Reforms in the Banking Sector | Commerce & Accountancy Optional Notes for UPSC PDF Download

Key Elements of Banking Sector Reforms in India

Key Elements of Banking Sector Reforms in India:

• Liberalization:
  • Reforms commenced in the 1990s with the liberalization of the Indian economy.
  • Reduced government control, permitted entry of private and foreign banks, and encouraged competition.
• Capital Adequacy:
  • Adoption of Basel norms (Basel I, II, and III) to enhance banks' capital adequacy.
  • Mandates banks to maintain a minimum level of capital, ensuring the ability to absorb potential losses for financial stability.
• Asset Quality:
  • Addressed non-performing assets (NPAs) by introducing the Insolvency and Bankruptcy Code (IBC).
  • Aims to expedite the resolution of stressed assets and improve recovery mechanisms.
• Governance and Risk Management:
  • Reforms focused on improving corporate governance practices for transparency, accountability, and effective risk management.
  • Establishment of the Banking Codes and Standards Board of India (BCSBI) to strengthen customer protection.
• Financial Inclusion:
  • Initiatives like Pradhan Mantri Jan Dhan Yojana (PMJDY) promote financial inclusion by providing banking access to unbanked segments.
  • Encouraged the use of technology, such as mobile banking and digital payments, to enhance financial access.
• Regulatory Framework:
  • The Reserve Bank of India (RBI) plays a pivotal role in implementing reforms.
  • Introduction of regulations and guidelines to strengthen prudential norms, risk management, and bank supervision.
• Merger and Consolidation:
  • Encouragement for the merger and consolidation of public sector banks to create stronger, more efficient entities.
  • Aims to improve operational efficiency, reduce costs, and enhance capital adequacy.
• Financial Technology (FinTech) and Innovation:
  • Reforms promote the adoption of financial technology and digital innovation.
  • Development of payment systems, encouragement of fintech startups, and creation of regulatory sandboxes to foster experimentation and innovation.

Banking Sector Reforms Since 1991

The banking sector reforms in India, initiated post-1991, sought to liberalize and modernize the banking system with the objectives of improving efficiency and fostering financial stability. Multiple committees were established to propose measures and advocate for reforms.
Let's delve into the primary committees and their recommendations:

Narsimha Committee I:

• Chaired by M. Narasimham, former RBI Governor.
• Proposed measures to fortify the banking system, advocating for diminished government interference, heightened RBI supervision, and increased transparency.
• Suggested lowering the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) to enhance bank liquidity.
• Advocated for the rejuvenation of weak banks, reinforcement of bank management, and the implementation of prudential norms.

H. Khan Committee:

• Led by R. H. Khan, former Deputy Governor of RBI.
• Examined the effectiveness of the financial system for the small-scale sector and the role of primary dealers.
• Made recommendations to improve credit delivery to the small-scale sector and enhance the operations of primary dealers.

Narsimham Committee II:

• Followed up on Narsimham Committee I, focusing on reviewing reform progress.
• Stressed the necessity for structural reforms, consolidation of the banking sector, and the establishment of robust, independent regulatory bodies.
• Recommended reducing the government's stake in public sector banks (PSBs) to below 33% and elevating corporate governance standards in PSBs.

Raghuram Rajan Committee:

• Headed by Raghuram Rajan, former Chief Economist of the IMF.
• Tasked with examining financial sector reforms in India.
• Provided recommendations aimed at fortifying the banking system, fostering financial inclusion, and promoting financial stability.

Financial Sector Legislative Reforms Commission (FSLRC)

• Headed by Justice B. N. Srikrishna.
• Tasked with reviewing and restructuring the legal and regulatory framework of the financial sector in India.
• Aims to consolidate and streamline laws governing the financial sector, covering banking, insurance, securities, and pensions.

PJ Nayak Committee:

• Led by P. J. Nayak, formed to assess the governance of Public Sector Banks (PSBs).
• Emphasized the necessity for governance reforms, advocating for a strengthened role of the board, empowerment of bank management, and professionalization of executive appointments.
• Recommended reducing government interference and promoting greater board involvement in crucial decisions, including appointments and capital allocation.

Nachiket Mor Committee:

• Headed by Nachiket Mor, established to examine Comprehensive Financial Services for Small Businesses and Low-Income Households.
• Recommended measures to boost financial inclusion, including the creation of payment banks, small finance banks, and the introduction of a universal electronic bank account (Jan Dhan Yojana).
• Proposed the concept of "payment banks" to offer essential banking services, such as payments and remittances, to underserved sections of society.

Indradhanush Framework:

• Introduced in 2015 by the Government of India to revitalize and reform public sector banks (PSBs).
• Aims to enhance efficiency, transparency, and governance of PSBs, strengthening their capacity to support economic growth.
• Seven pillars of the Indradhanush framework include:
  • Improving the selection process for top management positions to attract skilled professionals.
  • Establishing the Bank Board Bureau (BBB) as an autonomous body to provide guidance and enhance governance in PSBs.
  • Infusing capital into PSBs to fortify balance sheets and meet Basel III capital adequacy norms.
  • Implementing measures to address non-performing assets (NPAs) and stressed assets.
  • Granting more autonomy to bank boards and empowering them with greater decision-making authority.
  • Introducing a Framework of Accountability to hold PSB management accountable for performance.
  • Enhancing transparency, risk management, and governance practices in PSBs.

HR Khan Committee:

• Headed by H. R. Khan, former Deputy Governor of RBI.
• Formed to examine the existing framework for monetary policy in India.
• Made recommendations on issues like inflation targeting, monetary policy transmission, and improving the decision-making process of the RBI's Monetary Policy Committee (MPC).

4R Framework

• Introduced in 2017 as a part of the government's strategy to tackle the rising issue of bad loans in the banking system.
• Focused on four key elements:
  • Recognition: Swift identification and classification of stressed assets as Non-Performing Assets (NPAs) to accurately assess the problem's extent.
  • Recapitalization: Infusing capital into banks to enhance their financial health and increase their lending capacity.
  • Resolution: Establishing mechanisms for the timely resolution of stressed assets through processes like the Insolvency and Bankruptcy Code (IBC) and other resolution frameworks.
  • Reforms: Implementing structural reforms to enhance the governance, risk management, and operational efficiency of banks.
• Aims to address the challenges related to stressed assets, promote transparency and accountability, and strengthen the overall resilience of the banking sector.

EASE (Enhanced Access and Service Excellence) Framework

Initiated in 2018 to enhance the performance of public sector banks (PSBs) in India.
Key features include:

• Governance Reforms:
  • Strengthening the governance structure of PSBs.
  • Enhancing board effectiveness and transparency.
  • Reinforcing risk management practices.
• Responsible Banking:
  • Encouraging PSBs to align activities with national development goals.
  • Promoting social objectives and environmental sustainability.
• Credit Offtake:
  • Improving credit processes and streamlining lending procedures.
  • Promoting digital lending platforms.
  • Enhancing credit access for small and medium-sized enterprises (SMEs), agriculture, and retail borrowers.
• Deepening Financial Inclusion:
  • Expanding banking services in unbanked and underbanked areas.
  • Leveraging technology for broader reach and accessibility.
  • Providing affordable banking services to all sections of society.
• Customer Responsiveness:
  • Adopting a customer-focused approach in PSBs.
  • Simplifying processes and utilizing technology for seamless banking experiences.
• Responsible Banking Index:
  • Introducing an index to assess and rank PSBs based on responsible banking practices.
  • Evaluating governance, credit, and customer service parameters.
  • Promoting healthy competition and continuous improvement.

Bimal Jalan Committee:

• Chaired by Bimal Jalan, formed to review the economic capital framework of the Reserve Bank of India (RBI).
• Recommended transferring a portion of RBI’s surplus reserves to the government.
• Aimed to revise the framework for determining RBI’s capital requirements, striking a balance between the central bank’s need for capital buffers and the government’s fiscal requirements.