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Banking & Financial Reforms
Group 3
Anantharaman N
Karthic R
Pranay Kumar
Apoorv S
Vijay V
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Introduction
Pre-Reform Banking Sector
Planned development, mixed economy
framework
Fiscal activism- Focus on long gestation projects
Lowered interest rates for govt. securities
Ad Hoc treasury bills High levels of fiscal deficits
Frequent increase in CRR
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Contd..
Issues
Segmented and underdeveloped financial markets
Complex structure of interest rates Lack of importance to transparency,
accountability and prudential norms
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Objectives of Reforms
Eliminate complexity
Enabling growth of financial market
Provide operational and functional autonomy Accommodate global growth
Opening of external sectors
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Pre liberalization periodAn Overview
Handcuffed institutions
Strong govt regulations
Preference for public sector institutions Stringent regulation in WCM
Exploitation of loopholes
The balance of payments crisis
Threat of insolvency
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Financial & Banking Sector Reforms
Tarapore Committee Recommendations
Set by RBI to lay road map to capital accountconvert ability in 1997, 5 member committee
Preconditions Fiscal consolidation
Mandated Inflation target
Strengthening of financial system
Account limit specification
Capital inflow should be converted to semi-liquidassets
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Tarapore Committee Recomendation
Capital Account Convertibility
Freedom to convert local financial assets into foreignfinancial assets and vice versa.
Undergone changes from the emerging marketeconomics
Portfolios or FDI
Key Lessons
Preparedness, Infrastructure Prolonged, over valued exchange rates
Gradual and phased liberalization
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Tarapore Committee Recomendation
Key Lessons cntd
Channelizing the investments
Regulatory and supervisory measures
Capital inflows should be put in semi liquid assets
CAC does not serve the main purpose of the majorproblems in the country
Transaction across countries help them to providea cheaper rates of interest
Improve the efficiency of the businesstransactions.
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Pending Reforms
Pension Sector
Help the elderly people from the economicdeprivation
Tier I &Tier II accounts
Contribution based reform
Govt cut down the salary components
Conditions of withdrawal
No mention about the tax benefits
Economical transaction of 2100 crore rupees
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Goods & Service Tax
To be implemented by april 2012
Replaces indirect taxes
GST is a comprehensive value added tax levied on goods and services (No differentiation)
Dual rate -- Central GST and State GST
Both the taxes would be applying on the same tax base
15 Million for the central and 1 Million for state
Low rate for unnecessary items and standard rate for general goods
Procurement Higher tax outgo, credit availability, exemptions
Distribution Tax efficiency, replacement by refund schemes
Commercial increase in rate of tax, increase in GST credit
Others Redesign ofIT system, registrations, Interoperability
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Land Acquisition
Acquisition, industrialization, infrastructure development
Provides better deal, higher compensation
Information exchange with authorities
Enables rehabilitation and relief to the person
Protection against forceful occupation
Law applicable for 50 acres in urban area and 100 acres inrural
Agitation and increased responsibility
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Direct tax code Replacement of the current tax system
Brackets and dividend distribution tax
Exemption investment limit
ITA to be follow the DTC Surcharge and cess are abolished
TE on LTA, Medical reimbursement
Impact on the tax savings
Impact on the home loans
Enforcement of tax legislation Strong and bold step to eliminate ambiguity
Tax benefits for foreign companies
GAAR,CFC to avoid aggressive tax avoidance plan
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Narasimham Committee
1991 RBI proposed the committee chaired by M. Narasimhamformer RBI governor to review the financial system
Review aspects relating to the structure, organization,procedure and functioning of the financial system
Constituted in 1991, the committee submitted two reports in1991 and 1992 which laid significant thrust on enhancing the
efficiency and viability of banking sector
The Narasimham committee laid the foundation for thereformation of the Indian Bank sector
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Why
Phenomenal increase in the geographic coverage of our
banking institution
Despite impressive quantitative achievement low efficiencyand productivity, bad portfolios performance and eroded
profitability
Several public sector banks and financial institutions wereincurring losses year after year
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Problems Faced
Higher rates of CRR(15%) and SLR(38.5%)
Directed credit programs
Political and Administrative interference
Subsidizing of credit
Mounting expenditures of banks
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Recommendations
Reduction of Statutory Liquidity Ratio (SLR) to 25% over a period of five
years
Progressive reduction in Cash Reserve Ratio (CRR) to 3-5%
Phasing out of directed credit programme and redefinition of the priority
sector
Stipulation of minimum capital adequacy ratio of 8% by March 1996
Adoption of uniform accounting practices in regard to income recognition,
asset classification and provisioning against bad and doubtful debts
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Continued
Setting up of special tribunals to speed up the recovery process of loans
Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a
portion of their bad and doubtful advances at a discount
Abolition of branch licensing
Liberalizing the policy with regard to allowing foreign banks to open
offices in India
Giving freedom to individual banks to recruit officers
Revised procedure for selection of Chief Executives and Directors of
Boards of public sector banks
Speedy liberalization of capital market
Enactment of a separate legislation providing appropriate legal framework
for mutual funds and laying down prudential norms for such institutions,
etc
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Committee On Banking Sector Reforms 1998
1998- Finance minister appointed Mr. Narasimham aschairman of one more committee
This committee was asked to review the progress ofbanking sector reforms to date and a programme onfinancial sector reforms to strengthen India's financialsystem and make it internationally competitive
The committee submitted its report to the government inApril 1998
The report covered issues like- capital adequacy,bank mergers, recasting bank board, and creation ofglobal sized banks
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Major Recommendations of Narasimham Committee
1998
Need for stronger banking system
Experiment with concept of narrow banking
Small local banks
Capital Adequacy Ratio
Review and update banking laws
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The Effect
Emergence of 9 new private sector banks
Opening up of vibrant capital market
Great impact on banks balance sheets both onassets and liabilities side
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Some Facts
Branch expansion: Increased from 8260 in
1969 to 71177 in 2006
Population served per branch has come down
from 64000 to 16000
A rural branch office serves 15 to 25 villages
within a radius of 16 kms
However, at present only 32,180 villages out
of 5 lakh have been covered
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Continued
Banking has moved from deposit and lending
to
Merchant banking
Mutual funds
Retail banking
ATMs
Internet banking
Venture capital funds
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Conclusion
Way Ahead
Consolidation
Adoption of Basel II
Risk Management
Improvement in customer service