The crisis that developed in the Indian Banking System towards the end of the Eighties is described in the earlier pages. This coincided with the economic crisis faced by the Government at the same period. In the aftermath of the Reforms in the Economic Front, Government undertook comprehensive Reforms in the Financial and Banking Sector. Reforms in the Financial Sector are described in the previous page. Banking Sector Reforms are covered in this page.

Financial Institutions and Commercial Banks are under direct functional and regulatory control of the Reserve Bank of India. But a major segment of banking upto 80% is owned by the Government of India and Finance Ministry exercises a significant control over the Public Sector banks. Reforms that require amendment to existing banking law or enactment of new legislation is only within the ambit of the Government of India (e.g. constitution of Debt Recovery Tribunal). We can therefore find the roles of both the RBI and the Government of India in the implementation of banking reforms.

Initial efforts aimed at banking reforms were slow to be taken and accepted. Decades of non-commercial orientation, directed lending, loan waivers and increasing non-performing assets had made banks difficult to adjust to the reform culture and a market environment having strict prudential norms. However, the emerging results suggest that banks are beginning to adapt to the competitive environment and face the challenge. Now they should learn to assess their problems and to solve them through direct initiatives and efforts, instead of looking to RBI and Government of India.

To provide for operational freedom independence and develop a competitive spirit, many steps were taken in 1995-96 to reduce controls and remove operational constraints in the banking system. These include interest rate decontrol, liberalization and selective removal of Cash Reserve Ratio (CRR) stipulation, freedom to fix foreign exchange open position limit and enhanced refinance facilities against government and other approved securities.

Direct Steps initiated by RBI during the period 1992-95 under the spirit of the policy of deregulation representing the same spirit as that of the Banking Reforms, are briefly summarised as under:

• Inventory holding norms (Tandon Committee Norms) liberalized and banks have been given the freedom to decide levels of holding of individual items of inventories and receivables

• Ceiling on term loans raised to Rs 10,000 million for projects involving expansion/modernization of power generation capacities.

• Banks are allowed to set their own interest rate on post-shipment export credit (in Rupees) for over 90 days.

• Deregulation of interest rates on loans over Rs 200,000 against term deposits and on domestic deposits with maturity periods over two years.

• Banks have been freed to fix their own foreign exchange open position limit subject to RBI approval.

• Guidelines issued to banks to ensure qualitative improvement in their customer service.

• Loan system introduced for delivery of bank credit. Banks required to bifurcate the maximum permissible bank finance of Rs 200 million and above into loan component of 40% (short term working capital loan) and cash credit component of 60%, by Dec 31, 1995.

• The bank rate has been reactivated in the belief that it should become the instrument to transmit signals of monetary policy and to influence the direction of interest rate movement in the country.

The reform of the financial sector was initiated in 1991 following the recommendations of the Narasimham Committee. This dealt mainly with the banking sector. What has been accomplished so far is recapitulated briefly hereunder (As per web-site of Finance Ministry, Govt. of India - (http://finmin.nic.in/demo/bankingdivision.htm)

The banking sector reforms in India, initiated since 1992 in the first phase has provided necessary platform to the banking sector to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms brought out structural changes in the financial sector, eased external constraints in their working, introduced transparency in reporting procedures, restructuring and recapitalisation of banks and have increased the competitive element in the market. The salient features of these reforms include:

• Phasing out of statutory pre-emption - The SLR requirement have been brought down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently 4.5%)

• Deregulation of interest rates - All lending rates except for lending to small borrowers and a part of export finance have been de-regulated. Interest on all deposits are determined by banks except on savings deposits.

• Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.

• Other prudential norms - Income recognition, asset classification and provisioning norms has been made applicable. The provisioning norms are more prudent, objective, transparent, uniform and designed to avoid subjectivity.

• Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. Comprehensive amendment in the Act have been made to make the provisions for adjudication, enforcement and recovery more effective.

• Transparency in financial statements - Banks have been advised to disclose certain key parameters such as CAR, percentage of NPAs, provisions for NPAs, net value of investment, Return on Assets, profit per employee and interest income as percentage to working funds.

• Entry of new private sector banks - 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both in retail and corporate banking

• Functional autonomy - The minimum prescribed Government equity was brought to 51%. Nine nationalised banks raised Rs.2855 crores from the market during 1994-2001. Banks Boards have been given more powers in operational matters such as rationalization of branches, credit delivery and recruitment of staff.

• Hiving off of regulatory and supervisory control - Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions.

India has made significant progress in payment systems by introducing modern payment media viz., smart/credit cards, electronic funds transfer, debit/credit clearing, e banking, etc. RBI would soon put in place Real Time Gross settlement System (RTGS) to facilitate efficient funds management and mitigating settlement risks.

Indian banking has made significant progress in recent years. The prudential norms, accounting and disclosure standards and risk management practices, etc. are keeping pace with global standards. The financial soundness and enduring supervisory practices as evident in our level of compliance with the Basle Committee's Core Principles for Effective Banking Supervision have made our banking system resilient to global shocks. The need for further refinements in our regulatory and supervisory practices has been recognized and steps are being taken by RBI to move towards the goal in a phased manner without destabilising the system. Success of the second phase of reforms will depend primarily on the organisational effectiveness of banks, for which the initiatives will have to come from banks themselves. Imaginative corporate planning combined with organisational restructuring is a necessary pre-requisite to achieve desired results. Banks need to address urgently the task of organisational and financial restructuring for achieving greater efficiency.

• All public sector banks, private sector banks and foreign banks as a group has achieved the over all target of priority sector for the last 3 years.

• NABARD's resource base has been considerably augmented and its paid-up capital has been increased from Rs.100 crore in 1991-92 to Rs.1000 crore at present, and its overall resource position has been enhanced substantially by other means as well. NABARD has sanctioned and disbursed Rs.19849 crores and Rs. 10078 crores respectively to various State Governments under RIDF I to VII, as on 30th September, 2001.

• Share of commercial banks, cooperatives and RRBs in the production credit amounted to 38%, 55% and 7% respectively.

• There are 196 RRBs functioning in 26 States (including 3 newly creates states) covering 495 districts with a network of 14311 branches. Number of profit making RRBs increased from 44 to 172 during 1996-1997 to 2000 to 2001 and the amount of profit of RRBs increased from Rs.69.68 crores to Rs.681 crores during the same period.