. The ultimate goal of this system was to properly allocate resources through functional flexibility, improved financial viability and institutional strengthening.
The reforms are mainly focused towards eradicating financial repression through minimizations in statutory preemptions, while concurrently stepping up prudential regulations. In addition to this, interest rates on deposits and the loans lent by banks had been progressively denationalized.
By the year 1991, India had nationalized banks in two phases in 1969 and 1980. The public sector banks (PSBs) controlled the credit supply. The post-1991 period saw three different chronological phases. The first phase was roughly between 1991 to 1998. The second phase started in 1998 and continued until the beginning of global financial crisis. The third phase is the ongoing one.
Phase 1
As we know post-1991 was a period of structural reforms in the financial sector. There was unprecedented development in various areas such as banking and capital markets. These reforms were based on the recommendations put forward by the Narasimham Committee in their report in November 1991.
After the first phase of banking sector reforms under the guidance of Narasimham Committee the following measures were undertaken by government −
Lowering SLR and CRR
The high SLR and CRR minimized the profits of the banks. The SLR was minimized from 38.5% in 1991 to 25% in 1997. As a result, banks were left with more funds that could be allocated to agriculture, industry, trade etc.
The Cash Reserve Ratio (CRR) is a bank’s cash ratio of total deposits to be maintained with RBI. The CRR has been lowered from 15% in 1991 to 4.1% in June 2003. The aim is to release the funds locked up with RBI.
Prudential Norms
These norms were initiated by RBI in order to bring in professionalism in commercial banks. The main objective of these norms were proper disclosure of income, classification of assets and provision for bad debts so as to assure that the books of commercial banks mirrored the accurate and correct picture of financial position.
Prudential norms ensured the banks made 100% provision for all non-performing assets (NPAs). For this purpose, sponsoring was placed at Rs.10,000 crores phased over 2 years.
Capital Adequacy Norms (CAN)
It is the ratio of minimum capital to risk asset ratio. In April 1992, RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%.
Deregulation of Interest Rates
The Narasimham Committee recommended that interest rates should be determined by market forces. From 1992, determining interest rates has become more simple and easy.
Recovery of Debts
The government of India issued the “Recovery of debts due to Banks and Financial Institutions Act 1993” in order to support and speed up the recovery of the dues of banks and financial institutions. Six Special Recovery Tribunals have been established to work on the same. An Appellate Tribunal was also established in Mumbai.
Competition from New Private-Sector Banks
Today banking is open to private-sector. New private-sector banks have already started functioning well in the banking industry. These new private-sector banks are permitted to hike capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. As a result, there is an increase in competition.
Phasing Out of Directed Credit
The committee recommended phasing out of the directed credit plans. A recommendation was made to lower the credit target for the priority sector from 40% to 10%. It would be very difficult for the government as farmers, small industrialists and transporters have powerful lobbies.
Access to Capital Market
The Banking Companies (Accusation and Transfer of Undertakings Act) was enhanced to allow the banks to increase capital through public issues. This is subject to a provision that the holding of central government would not decrease below 51% of paid-up-capital. The State Bank of India has already increased substantial amount of funds through equity and bonds.
Freedom of Operation
Scheduled commercial banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. The banks are also permitted to close non-viable branches other than in rural areas.
Local Area banks (LABs)
In 1996, RBI issued guidelines for establishing Local Area Banks and it approved to build 7 LABs in private-sector. LABs provide support in mobilizing rural savings and in converting them to investment in local areas.