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Financial Reforms In Banking Sector

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A study on financial reforms in banking sectors in India
Abstract:
The Indian Banking sector is an important constituent of the Indian Financial system. Banking sector plays an important role in developing countries. Development in the financial sector, particularly banking sector increase the efficiency of resources which in turn stimulate and improve the economic growth. Without effective banking system, India cannot be considered as healthy economy. In August 1991, the Government appointed a committee under the chairmanship of M. Narasimham, which worked for the liberalization of banking practices. The aim of this Committee was to bring about operational flexibility so as to enhance efficiency, productivity and profitability of banks. This …show more content…

The first stage of reforms was shaped by the recommendations of the Narsimham Committee on the Financial System, which submitted its report in December 1991, suggesting reforms in banking, the government debt market, the stock markets, and in insurance, all aimed at producing a more efficient financial sector. Subsequently, the East Asian crisis in 1997 led to a heightened appreciation of the importance of a strong banking system, not just for efficient financial intermediation but also as an essential condition for macroeconomic stability. Recognizing this, the government appointed a Committee on Banking Sector Reforms to review the progress of reforms in banking and to consider further steps to strengthen the banking system in light of changes taking place in international financial markets and the experience of other developing …show more content…

Reduced CRR and SLR: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) are gradually reduced during the economic reforms period in India. It is reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, the SLR is also reduced from 38.5% to current minimum of 25% level. This has left more funds with commercial banks, solving the liquidity problem.

2. Deregulation of Interest Rate: Another important development has been made i.e interest rates of commercial banks were deregulated. Banks now enjoy freedom of fixing the interest rate except interest on savings account, small loan and differential rate of interest loans etc.

3. Prudential Norms: In order to induce professionalism in its operations, the RBI fixed prudential norms for commercial banks. It includes recognition of income sources, Classification of assets, provisions for bad debts etc. It also helped banks in reducing and restructuring Non-performing assets (NPAs). Currently, these norms are close to International

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