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Banking Sector Reforms
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Pre-Reform Era
Prior to reforms, the Indian banking Sector was
characterised by:
Administered interest rate structure
Quantitative restrictions on credit flows
High Reserve Requirements
Imposition of stringent regulations by RBI Low productivity / efficiency in PSU banks
Deteriorating portfolio quality/ increasing NPAs
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Pre-Reform Era
7. Inferior work technology
8. Poor quality of customer service
9. Inability to face competition
It was in the above circumstances that
the first Narasimham Committee was
set up.
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Narasimham Committee
The first Narasimham Committee was set up
in 1991 to suggest remedial measures for
strengthening the banking systemencompassing:
1. Banking Policy
2. Institutional Structure3. Supervisory System
4. Legislative and technological changes
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Thrust of reforms
The main thrust of economic reforms was on:
1. Removal of structural bottlenecks
2. Introduction of new players and instruments3. Introduction of free pricing of financial assets
4. Relaxation of quantitative restrictions
5. Improvement in trading, clearing and
settlement practices6. Promotion of institutional infrastructure
7. Ensuring of technological upgradation.
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First Phase of Banking Sector Reforms
included the following:
1. Reduction in SLR and CRR to 25% and 10%
respectively2. De-regulation of interest rates on deposits andadvances
3. Transparent guidelines for private sector
reforms4. Modification of bank balance sheet and P&L a/c
to disclose more information
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First Phase of Banking Sector Reforms
included the following:
5 Direct access to capital markets for PSU banks
6 Liberalised branch licensing policy and morelicenses for private sector banks
7 Setting up of Debt Recovery Tribunals to ensurequick recovery of debts
8 Prudential norms for income recognition, asset
classification and provisioning of bad debts9 Capital adequacy norms BIS norms on capital
adequacy to be followed.
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Non Performing Assets (NPA)
The Narasimham Committee (1991) identified NPAs
as one of the possible causes / effects of the
malfunctioning of PSU banks.
NPAs are those categories of assets (advances ,
bills disc, cash credit, etc) which cease to generate
income for the bank.
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Basis of treating an asset
(credit facility) as NPA
1. Where the interest and installments remainoverdue for a period exceeding 90 days
2. Any bill which remain overdue for a period of90 days
3. Any amount due on any other loan whichremain overdue for a period exceeding 90 days
4. Any Cash Credit / overdraft facility whichremains out of order for a period exceeding 90days
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Asset Classification
1.Standard asset
2.Sub Standard Asset
3.Doubtful asset
4.Loss asset
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Standard Asset
is one which does not carry
more than normal riskattached to the business andwhich does not disclose any
problems.
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Sub Standard Asset
is one which has been
classified as NPA for aperiod not exceeding 12
months.
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Doubtful Asset
is one which has beenclassified as NPA for a period
exceeding 12 months.
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Loss Asset
Loss Asset is one where loss hasbeen identified by the bank orinternal or external auditors orRBI Inspectors , but the amounthas not been written off.