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The Banking has come a long way from the days
of presidency banks.
In pre-independence and post –independence
period and even after independence , banking was
handicapped by the poor saving habits of people .
During the Second World War , there was a
mushroom growth of bank offices.
During 1939-45,on an average a bank failed every
sixth day which endangered the banking industry.
The position was controlled with enactment of the
Banking Companies (Regulation)Act,1949.
Foundation Phase
2. Expansion Phase
3. Consolidation Phase
4. Reform Phase
1.
The period upto first ‘nationalization of
banks’ i.e. 1969.
 Focus – laying of a foundation for sound
banking system.
 Setting up of required legal framework
for consolidating the banking system.
 Imperial Bank of India converted into the
State bank of India.
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Princely state banks converted into
associate banks of the State Bank of India.
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This phase started in mid 1960s but gained
momentum in July 1969.
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A phase of ‘mass banking’.
The network of branches expanded at a rapid
speed.
Credit was directed into priority sector.
Banks emerged as important instrument of socioeconomic change but fast expansion created
certain problems.
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This phase started in 1985.
 The weakness of expansion phase pushed banking
into consolidation phase.
 The RBI started some initiatives like relaxation in
control.
 AIM- was to overcome the weaknesses which
emerged from fast expansion and too much of
control of RBI.
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From 1947-1990, there was impressive widening of
the banking system but at the end of 1990 there was a
general consensus that banking system has not
become sound enough.
In 1991, India faced a macro- economic crisis.
Concerned Govt. of India appointed a high level
committee headed by Shri M.Narasimham.
Another committee headed by Mr. Khan .
Banking sector is centred around recommendations
from these experts.
The committee can be described as committee on
financial sector reforms.
 The committee was appointed to examine
structure ,organisation and function of financial
system.
 The second committee also headed by M.
Narasimham was for reviewing financial sector
reforms .
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SLR and CRR
Higher interest rates on SLR and CRR
Phasing out of Directed Credit
Deregulate interest rates
Capital Adequacy Norms
Adoption of Uniform Accounting Practices
Income Recognition
Provisions
Transparency
10.Asset Re - construction Fund
11.Structure of Banking System
12.Branch Licensing
13.Computerisation
14.Control
15.Development Financial Institutions
M . Narasimham headed the committee on review of
financial sector reforms . It submitted its report in
April , 1998.
1. Need for a strong banking system
2. Merger of strong banks
3. Narrow banking for weak banks
4. Confine area of local banks
5. Review govt.’s role in public sector banks
6. Review capital adequacy norms
7.Review legislations
8.Lesser regulation and supervision
9.Integrate lending activities
10.Speed up computerisation
11.Review personnel policies
12.Safeguard against vigilance enquiries
13.Depoliticise bank boards
14.System for asset liability and risk management
15.Assets reconstruction company (ACR)
16.New watch dog for banks
17.Money market rate
(Working Group for Harmonisation of the Operations of
Development Financial Institutions (DFI’s) and Banks)
The Khan Committee reviewed the role ,structure and operations of
DFI’s and banks in the emerging operating environment and
submitted its report in may 1998. It’s important recommendations
are :
1. Need for a super regulator
2. Redefine priority sector
3. Mergers between FI’s and banks
4. Co-ordination Committee
5. Removal of certain restrictions
6. Move towards universal banking
7. Recommendations regarding state – level financial institutions (SLI)
8. Other recommendations
The RBI set up the group to suggest measures for revival
of weak public sector banks.
In summarised form the recommendations of the panel
in each of the area can be summed up as follows:
1.OPERATIONAL RESTRUCTURING:
a) Change in mode of operations
b) NPA management
c) Cost reduction
2.ORGANISATIONAL RESTRUCTURING
3.FINANCIAL RESTRUCTURING
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According to RBI’s declaration, Indian banks having
foreign branches and foreign banks operating in India
have to migrate to BASEL 2 norms from March
31,2008 while all other commercial banks excluding
local area banks and Regional Rural Banks have been
permitted to adopt BASEL 2 norms latest by
March31, 2009. To prepare banks for
implementation of BASEL 2 norms , a three -track
approach has been adopted by the RBI with regard to
capital adequacy rules
The Govt. of India primarily relied on
recommendations of various committee’s and
working groups to start the process of reforms. The
changes brought down by the process of reforms are
discussed below:
1. Reduction in SLR AND CRR
2.Higher Interest Rates on SLR and CRR
3.Deregulation of interest rates
4.Change in the approach of banks
5.Setting up of new banks
6.Turning into buyer’s market
7.Capital adequacy norms
8.Directed credit
9.Prudential accounting standards
10.Valuation of bank’s investment in govt . securities
11.Branch licensing
12.Bank’s access to capital market
13.Bank’s supervision
14.Customer services
15.Merger of banks
16.Recovery tribunals
17.Computerisation
18.Narrowing down of distinction between banks and financial
institutions
19.Reduction of non- performing assets
The process of globalisation and liberalisation has presented certain
challenges to the Indian banking . They are briefly discussed
below:
1. Competition from global majors
2. Competition from new banks
3. Pressure on spread
4. Changes in product pricing
5. Relationship banking
6. Self –regulation by banks
7. Challenges from the structure of Indian economy
8. Management of non- performing assets
9. Managing technology