Detailed steps introduced by RBI/Government of India in terms of the two Reports of Mr.Narasimham Committee are covered already in different pages in this project (Indian Banking Today & Tomorrow). We will therefore mention such steps as are introduced under the Banking Reforms in brief omitting details to the extent it is relevant to handling NPAs

Various measures introduced since 1993 to arrest and contain the growth of NPAs are described below:

1. Dismantling of controls and deregulation of working of commercial banks, permitting entry of new private sector Banks and permission for Foreign Banks to open more branches are steps that were carried out under Banking Sector Reforms. These steps had the effect of opening Indian Banking to Global standards by making them to function efficiently in a competitive environment. For more details on banking sector reforms please refer web page titled Banking Sector Reforms: 1992-93 to 1995-96. Various recommendations of Narasimham Committee Second Report are detailed under web pages Recommendations of Narasimham Committee- Second Report and further continued in the Next Page". This is the initial step to create a structural framework for the public sector banks to enable them to adjust to the new environment and turn into dynamic and self-reliant operating units.

2. The process of deregulation freed the banks from the control of the Finance Ministry and RBI. Reserve Bank of India, hereafter, acts not as a controller, but a regulator. In the year 1994 RBI further fine-tuned the process by constituting a seperated a Board of Financial Supervision with the objective of segregating the supervisory role from the regulatory functions of RBI. Banks now operate independently in a competitive financial market, but have to comply with prudential norms and safeguards essential for their well-being. They have to report due compliance to RBI. Complete particulars about system of Supervision of Financial Institutions by RBI in the Post Reforms Period (since 1994) are summarised in web-page Supervision of the Indian Financial System by Reserve Bank of India

3. RBI in the year 1993 introduced prudential norms as conveyed by Basel Accord of 1988 applicable to Indian banks. These included standards relating to Capital Adequacy, Income Recognition, Asset Classification and Provisioning for non-performing assets. These are detailed in web-page Capital Adequacy Standards - Basel Accord,1988. This had the effect of providing a much needed transparency with regards to the state of affairs of each bank and enabled instant corrective measures to be executed.

4. Avenues of New Recovery Forums/strategies
   DRTS were made more functional to dispose of pending litigation quickly. More DRTS and DARTs were established. Banks were encouraged to avail the forum of Lok Adalats for quick settlement of overdues under small loans. A number of one time settlement schemes were approved by RBI to promote compromise settlements for different categories of borrowers. For more details please refer we-page In Retrospect - Efforts, Results & Review - Part: 2 - Measures Initiated by RBI and Government of India for Reduction of NPAs

5. Banks were permitted to seek infusion of fresh equity from the public retaining Government share of equity capital at 51%. A number of PSBs entered the market and raised Tier I and Tier II capital accordingly. Their public issues are now listed in Stock Exchanges. This has created a new class of stake-holder (albeit share-holders) vitally interested in the well-being of the banks and qualified/empowered to question the Board of Directors at the appropriate forum. Annual General Meetings hence forth for the PSBs cannot be a tame show.

6. Norms of Corporate Governance
   Corporate Governance is defined: "Corporate Governance means doing everything better, to improve relations between companies and their shareholders; to improve the quality of outside Directors; to encourage people to think long-term; to ensure that information needs of all stakeholders are met and to ensure that executive management is monitored properly in the interest of shareholders." Corporate Governance, a phenomenon of recent origin in the wake of increasing competition and globalization, stipulates parameters of accountability, control and reporting functions of the Board of Directors and encompasses the relationship among various participants in determining the direction and performance of the corporation, the Board, management team, shareholders and other stake-holders. RBI emphasises the paramount importance of accepting this discipline by Banks. While SEBI has introduced a general set of norms applicable to all companies including banking companies, RBI has further covered the special needs of banking companies by appointing a group of experts under chairmanship of Dr.A.S.Ganguly and bring out appropriate set of standards, to make recommendations towards more effective functioning of bank boards. The Group was to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-�-vis compliance, transparency, disclosures, audit committees etc. and submit recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure. PSBs and other commercial banks are now asked to implement the recommendations. View through hyperlink more details about Ganguly Report

7. In order to expedite credit and investment decisions by banks and financial institutions, and curb the accretion of fresh NPAs, Credit Information Bureau (India) Ltd., (CIBIL) was set up by State Bank of India in association with HDFC in August 2000, The CIBIL was to be technology driven to ensure speedy processing, periodic updating and availability of error-free data at all times in the system. As a first step towards activating the Credit Information Bureau (CIB), it was decided to initiate the process of collection and dissemination of some Relevant information, within the existing legal framework. The Reserve Bank accordingly decided to constitute a Group drawing representation from CIB, Indian Banks' Association (IBA), select banks and FIs to examine the possibility of the CIB performing the role of collecting and disseminating information on the list of suit-filed accounts and the list of defaulters, including willful defaulters, which is presently handled by the Reserve Bank. The Group will also examine the other aspects of information collection and dissemination, such as, the extent, periodicity and coverage including the feasibility of supplying such information on-line, to members in future. Complete particulars about CIBL can be viewed in three web pages commencing from Credit Information Bureau Ltd. (CIBL) and the next two consecutive pages linked thereto.

8. Asset Reconstruction & Securitisation
   The suggestion for creation of Asset Reconstruction company to tackle problem of hangover of piled up past NPAs was first suggested by Narasimham Committee Report II. To Quote therefrom - "An important aspect of the continuing reform process is thus to reduce further the high level of NPAs as a means of institutional strengthening. While there is reason to expect that with a combination of policy and institutional development, new NPAs could in future be lower than hitherto, the problem remains of the huge backlog of existing NPAs which impinges severely on banks performance and their profitability. Several approaches are possible. The earlier Committee had suggested the creation of an Assets Reconstruction Fund (ARF) to take these assets off banks books at a discount. Recapitalisation through infusion of capital is another approach and has been used in the case of some banks. In the last six years massive budgetary funds have been used for recapitalisation of public sector banks. This a costly and over time, not a sustainable option. The problem, however, remains and consideration would need to be given to revisiting the concept of an ARF." The Ordinance for creation of ARCs for recovery of NPAs of Banks was passed during June 2002 and this was upgraded as an Act of the Parliament in December 2002. This is an important measure, as handicaps posed by the infirmities of the legal system were undone. Full details of the ordinance and subsequent developments are furnished in several pages commencing from Securitisation of Assets - Ordinance of 2002

9. Promopt Corrective Action
   PCA is a regulatory and remedial mechanism and correctional strategy designed by RBI, intended for implementation towards resurrecting a commercial bank that exhibits symptoms of a progressive downward trend in its operational parameters and quality of assets. It diagnoses and identifies the symptoms of an impending crisis developing in the banking institution and responds towards arresting and preventing further decadence on the one hand and promoting quick resurgence through timely restorative measures. The operational particulars of the Scheme are narrated in web page Promt Corrective Action (PCA) and continued in the next succeeding page.

10. Norms of Lenders' Liability
    While successfully piloting the "The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Bill" in the houses of the Parliament by way of moderating the possible misuse of the powers under the legislation by Banks and Financial Institutions, the Finance Minister gave an assurance to bring out a code of Fair Practices defining Lenders Liability to the borrowers in respect of loans and advances extended by them. Consequent to the assurance by the Finance Minister, RBI during December, 2002 has come out with broad guidelines for framing the Fair Practices Code with regard to lenders' liability " to be followed by commercial banks and financial institutions, emphasising on transparency and proper assessment of borrowers' credit requirements". RBI has issued a draft of the model code and has advised the individual banks to adopt model guidelines for framing their respective Fair Practices Code with the approval of their Boards. Particulars of the scheme of Lenders' Liability is given in web page Fair Practices Code on Lenders Liability - RBI Guidelines. The draft code given by RBI is given in the next web-page and linked with the first page. This is a balancing measure. It imposes a self-discipline on the part of the Banks, which indirectly will only prevent accounts turning into NPA on account of Bank's own failures or wrong actions.

11. Risk Assessment & Risk Management
    Risk management is a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission. There can be minimum risk in a captive controlled economy, where industry is protected by high tariff walls and banks by directed credit and directed interest rates, and directed investments. But along with such minimum risk, there would also be minimum growth of the economy. In India after total regulation for several decades, the economy witness around 3% average growth. The Indian economy has now been freed of State controls. Consequently in today's corporate world, it is a challenge for corporate leaders to run a business with the objective of maximizing shareholders' value. The changing environment, on account of on-going process of liberalisation and reforms all round, of easing of import restrictions, resulting in an emerging new economic order increases risks content whilst also unfolding new opportunities. In this environment while decision making is the prerogative of the management, sound risk management is also their prime responsibility - as it provides them with the frame work to proactively identify and manage risk associated with their decisions.

    Banks in the process of financial intermediation are confronted with various kinds of financial and non-financial risks viz., credit, interest rate, foreign exchange rate, liquidity, equity price, commodity price, legal, regulatory, reputational, operational, etc. These risks are highly interdependent and events that affect one area of risk can have ramifications for a range of other risk categories. It therefore becomes very essential for top management of banks to attach considerable importance to improve the ability to identify, measure, monitor and control the overall level of risks undertaken. This is a new development in Indian Banking. All these decades before the advent of Reforms the exercise of risk assessment and risk management were never seriously considered or attempted , as the banks were operating in a captive economy.

    Since the year 1998 RBI have been giving serious efforts and attention towards evolving suitable and comprehensive models for Risk-management by the Banks and to integrate this new discipline in the working systems of the Banks. RBI has identified risk-prone areas in Asset-Liability Management, Credit Management, Changes in Market conditions and counter-party & Country Risks and has evolved suitable models for managing all such risk. RBI has also evolve a system of Risk based Supervision Banks. It also advised banks a parallel scheme for carrying out internal audit based on risk perception. The full particulars of these schemes are given under the project on risk-management in several web pages.

12. CDR
    Not all customers who have defaulted repayment to the commercial banks and contributed of the burgeoning NPA of these banks are willful defaulters. Quite a few are described as "Sunset" industries. Others have become weak due to changes in external environment, due to delay in execution of the project, due to cost escalation or on account time-up needed to develop an optimum share for the product. These accounts are classified as "NPAs" no doubt, but these pertain to a different category, where hasty coercive action or forced recovery measures cannot be justified. Lenders have an obligation, to consider genuine difficulty of borrowers. If this principle is not accepted the purpose of bank financing industries and other sectors of economy loses the definition "development finance" and becomes reduced to mere money lending. Recognising the need for such a commitment on the part of the banks the Finance Minister made a policy statement about "Corporate Debt Restructuring in his budget speech for the year 2000-01 as under:

    "To deal with forces of competition, industrial and other companies require restructuring on a continuous basis. For this purpose it is essential to promote out of court mechanisms for timely and transparent corporate debt restructuring of viable entities, in addition to the use of legal avenues of financial restructuring. A mechanism for Corporate Debt Restructuring (CDR) has been set up under the guidelines issued by the Reserve Bank of India. I have decided to set up a small group consisting of bankers and others, under the chairmanship of Deputy Governor, Reserve Bank of India to suggest measures to make its operation more efficient."

    RBI has since given the outlines of the Scheme and has also made it operative. More details can be viewed from the web-page Industrial Restructuring - Corporate Debt Reconstruction (CDR) System

13. E-Banking & VRS
    The influence of these areas of banking reforms may not appear directly relevant for handling reduction of NPAs. But computerisation provides for data-accuracy and operational efficiency and results in better Management Information Service. VRS rationalises the work force, which in turn results in better productivity and operational efficiency.