Banking Sector Reforms : an Analytical Overview and Challenges Ahead

Abstract

Embarking upon a course of economic Reforms in 1991, it was realized that financial sector reforms are must to streamline the economic system with the whole course of economic reforms. Not only theoretical but the practical scenario of the entire banking industry was much demanding for the reforms at that time. Plagued by the administered interest rates, high statutory reserve ratios, absence of prudential accounting and legal norms, disguised balance sheets due to non transparent disclosures, mounting levels of NPA, less per capita profit and capital in banking industry, low advance and deposit ratio, poor staff and fund management, monopoly of public sector banks and lack of competition by the private sector and foreign banks, protection to inefficiencies and political disruption in banking etc. all demanded an instant course of necessary action. Narsimhan committee, Tarapore committee on conversion of rupee, Reddy report etc have thus suggested the measures to be taken. A lot of recommendation of first phase of reforms have been accepted and implemented also yet a long distance has still to be covered. The present article takes an analytical overview of the banking reforms in India and hereby suggests that Convergence Consolidation and Convergence will remain the key of the Banking Sector Reforms. Up gradation of the accounting norms according to Basle Capital Adequacy Accord and greater autonomy in staff management and in up gradation of the organizational structure of specially the public sector bank and more specifically of the rural sector banks is essential. Providing flexibility in prescribing the statutory CRR and SLR and inviting legislative changes accordingly is also requirement of the day. Vertical and horizontal integration of all the banks with the help of intensive exploration of Information Technology is also must to provide a reliable network of financial services to the growing number of consumers across all the categories. To improve on the lower advance and deposit ratios and to improve on the NPA level and risk management techniques and strategies, such type of integrated network and Biometric identification of customers in all categories should be mandatory. This will help the banking industry to expand its credit base in agricultural, industrial and tertiary sector of the economy with more precision and less risk. Evolution of corresponding regulatory framework according to needs of globalization is also must. E business, global movement of heavy capital due to transnationalism of big business houses, cartels and multinational corporations, money laundering and parallel economy are the emerging challenges for appropriately designing and effectively implementing such type of framework and are the greatest concern of the day for the industry. For consolidation of the banks, not only supporting the banks with larger volumes of capital against greater risks, but also upgrading asset classification system and appropriating a suitable risk management system in face of Basle accord and latest concurrent practices of the other globalize countries, is necessity. Effective Management of funds and optimizing returns from portfolio management, updating accounting and disclosure norms, and providing functional and operational autonomy to the banks are also helpful to consolidation of the internal structure of the banks. Consolidation of the banks at the structural level is therefore a prerequisite of the financial consolidation of the banks, however attended late. Thus the corresponding roadmap prescribed by the government hereby contains a plethora of corresponding measures including providing guidelines for the expansion of foreign banks, merger and acquisition games, ownership and governance issues of Private sector banks, Recapitalization of public sector banks and upgradation of their internal structure and prudential norms according to global practices etc. visualizes changes in two distinct phases. During the first phase beginning March 2005 and ending March 2009, foreign banks can establish wholly owned subsidiaries (WOS) or convert existing branches into WOS. Detailed guidelines have been issued by the RBI. They cover eligibility criteria for the applicant foreign bank, ownership pattern, international ranking and capital adequacy (at least Rs. 300 crores). At last but not the least RBI is putting its stake on reforms with due attention. However the course is always unending due to limitation posed by the status of overall economy, its difference from the developed countries, prevailing fiscal and monetary considerations, limitation of the resource base for financing infrastructural, and development of the banking industry and infusing private and foreign capital in the industry, all require a lot of attention in a very dynamic perspective. Hence any static course of reform is thus neither sufficient nor practically possible. Only a gradual, speedy and effective process of reform can do the justice. Overview of the reforms only suggests that a lot of work is still to be done.