Indian Economy Quiz: Banking Reforms since Independence | 15 July, 2021

The three decades after nationalization had seen a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country.

• As certain weaknesses were found to have developed in the system during the late eighties, it was felt that these had to be addressed to enable the financial system to play its role ushering in a more efficient and competitive economy.
• Accordingly, a high-level committee (Narasimham Committee) on Financial System (CFS) was set up on 14 August, 1991 to examine all aspects relating to structure, organization, function and procedures of the financial system—based on its recommendations, a comprehensive reform of the banking system was introduced in the fiscal 1992–93.

Source: TMH Ramesh Singh

The RBI was advised not to use the CRR as a principal instrument of monetary and credit control, in place it should rely on open market operations (OMOs) increasingly. Two proposals advised regarding the CRR:

• CRR should be progressively reduced from the present high level of 15 per cent to 3 to 5 per cent; and
• RBI should pay interest on the CRR of banks above the basic minimum at a rate of interest equal to the level of banks, one year deposit.

Concerning the SLR it was advised to cut it to the minimum level (i.e., 25 per cent) from the present high level of 38.5 per cent in the next 5 years (it was cut down to 25 per cent in October 1997). The government was also suggested to progressively move towards market-based borrowing programme so that banks get economic benefits on their SLR investments.

Source: TMH Ramesh Singh

Under this sub-title the suggestions revolved around the compulsion of priority sector lending (PSL) by the banks:

• Directed credit programme should be phased out gradually. As per the committee, agriculture and small-scale industries (SSIs) had already grown to a mature stage and they did not require any special support; two decades of interest subsidy were enough. Therefore, concessional rates of interest could be dispensed with.
• Directed credit should not be a regular programme—it should be a case of extraordinary support to certain weak sections—besides, it should be temporary, not a permanent one.
• Concept of PSL should be redefined to include only the weakest sections of the rural community such as marginal farmers, rural artisans, village and cottage industries, tiny sector, etc.
• The “redefined PSL” should have 10 per cent fixed of the aggregate bank credit.
• The composition of the PSL should be reviewed after every 3 years.

Source: TMH Ramesh Singh

The differential rate of interest (DRI) is a lending programme launched by the government in April 1972 (Fourth five-year plan) which makes it obligatory upon all the public sector banks in India to lend 1 per cent of the total lending of the preceding year to ‘the poorest among the poor’ at an interest rate of 4 per cent per annum. 

The Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 allows banks and other financial institutions to seize and sell residential or commercial properties of the defaulters to recover loans.

Source: TMH Ramesh Singh

ARCs were introduced to India under the SARFAESI Act (2002), as specialists to resolve the burden of NPAs.

• But the ARCs (most are privately-owned) finding it difficult to resolve the NPAs they purchased, are today only willing to purchase such loans at low prices.

• As a result, banks have been unwilling to sell them loans on a large scale.

Source: TMH Ramesh Singh

The Basel Accords/Norms (i.e., Basel I, II and now III) are a set of agreements set by the Basel Committee on Bank Supervision (BCBS), which provides recommendations on banking regulations in regards to capital risk, market risk and operational risk.

• The purpose of the accords is to ensure that financial institutions have enough capital on account to meet obligations and absorb unexpected losses.

• They are of paramount importance to the banking world and are presently implemented by over 100 countries across the world.

Source: The Hindu

Repos and Reverse Repos: In the era of economic reforms there developed two new instruments of money market-repo and reverse repo. Considered the most dynamic instruments of the Indian money market they have emerged the most favored route to raise short-term funds in India.

• ‘Repo’ is basically an acronym of the rate of repurchase. The RBI in a span of four years, introduced these instruments-repo in December 1992 and reverse repo in November 1996.
• Repo allows the banks and other financial institutions to borrow money from the RBI for short-term (by selling government securities to the RBI).
• In reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions).

• All government securities are dated and the interest for the repo or reverse repo transactions is announced by the RBI from time to time.
• The provision of repo and the reverse repo have been able to serve the liquidity evenness in the economy as the banks are able to get the required amount of funds out of it, and they can park surplus idle funds through it.
• These instruments have emerged as important tools in the management of the monetary and credit policy in recent years.

Source: Sriram’s Economy

Acronym derived from the terms capital adequacy (C), asset quality (A), management (M), earnings (E), liquidity (L) and systems for control (S).

The acronym is used as a technique for evaluating and rating the operations and performance of banks all over the world.

Source: TMH Ramesh Singh

Debt Recovery Tribunals also known as DRTs were created to facilitate the speedy recovery of debt payable to banks and other financial institutions by their customers.  

• The banks and financial institutions had been facing problems in recovery of loans advanced by them to individual people or business entities.  
• Due to this, the banks and financial institutions started restraining themselves from advancing out loans.  

• There was a need to have an effective system to recover the money from the borrower. 
• DRTs were set up after the passing of Recovery of Debts due to Banks and Financial Institutions Act (RDBBFI), 1993. 

Source: Sriram’s Economy