BANKING SECTOR REFORMS

As a result of the reforms process which was initiated more than a 15 years ago, the financial services system in general and the Banking System in particular, has undergone significant transformation. The first phase of reforms based on recommendations of Narasimham Committee I, was basically y curative in nature, while the 2nd phase aims at consolidation of the gains with emphasis on safety an soundness through strict prudential regulation, more disclosures, improved internal governance etc. There are moves to bring commercial, merchant and investment banking functions alongwith insurance business under one-stop financial supermarket called Universal Banking

BANKING SECTOR REFORMS

In this backdrop, the important issues required to be addressed by the banking system are: A reduction of huge non-performing advances from books of the banks, ( including putting in place an effective legal structure for recover) which has been keeping he cost of operations high, return from assets low and ultimately affecting the bottom-line. Improvement of quality and mix of assets and liabilities in future by establishing appropriate risk management mechanism and segmentation of business based on risk, so tht the shrinking spreads do not result in losses. Up gradation of the information technology to provide appropriate support for information management and operational efficiency, which will help in keeping the cost of operations low and help take benefit of economies o scale.

BANKING SECTOR REFORMS

Optimization of the manpower resources in terms of their numbers, knowledge and skills and rationalizing the branch network including ATM network, with a view to maximize the productivity and improvement of quality of operations. Increasing the customer orientation, undertaking financial innovations to bring out innovative products and improving the business processes, with a view to retain the customer including through techniques like customer relations management. Increasing the market share to take benefit of size and economies of scale. Improvement in the internal governance. New Basle capital accord implementation. Facing the impact of implementation of WTO agreements.

BANKING SECTOR REFORMS

REFORM PROCESS: The financial system reforms initiated during 1991-1992 are based on twin principles of operational flexibility and functional autonomy so as to continuously enhance efficiently, productivity and profitability of the financial institutions, It aimed at providing a diversified, efficient and competitive financial sector with ultimate objective of improving the allocative efficiency of available resources, increasing the return on investments in promoting an accelerate growth of real sector of the economy. THE SPECIFIC OBJECTIVES WERE:
Modification in the policy framework. Improving financial health Building financial structure relating to supervision, audit, technology and legal framework and Upgrading the level of managerial competence and quality of human resource of banks

BANKING SECTOR REFORMS

Phased reduction of SLR & CRR Interest rate of CRR balances Phasing out of priority sector Interest rate deregulations Capital adequacy norms Asset classification Transparency (disclosure norms) Loan recovery mechanism Tackling doubtful de debts Private Banks

SECOND PHASE OF REFORMS

1. Capital adequacy requirements should take into account the market risks in addition to credit risks. 2.The entire portfolio of Govt. securities should be marked to market The risk weight for a Govt Guaranteed advance should be same as for the other advances. The minimum capital to rsk assets ratio be increased to 10%An asset be classified as doubtful if it is in in the substandard category for 18 months in the first instance and subsequently for 12 months The bank should reduce the average level of net NPAs for all banks to below 3% and finally the net NPA should be reduced to 0%

SECOND PHASE OF REFORMS

For banks with high NPA portfolio, all loan assets in the doubtful and loss categories should be transferred to an Asset Reconstruction Company. We should move towards international practices in regard to income recognition by introduction of norms of 90 days in a phased manner. Banks should pay greater attention to asset liability management to avoid mismatches and to cover, among others, liquidity and interest rate risks. There should be an independent loan review mechanism especially for large borrowal accounts and systems to identify potential NPAs. In order to rationalize the staff strengths, it is necessary to introduce an appropriate VRS scheme The DFIs should, over a period of time, convert themselves to banks

SECOND PHASE OF REFORMS

The minimum share holding by Govt. / RBI in the equity of the nationalized banks and SBI should be brought down to 33%. The RBI as a regulator of the monetary system should not be the owner also of a bank in view of the potential for possible conflicts of interest. The minimum net worth of NBFCs should be progressively enhanced to Rs 200 lacs The inter-bank call and notice money market and inter-bank term money market should be strictly restricted to banks and primary dealers only There should be no recourse to any scheme of debt waiver in view of its serious and deleterious impact on the culture of credit. RRBs and Cooperative Banks should reach a minimum of 8% of capital to risk weighted assets over a period of 5 years