BANKING SECTOR REFORMS


For any economy, the banking sector plays a very important role because it regulates its smooth functioning. The banking sector reforms in India are being made from time to time not only to promote the efficiency and productivity of the banking system but also to stabilize the economy.

The first bank that was formed in the eighteenth century was called the Imperial Bank of India which, post independence came to be known as the State Bank of India. Though the Reserve Bank of India came into being in the year 1935, its role to monitor the banking sector and the policies related to it was formalised in 1949. Most of the banks at that time were private, so the need to bring them under one umbrella arose and 14 commercial banks were nationalised in 1969 with the Nationalization of Banks Act 1964.

In the 1990s, when the wave for Liberalisation, Privatisation, and Globalisation was riding high, the P V Narasimha Rao government introduced major policy changes in the banking sector that brought in the initiation of the Global banks, foreign direct investments(FDIs), flexibility in licensing and taxation and many such reforms. Many acts and reforms were instituted, to strengthen the banking system, in two phases. The first phase revolved around basic policy and institutional frameworks. And the second phase revolved around structuring and developing the industry with advancements.

1. The Narasimham Committee 1991 – First Phase

This committee was formed right after the economic crisis under the chairmanship of M. Narasimham, the 13th governor of RBI.

It suggested – Autonomy in Banking, Reforms in the role of RBI, Change in CRR and SLR, Recovery of Debts, Freedom of Operation, Local Area Banks, Prudential Norms, and Entry of Foreign Banks.

2. The second Narasimham Committee 1998 – Second Phase

This committee was an extension of the first one. It suggested – Development Finance Institution, Stronger banking system, the idea of Non-performing assets, Capital adequacy and tightening of provisioning norms, and, Rural and Small Industrial Credits.

The focus of these committees and many others after them was in the areas of Non-performing areas (NPAs), Capital Adequacy and Diversification of Operations.

Importance of Banking Sector Reforms

· To remove the external restriction on banks like high-interest rates, reserve requirements (CRR and SLR), and frequent change in interest rates.

· To smoothen the process of bank formation in India.

· To increase the Foreign direct investments.

· To improve the efficiency and productivity of banks by merging them.

Some of the noteworthy reforms in the banking sectors are Foreign Exchange Management Act, Prevention of Money Laundering Act, Industrial Development Banking Act, The Banking Ombudsman Scheme, The Companies Act (Amended),2015.

The Government recently announced the fifth generation of Banking reforms, involving the establishment of a Development Finance Institution (DFI) for infrastructure, creation of a Bad Bank to address the problem of chronic non-performing assets (NPAs), and privatisation of public sector banks (PSBs) to ease its burden in terms of mobilising additional capital.

In the words of our present Finance Minister Ms Nirmala Sitharaman, India is committed to privatisation, bank reforms, repositioning of the economy and globalisation challenges.

A Good Banking system is synonymous with the strong financial health of a country.


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