Banking Sector Reforms

Pre-Reform Era Prior to reforms, the Indian banking Sector was characterised by: Administered interest rate structure Quantitative restrictions on credit flows High Reserve Requirements Imposition of stringent regulations by RBI Low productivity / efficiency in PSU banks Deteriorating portfolio quality/ increasing NPAs

Pre-Reform Era Inferior work technology Poor quality of customer service Inability to face competition It was in the above circumstances that the first Narasimham Committee was set up.

Narasimham Committee The first Narasimham Committee was set up in 1991 to suggest remedial measures for strengthening the banking system encompassing: Banking Policy Institutional Structure Supervisory System Legislative and technological changes

Thrust of reforms The main thrust of economic reforms was on: Removal of structural bottlenecks Introduction of new players and instruments Introduction of free pricing of financial assets Relaxation of quantitative restrictions Improvement in trading, clearing and settlement practices Promotion of institutional infrastructure Ensuring of technological upgradation.

First Phase of Banking Sector Reforms included the following: Reduction in SLR and CRR to 25% and 10% respectively De-regulation of interest rates on deposits and advances Transparent guidelines for private sector reforms Modification of bank balance sheet and P&L a/c to disclose more information

First Phase of Banking Sector Reforms included the following: Direct access to capital markets for PSU banks Liberalised branch licensing policy and more licenses for private sector banks Setting up of Debt Recovery Tribunals to ensure quick recovery of debts Prudential norms for income recognition, asset classification and provisioning of bad debts Capital adequacy norms –BIS norms on capital adequacy to be followed.

Non Performing Assets (NPA) The Narasimham Committee (1991) identified NPAs as one of the possible causes / effects of the malfunctioning of PSU banks. NPAs are those categories of assets (advances , bills disc, cash credit, etc) which cease to generate income for the bank.

Basis of treating an asset (credit facility) as NPA Where the interest and installments remain overdue for a period exceeding 90 days Any bill which remain overdue for a period of 90 days Any amount due on any other loan which remain overdue for a period exceeding 90 days 4. Any Cash Credit / overdraft facility which remains out of order for a period exceeding 90 days

Asset Classification Standard asset Sub Standard Asset Doubtful asset Loss asset

Standard Asset is one which does not carry more than normal risk attached to the business and which does not disclose any problems.

Sub Standard Asset is one which has been classified as NPA for a period not exceeding 12 months.

Doubtful Asset is one which has been classified as NPA for a period exceeding 12 months.

Loss Asset Loss Asset is one where loss has been identified by the bank or internal or external auditors or RBI Inspectors , but the amount has not been written off.