Post 1991 Banking Sector Reforms in India: Policies

and Impacts

MR. BASANTA KALITA#

Tezpur College

ABSTRACT

The banking sector reforms in India were started as a follow up measures of the economic
liberalization and financial sector reforms in the country. The banking sector being the life
line of the economy was treated with utmost importance in the financial sector reforms. The
reforms were aimed at to make the Indian banking industry more competitive, versatile,
efficient, productive, to follow international accounting standard and to free from the
governments control. The reforms in the banking industry started in the early 1990s have
been continued till now. The paper makes an effort to first gather the major reforms measures
and policies regarding the banking industry by the govt. of India and the Central Bank of
India (i.,e. Reserve Bank of India) during the last fifteen years. Secondly, the paper will try to
study the major impacts of those reforms upon the banking industry. A positive responds is
seen in the field of enhancing the role of market forces, regarding prudential regulations
norms, introduction of CAMELS supervisory rating system, reduction of NPAs and regarding
the up gradation of technology. But at the same time the reform has failed to bring up a
banking system which is at par with the international level and still the Indian banking sector
is mainly controlled by the govt. as public sector banks being the leader in all the spheres of
the banking network in the country.

# Lecturer, Department of Economics, Tezpur College, Tezpur, Assam, India-784001

Name of the Presenter: Mr. Basanta Kalita

Electronic copy available at: http://ssrn.com/abstract=1089020

 Post 1991 Banking Sector Reforms in India:
Policies and Impacts
Introduction

Commercial banking has been one of the oldest businesses in India and the earliest
reference of commercial banking in India can be traced in the writings of Manu. Modern
banking in India can be dated as far back as in 1786 with the establishment of General Bank
of India. In the early nineteenth century three Presidency Banks were established in Bengal,
Bombay and Madras and in 1921 they were merged in to newly form Imperial Bank of India.
The Imperial Bank of India was converted in to State Bank of India under the State Bank of
India Act, 1955. The swadeshi movement witnessed the birth of several indigenous banks
such as Punjab National Bank, Bank of Baroda and Canara Bank (Chakraborty, 2006).
In order to increase its control over the banking sector, the govt. of India had
nationalized 14 major private sector banks with deposits exceeding Rs.500 million in 1969.
This had raised the number of scheduled bank branches under govt. control to 84 percent
from 31 percent (Chakraborty, 2006). But the poor performance of the public sector banks
was increasingly becoming an area of concern. The continuous rise of non-performing assets
(NPAs) of banks posed a significant threat to the stability of the financial system. Hence,
banking reforms were made an integral part of the liberalization process. The financial sector
reforms started in 1991 had provided the necessary platform for the banking sector to operate
on the basis of operational flexibility and functional autonomy enhancing productivity,
efficiency and profitability (Talwar, 2005). While several committees have gone in to the
problems of commercial banking in India, the two most important of them are-

a) Narasimham Committee I (1991).

b) Narasimham Committee II (1998).

Objectives of the study

The main objective of the research paper is to make a simple assessment of the
banking sector reforms in India. It has been more than 15 years of the start of the economic
reform in India and the financial sector reform was one of the important parts of the process.
The study will try to list the major reforms of the Indian baking sector and to find out the
impacts of these reforms. The study will be confined to the impacts of reforms upon credit
delivery, share of market of banks, profitability and prudential regulations.

Electronic copy available at: http://ssrn.com/abstract=1089020

Methodology
The methodology followed in the study is very simple and straight one. The study is
based on the secondary data mainly collected from the various publications of the Reserve
Bank of India and different publications of the Govt. of India. No primary data is used in the
research.
Reforms Process
The Narasimham Committee Report I aimed at bringing about operational
flexibility and functional autonomy so as to enhance efficiency, productivity and
profitability. The Narasimham Committee Report II focused on bringing structural changes
so as to strengthen the banking system to make it more stable.
The Narasimham Committee had acknowledged the success of public sector
banks in respect of branch expansion, deposit mobilization in household sector, priority
sector lending and removal of regional disparities in banking. But during the post
nationalization period, the banking sector suffered serious erosion in its efficiency and
productivity (Dhar, 2003). Moreover, the sound banking system has been disturbed by the
system of directed credit operation in the form of subsidized credit flow in the under banked
and priority areas, IRDP lending, loan festival, etc. According to the committee the
operational expenditure of the public sector banks has tremendously increased due to rise in
number of branches, poor supervision, rising staff level and high unit cost administering loan
to the priority sector.
The major recommendations made by the Narasimham I committee report are listed
below-
(1) Establishment of a four-tier hierarchy for the banking structure consisting of three
to four large banks with SBI at the top.
(2) The private sector banks should be treated equally with the public sector banks
and govt. should contemplate to nationalize any such banks.
(3) The ban on setting new banks in private sector should be lifted and the licensing
policy in the branch expansion must be abolished.
(4) The govt. has to be more liberal in the expansion of foreign bank branches and
also foreign operations of Indian banks should be rationalized.
(5) The Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should be
progressively brought down from 1991-92.
 (6) The directed credit program should be re-examined and the priority sector should
be redefined to comprise small and marginal farmers, the tiny industrial sector,
small business operators and weaker sections.
(7) Banking industry should follow BIS/Basel norms for capital adequacy within
three years.
(8) Interest rates should be deregulated to suit the market conditions.
(9) The govt. should tighten the prudential norms for the commercial banks.
(10) The competition in lending between DFIs and banks should be increased and a
shift from consortium lending to syndicated lending should be made.
(11) In respect of doubtful debts, provisions should be created to the extent of 100
percent of the security shortfall.
(12) The govt. share of public sector banks should be disinvested to a certain
percentage like in case of any other PSU.
(13) Each public sector banks should set up at least one rural banking subsidiary and
they should be treated at par with RRBs.
In order to initiate the second generation of financial sector reforms a committee on
Banking Sector Reforms (BIS) was formed in 1998 under the chairmanship of M.
Narasimham. The committee submitted its report on 23rd April 1998 to the Finance Minister
of Govt. of India. Narasimham committee report II had for mergers an acquisitions and had
observed that Central Banks role should be separated from being monetary authority to that
of regulator of the banking sector.
The major recommendations of the second Narasimham II report were mentioned
below-
(1) The committee favored the merger of strong public sector banks and closure of
some weaker banks if their rehabilitation was not possible.
(2) It recommended corrective measures like recapitalization is undertaken for weak
banks and if required such banks should be closed down.
(3) The committee had also suggested an amicable golden handshake scheme for
surplus banking sector staff.
(4) Suggesting a possible short term solution to weak banks, the report observed that
the narrow banks could be allowed as a mean of facilitating their rehabilitation.
(5) Expressing concern over rising non-performing assets, the committee provided the
idea of setting up an asset reconstruction fund to tackle the problem of huge non-
performing assets (NPAs) of banks under public sector.
 (6) The report emphasized the need of enhancement of capital adequacy norms from
the present level of 8 percent but did not specify the amount to which it should be
raised.
(7) The Banking Sector Reform Committee further suggested that existence of a
healthy competition between public sector banks and private sector banks was
essential.
(8) The report envisaged flow of capital to meet higher and unspecified levels of
capital adequacy and reduction of targeted credit.

Types of reform measures for the banking sector

The banking sector reforms started in the early 1990s essentially followed a two
pronged approach; first, the level of competition was gradually increased within the banking
system while simultaneously introducing international best practices in prudential regulation
supervision tailored to Indian requirements. In particular, special emphasis was placed on
building up the risk management capabilities of Indian banks while measures were initiated
to ensure flexibility, operational autonomy and competition in the banking sector. Secondly,
active steps were initiated to improve the institutional arrangements like legal and
technological frameworks (Mohan, 2006). Some of the measures undertaken in this regard
are as follows-

Competition Enhancing Measures

Allowing operational autonomy and reduction of public ownership in public
sector banks by raising capital from equity market up to 49 percent of paid up
capital.
Transparent norms for entry of Indian private sector banks, foreign banks and
joint venture banks.
Permission for foreign investment in the financial sector through foreign direct
investment (FDI) as well as portfolio investment.
The banks are allowed to diversify product portfolio and business activities.
Roadmap for foreign banks and guidelines for mergers and amalgamation of
private sector banks with other banks and NBFCs.
Instructions and guidelines on ownership and governance in private sector banks.
 Measures enhancing role of market forces
Reduction in pre-emption through reserve requirement, market determined pricing
for govt. securities, disbanding of administered interest rates and enhanced
transparency and disclosure norms to facilitate market discipline.
Introduction of auction-based repos and reverse repos for short term liquidity
management, facilitation of improved payments and settlement mechanism.
Significant advancement in dematerialization and markets for securitized assets
are being developed.

Prudential measures
Introduction of international best practices norms on capital to risk asset ratio
(CRAR) requirement, accounting, income recognition, provisioning and exposure.
Measures to strengthen risk management though recognition of different
component of risk, assignment of risk weights to various asset classes, norms of
connected lending, risk concentration, application of market to market principle
for investment portfolio limits on deployment of fund in sensitive activities.
Introduction of capital charge for market risk, higher graded provisioning for
NPAs, guidelines for ownership and governance, securitization and debt
restructuring mechanism norms, etc.
Introduction and roadmap for implementation of Basel II by 31 March 2007.

Institutional and legal measures

Setting up of debt recovery tribunals, asset reconstruction companies, settlement
advisory committees, corporate debt reconstructing mechanism, Lok-Adalat
(peoples court), etc. for quick recovery of debts.
Promulgation of Securitization and Reconstruction of Financial Assets and
Enforcement of Securities Interest (SARFAESI) Act, 2002 and its subsequent
amendment to ensure creditor rights.
Setting up of Clearing Corporation of India Limited (CCIL) to act as a counter
party for facilitating payment and settlement system relating to fixed income
securities and money market instruments.
Setting up of Credit Information Bureau of India Limited (CIBIL) for information
sharing on defaulters as also other borrowers.
 Supervisory measures
Establishment of Board of Financial Supervision as the apex supervisory authority
for commercial banks, financial institutions and non-banking financial companies.
move towards risk based supervision, consolidated supervision of conglomerates,
strengthening of off-site surveillance through control returns.
Recasting of the role of statutory auditors, increased internal control through
strengthening of internal audit.
Strengthening corporate governance, enhance due diligence on important
shareholders, fit and proper test for directors.
Technology related measures
Setting up of INFINET as the communication backbone for the financial sector,
introduction of Negotiated Dealing System (NDS) for screen based trading in
govt. securities and Real Time Gross Settlement System (RTGS).
Impacts of reforms upon the banking industry
The Indian banking industry had made sufficient progress during the reforms period.
The progress of the industry can be judged in terms of branch expansion and growth of credit
and deposits. Though the branch expansion of the SCBs has slowed down during the post
1991 era but population per bank branch has not changed much and the figure is hovering
around 15,000 per branch. Therefore, banking sector has maintained the gains in terms of
branch network in the phase of social banking during the reform period. Table 1 shows the
progress made by the commercial banks in India during the post reform period.
Table 1: Progress of Scheduled Commercial Banks in India
Indicators June, March, March, March,
1980 1991 2000 2005
1. No. of SCBs 154 272 298 288
2. No. of bank offices 34594 60570 67868 68355
Of which
Rural & Semi-urban 23227 46550 47693 47485
3. Population per Office (000) 16 14 15 16
4. Per capita Deposit (Rs.) 738 2368 8542 16091
5. Per capita Credit (Rs.) 457 1434 4555 10440
6. Deposit (% to national income) 36.0 48.1 53.5 68.3
Source: Basic Statistical Returns of Scheduled Commercial Banks in India, various issues.
 Interest rate deregulation
The main aim of the interest rate reforms was to simplify the complex and the tiered
interest rate structure that India had during pre 1990. Different interest rates, based upon size,
purpose, maturity of loan, group, sector, region, etc., were rationalized to converge at a single
lending rate called as prime lending rate over a period of five years. The aim was to provide
more options and flexibility to banks for their asset liability management operations and shift
towards indirect monetary control (Kohli, 2005).
Table 2: Interest rate deregulation- Bank Rate, CRR & SLR
1 2 3 4
Bank Rate CRR SLR
Year Effective rate Effective rate Effective rate
1989-91 11,12 15 38, 38.5
1992-93 12 15, 14, 14.5 38.5, 38.25, 38, 37.75
1993-94 12 14.5, 14 37.75, 37.5, 37.25, 34.75
1994-95 12 14.5, 14.75, 15 34.75, 34.25, 33.75, 31.5
1995-96 12 14.5, 14 31.5
1996-97 12 13.5, 12, 11.5, 11 31.5
1997-98 11, 10, 9, 11, 10.5 10.5, 10 31.5, 25
1998-99 10, 9, 8 9.75, 9.5, 10, 10.5, 10.25 25
1999-00 8 10, 11, 10.5 25
2000-01 7, 8, 7.5, 7 10, 9.5, 9, 8.5 25
2001-02 6.5 9, 8.5, 8, 8.25, 7.5, 5.75, 5.5 25
2002-03 6.5 5, 4.75 25
2003-04 6 4.5 25
2004-05 6 4.75, 5 25
2005-06 6 5 25
2006-07 6 5.5,6,6.5 25
Source: RBI, Handbook of Statistics on the Indian Economy, Various issues.
Along with the interest rate deregulation quantitative restrictions were initiated
simultaneously. In 1990, 40 percent of the bank credit was directed towards priority sectors.
The reserve requirement pre-emoted more than 40 percent of the net demand and time
liabilities of the banking sector. The amount of money available with the banks for credit was
very small. The reserve requirement was progressively brought down in time. The statutory
liquidity ratio (SLR) was brought down from 38.5 percent in 1990 to 25 percent in 2001. The
cash reserve ratio (CRR) was also steadily brought down to its statutory minimum of 3
percent (Table 2).
 The motive behind the liberalization of interest rates in the banking system was to allow
the banks more flexibility and encourage competition. Banks can charge rates according to
their cost of funds and to reflect the creditworthiness of different borrowers. Banks can vary
nominal rates offered on deposits in line with changes in inflation to maintain real returns
(Ahluwalia, 2002).
The most important and far reaching impact of banking liberalization in India has
been the deregulation of the interest rate. The Indian banks are now adopting a completely
market driven interest rate structure which was in earlier a govt. driven interest rate structure.
The interest rate deregulation has resulted in the integration of the lending rates across
spectrum. The prime lending rate of each bank is now synchronized with the bank rate. The
bank rate was revived by the RBI to serve as the reference rate for the banking sector. In
India, interest rate deregulation has contributed to a downward movement of the domestic
interest rates and a narrowing of the domestic-foreign rates differential. Indias high budget
deficits have kept domestic borrowing cost high, a factor that serves to attract foreign equity
capital (Kohli, 2005).
Table 3: Lending Rates in India, 1990-2001
1 2 3 4 5 6 7 8
Year Nominal Inflation Real lending Real Six Exchange Effective cost
lending rates(1-2) lending month rate of foreign
rate ratesa libor loans(5+6)
1990 16 9 7 7 8.4 7.9 16.2
1991 19 13.9 5.1 5.1 6.1 29.7 35.7
1992 17 11.8 5.2 5.2 3.9 14.2 18.1
1993 14 6.4 7.6 7.6 3.4 21.3 24.7
1994 15 10.2 4.7 4.8 5 -0.2 4.9
1995 16.5 10.2 6.2 6.3 6.1 3.3 9.4
1996 14.8 9 5.8 5.8 5.5 9.3 14.9
1997 14 7.2 6.8 6.8 5.8 2.5 8.4
1998 12.5 9 3.5 3.5 5.5 13.6 19.2
1999 12.2 4.5 7.8 7.8 5.5 4.4 9.9
2000 11.5 3.7 7.8 7.8 6.7 4.3 11
2001 11.5 5.1 6.4 6.4 3.7 5 8.71

Source: Kohli, Renu (2005), Liberalizing Capital Flows, page no. 116
The interest rate deregulation has able to alter the borrowing cost for the domestic
borrowers. Till 1993, borrowing from abroad was costlier than domestic loans but foreign
loans become cheaper than domestic loans from 1994. This was partly because resident firms
were selectively allowed to access international capital markets after 1990 as part of capital
account liberalization. Table 3 measures the relative borrowing costs faced by firms after
interest rates liberalization.
The corporate loan market in India is still not appearing to have fully equilibrated
over time. Recent studies by Banerjee and Duflo (2003) shows that banks are still under
lending to corporate and companies remain loan-starved. Hence, interest rates have shown
some upward stickiness as well as not worked perfectly in allocating credit. Though there
has been a marginal decline in the lending rates of commercial banks in India, it is still one of
the highest lending rates in the world (Chakraborty, 2006).
Another noteworthy feature of the banking sector reforms has been the
stickiness of the credit volume. The share of credit in the pool of credit and investments was
72 percent in 1969 and declined to 61 percent in 1991 in the portfolio of commercial banks.
In the post 1991 period, the share of credit has not shown a particular rise and it is still below
60 percent though there has been a decline in the rate of fall. The situation is not improving
even though SLR has been reduced gradually from as high as 31 percent to 25 percent. One
of the reasons for this is the incentive structure of the bank employees, specially the public
sector banks. Employees in public sector banks work under the threat of enquiries by Central
Vigilance Commission (CVC) for every loan that goes bad. On the other hand, they have
very little to gain from successful lending. As a result, bankers are reluctant to grant loans to
the clients (Banerjee, 2004). The alternative to lending is investment in govt. securities which
are default free by nature. This explains the high and sticky proportions of investments in
bank portfolio.
Directed credit
Directed credit policies have been an important part of Indias financial sector
reforms. Under the directed credit policy commercial banks are required to provide 40
percent of their commercial loans to the priority sectors which include agriculture, small-
scale industry, small transport operators, artisans, etc. Within the aggregate ceiling there are
various sub-ceilings for agriculture and also for loans to poverty related target groups. The
Narasimham committee had recommended reduction of the directed credit to 10 percent from
40 percent. The committee had also suggested narrowing down the definition of priority
sector to focus on small farmers and low income target groups.
The policy of 40 percent of loans to the priority sectors has not been abolished by the
govt. However, the definition of the priority sector activities has been broadened with the
new inclusion and reclassifications. The Committee on Banking Reforms has suggested
inclusion of activities related to food processing, dairying and poultry in the priority sector
list. This will increase the list of activities under the priority sector credit and also improve
the quality of the portfolio. The priority sector should be considered as a percentage of the
total assets of the banking system and not as a percentage of commercial advances as at
present. The issue of priority sector lending, an important concern against privatization, is no
longer that crucial, since in 2003 the share of credit of private sector banks going to the
priority sector had surpassed that of public sector banks (Table 4).

Table 4: Priority Sector Lending by Scheduled Commercial Banks

(In INR/ Million)
Public Sector Banks

Item 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

1 2 3 4 5 6 7 8 9
Priority 913190 1040940 1274780 1491160 1711850 2030950 2444560 3100930
Sector (41.8) (39.2) (40.2) (43.7) (43.1) (42.5) (43.6) (43.3)
Agriculture 343050 376310 452960 535710 630820 735070 844350 1124750
(15.7) (14.2) (14.3) (15.7) (15.9) (15.4) (15.1) (15.7)
SSI 381090 425910 460450 484000 497430 529880 583110 676340
(17.5) (16.1) (14.6) (14.2) (12.5) (11.1) (10.4) (9.4)
Other 188810 236610 308160 407910 537120 714480 1017100 1299840
priority (8.7) (8.9) (9.7) (12.0) (13.5) (15.0) (18.1) (18.1)
Sector
Private Sector Banks
Item 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05
1 2 3 4 5 6 7 8 9
Priority 116140 141550 183680 215500 257090 367050 489200 693840
Sector (40.9) (41.4) (38.0) (38.2) (40.9) (44.4) (47.3) (43.3)
Agriculture 27460 32570 40230 53940 80220 118730 147300 214750
(9.7) (9.5) (8.3) (8.5) (8.5) (11.2) (14.2) (12.1)
SSI 58480 64510 80000 81580 86130 68570 75000 86680
(20.6) (18.9) (16.5) (14.4) (13.7) (8.2) (7.3) (5.4)
Other 30200 44470 63450 79980 90740 176020 266000 392410
priority (10.6) (13.0) (12.0) (14.2) (14.4) (22.1) (25.7) (24.5)
S t
Source: Report on Trend and Progress of Banking in India, various issues
Figures in brackets represent percentages to net bank credit for the respective bank group.
Despite a decline, direct lending to the disadvantaged segments of the under the
priority sector advances remained high during the reform period (Mohan, 2004). The decline
in priority sector lending since the initiation of reform infect reflects greater flexibility
provided to banks to meet such targets. At present if a bank fails to fulfill the target for
priority sector lending, it can invest the shortfall amount in RBI securities dealing with flow
of funds towards agriculture and small-scale industries but it still desirable that banks adhere
to the priority sector lending target. The current arrangement shows how the banking sector
reforms have provided operational flexibility to the banks even while meeting social
objectives.
The priority sector lending norms have been fulfilled by a good margin by both public
and private sector banks at present. While public sector banks, as a group, achieved the
overall priority sector targets 40 percent, they failed to achieve the various sub-targets for
agriculture, tiny sector within the SSI sector, advances to weaker sections, etc. Significant
variation was also observed in the performance of different banks within the public sector
banks with regard to the achievement of sub-targets (RBI, Annual Report, 2004-05).
The performance of the private sector banks in the area of priority sector lending
remain less satisfactory with 12 out of 30 private sector banks failing to achieve the overall
priority sector targets. Only one private sector bank, ICICI Bank, could achieve the sub-
targets within the priority sector. Private sector banks credit to weaker sections at 1.2 percent
of net bank credit is much lower than the stipulated target of 10 percent for the sector.
Foreign banks have achieved the overall priority sector targets and sub-targets for export
credit and nearly achieve the sub-target with respect to SSI as well.
Regulatory reforms
Since the beginning of the financial sector reforms, an important task of the policy
makers was to bring in an appropriate regulatory framework. The design of an appropriate
regulatory framework which encourages competition and efficiency in banking services and
at the same time ensures a safe and sound banking sector may be very difficult and complex
component of the banking sector liberalization process. The Narasimham Committee Report I
have provided guidance on the actual design of the regulatory mechanism. The regulatory
framework for banks known as Prudential Regulation in the literature consists of broadly
of capital adequacy norms, restrictions on the lines of activities that banks can participate in,
restrictions on entry and deposit insurance (Sen & Vaidya, 1997).
The prudential regulatory framework for banks has been design to address the
following five issues-
9 Market structure,
9 Capital adequacy norms
9 Accounting and provision for NPAs,
9 Supervision of banks and
 9 Privatization of banks
These issues as mentioned above are discussed in details below.
9 Market structure
Following the recommendation of the Narasimham committee, RBI had issued a
policy guideline in January, 1993 regarding the entry of private sector banks in to the industry
in large scale. The first new private sector banks entering the market was UTI bank in 2nd
April 1994, In this way, there are 10 new private sector banks had entered the banking
industry till 1995.
Some of the important guidelines regarding the entry of private sector banks issued by
RBI in1993 were-
1) New private sector banks have to be registered as public limited companies under
Companies Act, 1956.
2) The RBI may grant license to the new private sector banks under Banking
Regulation Act, 1949.
3) The new banks have to list their shares in stock exchanges.
4) Preference will be given in issuing license to those banks whose headquarters are
located in areas which do not have headquarters of any other bank.
5) No one will be allowed to be a director of a new bank who is already a director of
any other banking company which among themselves are entitled to exercise
voting rights in excess of 20 percent of the voting fights of all shareholders of the
banking company.
6) New banks must have a paid up capital of Rs.1000 million. They are also to
follow the prudential norms in respect of banking operations, accounting practices
and other policies as laid down by RBI.
7) The new private sector banks are to follow the priority sector lending
requirements as applicable to other domestic banks.
8) The existing policy of branch licensing for commercial banks will be applicable to
new banks.
The Narasimham committee, 1991 has suggested the following market structure for
the Indian banking sector during the post reform era-
a) Three or four large bank should try to acquire multinational character by starting
overseas business.
b) Eight to ten banks with presence throughout the country should engage in general or
universal banking.
 c) Existence of local banks with activities confining to a particular area or region.
d) Rural banks with operations limited to rural areas and their predominant business
should be to finance agriculture and allied activities (Sen & Vaidya, 1997).
Even during the reform period the public sector banks are still having the largest
banking network in India comprising around 90 percent of the total branches in 2005 (Table
5). In 1994 the share of public sector banks in total branch network was 93.5 percent and that
of private sector banks was a meager 6.5 percent. Thus the market structure of the Indian
banking sector has not change much during the reform era. Though many new private sector
banks have come up during the liberalization period but they are very slow and apprehensive
regarding the opening of new offices as they are always guided by the profit motives.
Therefore, the expansion of the private sector bank branches is not taking place at a fast rate
as it is supposed to be. The foreign banks are mainly operating in the metropolitan and the
urban areas only and they are also restrained by the govt. policy regarding opening of new
branches by the foreign banks (Kohli, 2005).
Table 5: Structure of Commercial Banks in India
(Figures in decimal are in percent)
Indicators SBI Group Nationalised RRB Foreign Private Banks
Banks Banks
1994 2005 1994 2005 1994 2005 1994 2005 1994 2005
No. of 8 8 19 19 196 196 24 31 28 29
banks
Branch 20.6 20.0 49.2 49.3 23.5 21.3 0.2 0.4 6.5 9.0
Network
Deposits 27.0 57.1 2.6 7.7 5.6
Advances 33.6 26.4 51.8 46.2 2.8 2.7 6.7 6.9 5.1 17.8
Source: Report on Trend and Progress of Banking in India, various issues.
In recent years, a number of public sector banks and the private banks have set up
ATMs and have expanded branch network to rural and semi urban areas. Table 6 has shown
the branch network and number of ATMs in recent years. The computerization of bank
branches has also taken momentum since 1993 and the process has got boosted with the entry
of hi-tech private sector banks. From table 6 it is clear that the State Bank of India Group is
the market leader with the largest number of branches specially in the rural and semi urban
areas. The domestic private sector banks are also expanding their network of branches but
concentrating more on semi urban, urban and metropolitan areas. The foreign banks in India
are mainly operating in urban and metropolitan areas with not a single branch in rural and
semi urban places.
Table 6: Branches and ATMs of SCBs in India, 2005
Bank Group Branches ATMs
Rural Semi- Urban Metropolitan Total On- Of- % of
urban site site off-site
ATM
SBI 5480 4081 2334 1767 13661 1548 3772 70.3
Nationalised 13588 7291 6935 5813 33627 3205 1567 32.8
Banks
Old Private 994 1499 1150 868 4511 800 441 35.5
Sector
Banks
New Private 108 348 588 640 1685 1883 3728 66.4
Sector
Banks
Foreign Nil Nil 38 204 242 218 579 72.9
Banks
Source: Report on Trend and Progress of Banking in India, various issues.
During the post reform period, there has been a consistent decline in the share of
public sector banks in the total assets of commercial banks. This has been happening mainly
because of greater competition from the private sector banks and as well as entry and
expansion of several foreign banks. Notwithstanding such transformation, the public sector
banks still account for nearly three fourth of assets and income. The public sector banks have
also responded to the challenges and it has been reflected in their increased share in the
overall profit of the banking sector. Share of Indian private sector banks in the income and
assets of the industry have improved consistently (Table 7). The share of foreign banks has
got reduced partially due to their increased focus on off-balance sheet non-found based
business.
Table 7: Bank Group-wise Share: Select Indicators (In percent)
1 2 3 4
1995-96 2000-01 2004-05
Public Sector Banks
Income 82.5 78.4 75.6
Expenditure 84.2 78.9 75.8
Total assets 84.4 79.5 74.4
Net profit -39.1 67.4 73.3
Gross profit 74.3 69.9 75.9
 New Private Sector Banks
Income 1.5 5.7 11.8
Expenditure 1.3 5.5 11.4
Total assets 1.5 6.1 12.9
Net profit 17.5 10.0 15.0
Gross profit 2.5 6.9 10.7
Foreign Banks
Income 9.4 9.1 7.0
Expenditure 8.3 8.8 6.6
Total assets 7.9 7.9 6.8
Net profit 79.8 14.8 9.7
Gross profit 15.6 15.7 9.0
Source: Reserve Bank of India
Another major impact of banking sector reforms in India has been the emergence of
changing business strategy of the commercial banks. Before the start of banking sector
reforms, more than 90 percent of the income of the banks in India came from interest income.
But this has gone down very significantly to 80 percent in recent years. It shows the
diversification into non-fund business and also into the treasury and foreign exchange
business as source of profit for the Indian banks (Mohan, 2004). It is found that there has
been a general decline in the operating expenditure as a proportion of total assets (Table 8).
This is achieved by the banking sector in spite of huge expenditure made on the installation
and up gradation of the information technology of the banks
Table 8: Earnings and Expenses of the Scheduled Commercial Banks in India
(In billion)
Year Total Total Interest Total Interest Establishment Net Interest
Assets Earnings Earnings Expenses Expenses Expenses Earning
1980 582 42 38 42 27 10 10
(7..3) (6.4) (7.2) (4.7) (1.7) (1.8)
1991 3275 304 275 297 190 76 86
(9.3) (8.4) (9.1) (5.8) (2.3) (2.6)
2000 11055 1149 992 1077 690 276 301
(10.4) (9.0) (9.7) (6.2) (2.5) (2.7)
2003 16989 1724 1407 1553 936 380 471
(10.2) (8.3) (9.1) (5.5) (2.2) (2.8)
2005 23555 1902 1558 1692 890 501 668
(8.07) (6.61) (7.18) (3.78) (2.13) (2.8)

Source: Report on Trend and Progress of Banking in India, various issues.

(Figures in bracket are in percent.)
 Again the efficiency of the Indian banking industry can be determined from the
significant reduction in the interest spread over the reform period. The reduction has taken
place across the bank groups but the spread is highest for the foreign banks and it the lowest
for the new private sector banks (Table 9).
Table 9: Important indicators of Indias Banking Sector
(In percent)
Bank Group 1996-97 2001-02 2002-03 2004-05
Operating Expenses/Total Assets
Scheduled Commercial Banks 2.9 2.2 2.2 2.1
Public Sector Banks 2.9 2.3 2.3 2.1
Old Private Sector Banks 2.5 2.1 2.0 2.0
New Private Sector Banks 1.9 1.1 2.0 2.1
Foreign Banks 3.0 3.0 2.8 2.9
Spread/Total Assets
Scheduled Commercial Banks 3.2 2.6 2.8 2.8
Public Sector Banks 3.3 2.7 2.9 2.9
Old Private Sector Banks 2.9 2.4 2.5 2.7
New Private Sector Banks 2.9 1.2 1.7 2.2
Foreign Banks 4.1 3.2 3.4 3.3
Net Profit/Total Assets
Scheduled Commercial Banks 0.7 0.8 1.0 0.9
Public Sector Banks 0.6 0.7 1.0 0.9
Old Private Sector Banks 0.9 1.1 1.2 0.3
New Private Sector Banks 1.7 0.4 0.9 1.1
Foreign Banks 1.2 1.3 1.6 1.3
Note: Spread= interest income interest expenditure
Source: Mohan, Rakesh (2004)
9 Capital Adequacy Norms
One of the most important components of prudential regulation of banks is the
maintenance of minimum capital ratios. The Basel Committee on Banking Regulation and
Supervisory Practices,1988 known as Basel I, appointed by the Bank of International
Settlements (BIS) recommended adoption of a common capital adequacy standard known as
the Cook Ratio. The Cook Ratio is a risk-weighted approach to capital adequacy so that
institutions with a higher risk profile maintain higher levels of capital. For the purpose of
calculation capital, BIS classifies capital into two broad categories (Sen & Vaidya, 1997),
Tier I capital constituting share capital and disclosed reserves and Tier II capital consisting of
undisclosed and latent reserves, general provision, hybrid capital and subordinated debt. BIS
recommends that Tier II capital must not exceed Tier I capital. The Capital to Risk Asset
Ratio (CRAR) suggested by BIS in 1992 was 8 percent, i.e. Tier I and Tier II capital should
be equal to minimum of 8 percent of the total assets of the bank.
The Narasimham committee 1991 has recommended that all banks in India must
reach the figure in a phased manner latest by March 1996. In 1995, 13 of the 27 public sector
banks had attained the 8 percent capital to risk assets ratio, 11 had reached 4 percent and
remaining less than 4 percent. This move to achieve capital adequacy norms has been greatly
boosted by the infusion of fresh capital in several public sector banks by the govt. in its 1993-
94 and 1994-95 budgets by the amount of Rs.57000 million and Rs.56000 million
respectively. Subsequently the strategy to attain CRAR of 8 percent was gradually raised to 9
percent with effect from 1999-2000. The overall capital position of commercial sector banks
Table 10: Distribution of commercial banks according to the CRAR
Year Below 4 4 to 8 percent 9 to 10 percent Above 10 Total
percent percent
1995-96 8 9 33 42 92
1996-97 5 1 30 64 100
1997-98 3 2 27 71 103
1998-99 4 2 23 76 105
1999-00 3 2 12 84 101
2000-01 3 2 11 84 100
2001-02 1 2 7 81 91
2002-03 2 0 4 87 93
2004-05 1 1 8 78 88
Source: RBI

had witnessed a mark improvement during the reform period (Table 10). At the end of March
2005, 86 out of the 88 commercial banks in India maintain CRAR at or above 9 percent. The
corresponding figure for 1995-96 was 54 out of 92 banks.
Table 11: Capital Adequacy Ratio- Bank Group-Wise
(Percent)
Bank Group 1998 1999 2000 2001 2002 2003 2004 2005
Nationalised Banks 10.3 10.6 10.1 10.2 10.9 12.2 13.1 13.2
State Bank of India Group 14.0 12.3 11.6 12.7 13.3 13.4 13.4 12.4
Old Private Sector Banks 12.9 12.1 12.4 11.9 12.5 12.8 13.7 12.5
New Private Sector Banks 13.2 11.8 13.4 11.5 12.3 11.3 10.2 12.1
Foreign Banks 10.3 10.8 11.9 12.6 12.9 15.2 15.0 14.0
Source: Report on Trend and Progress of Banking in India, 2004-05
As far as the individual bank groups are concerned, all the five bank groups in India
are maintaining CRAR above 12 percent in 2005. The CRAR level across the bank groups
has been continuously increasing over the reform period. The foreign banks are having the
highest level of CRAR in 2005 with 14 percent followed by nationalized banks with 13.2
percent. The new private sector banks have the lowest CRAR in 2005 that stood at 12.1
percent (Table 11).
Basel I proposals forced the bank to look at credit risk and regulatory capital more
closely than they had done earlier. Subsequently, some weaknesses in Basel I framework
came up and the Basel committee finally came up with International Convergence of Capital
Measurement and Capital Standards: A Revised Framework, popularly known as Basel II in
June 2004 (Leeladhar, 2005). The Basel II rests on three pillars, pillar minimum capital
requirements, pillar II- supervisory reviews and pillar III- market discipline. India has agreed
to conform to the Basel II norm by 31st March 2007. The norms are expected to raise capital
requirement anywhere from 2 percent to 8 percent (Chakraborty, 2006). The first pillar of
Basel II moves beyond the one size fits all approach of 1998 and allow banks to follow one
of two choices. The second pillar stresses oversight and monitoring of banks risk
management by the top management and board of the bank. The third pillar refers to periodic
reporting of specific variables by banks so as to allow the financial markets to appropriately
value and discipline them.

Finally, transition from the old system to the Basel II norms would be very hard
sailing for the Indian banks or to the RBI. For the next few years, this may be the greatest
challenges for the Indian banking sector (Chakraborty, 2006).
9 Accounting and Provisioning of NPAs
Following the recommendation made by Narasimham committee (1991), RBI had
introduced regulation relating to income recognition, asset classification and provisioning in
the banks borrowal accounts and to reflect actual health of banks in their balance sheets
starting from 1992-93. The regulations have put in place objective criteria for asset
classification, recognition of income and provisioning which are lacking hitherto (Kapila &
Kapila, 2000). This change has brought in the necessary quantification and objectivity in to
assessment of non-performing assets (NPAs) and provisioning in respect of problem credit.
With increasing freedom given to banks, a uniform and transparent accounting
standard is critical to the effective monitoring of bank solvency. To start with, it is important
to have a definition of the non-performing asset popularly called as NPA. NPA is an advance
where payment of interest or repayment of installments of principal (in case Term Loans) or
both remains unpaid for a period of two quarters or more. An amount under any of the credit
facilities is to be treated as past due when it remains unpaid for thirty days beyond due date
for four quarters up to March 1993, three quarters up to 1994 and two quarters in March
1995. Based on the status of the asset, an asset is classified on to four categories- standard,
sub-standard, doubtful and loss asset. In India, standard assets are defined as credit facilities
of which interest or principal or both are paid by due date. Generally, Sub-standard assets are
called NPAs. A sub-standard asset is called doubtful asset if it remains NPA for two years
2000 (reduced to 18 months in 2001and further reduced to 12 months over a four year period
starting from March 2005). An asset is called as loss, without any waiting period, where the
dues are considered uncollectible or marginally collectible. The concept of past due in the
identification of NPA was dispensed with from March 2001 and the 90 days delinquency
norm was adopted for the classification of NPAs with effect from March 2004.
Depending upon the asset classification shown above, banks are to make provisions
against NPAs as- 100 percent for loss assets; 100 percent for the unsecured portion plus 20 to
30 percent of the secured portion depending on the period for which the account has
remained in doubtful category and general provision of 10 percent on the outstanding balance
in respect of sub-standard assets from March 2000. Banks are also to classify small advances
of Rs.25,000 and below in these four categories by March 1998 or they are to make provision
at the rate of 15 percent of aggregate outstanding including performing loans. Commercial
banks are also asked to make provision @ 0.25 percent on their standard advances from year
ending March 31, 2000. Banks are also required to create provisions on govt. guaranteed
NPAs from first April 2000.
 In June 2004, RBI had advised banks to adopt graded higher provisioning in respect
of -
(a) secured portion of NPAs included in doubtful for more than three years category, and
(b) NPAs which have remained in doubtful category for more than three years as on March
31, 2004.
Provisioning ranging from 60 percent to 100 percent over a period of three years in a
phased manner, from the year ending March 31, 2005 has been prescribed. However,
advances classified as doubtful for more than three years on or after April 1, 2004, the
provisioning requirement has been stipulated at 100 percent. The provisioning requirement
for the unsecured portion of NPAs under the above category was retained at 100 percent (RBI
Annual Report, 2004-05).
The overall capital adequacy position of commercial banks has shown a great
improvement during the reform period. At the end March 2005, 86 out of 88 commercial
banks operating in India had maintained CRAR at above 9 percent which was 54 out of 92
banks in 1995-96.Regarding the asset quality of commercial banks, it has shown
considerable improvement. The Indian banking industry has accepted a 90 days NPL
recognition norm (from 180 days norm) in 2004. Non-Performing Loans (NPLs) as ratio of
both total advances and assets have declined substantially and consistently since mid 1990s
(Table 12).This has been caused by improvement in the credit appraisal process, upturn of the
business cycle, new initiatives of NPLs like promulgation
Table 12: Non-performing loans (NPLS) of SCB (In percent)
1 2 3 4 5
Gross Gross NPL/Assets Net Net NPL/Assets
NPL/Advances NPL/Advances
1996-97 15.7 7.0 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4.0 4.4 1.9
2003-04 7.2 3.3 2.9 1.2
2004-05 5.2 2.6 2.0 0.9
Source: Reserve Bank of India
of SARFAESI Act, greater provisioning and write-off of NPLs enabled by greater
profitability, have kept incremental NPLs low.
In 1992-93 RBI introduced prudential regulations regarding income recognition, asset
classification and provisioning as suggested by Narasimham committee. These strict
provisioning rules posed big challenges for the banks but they prevented the NPA situation in
India from getting out of control and destabilizing the entire financial structure (Chakraborty,
2006) The reasons and the factors leading to NPA may be listed under the following broad
categories (Kapila & Kapila, 2000)-
a) Diversion of funds for expansion/modernization/setting up new projects etc.
b) Time/cost over run while implementing the project.
c) External factors like shortage of raw materials, input price escalation, power shortage,
natural calamities, industrial recession, etc.
d) Business failure like failing to capture market, inefficient management, strike, etc.
e) Govt. policies like excise, import duty changes, deregulation, etc.
f) Windfall default, siphoning of funds, fraud, misappropriation, management dispute, etc.
g) Deficiencies on the part of banks, viz., in credit appraisal, monitoring and follow up,
delay in release of limits, delay in settlements of payments/subsidies by govt. bodies, etc.
It has been observed and also backed by evidence from a study of NPAs of 33 banks
by RBI that the priority sector lending generates a higher proportion of NPAs than the non-
priority sectors. But in recent years the relative contribution of non-priority sectors in the
NPAs of banks has been increasing (Mukherjee, 2003). Study has shown that the proportion
of NPAs in the priority sector to the total NPAs was 48.27 percent as on 31st March 1996 and
came down to 46.40 percent as on 31st March 1998.An important point to be noted here is
that the priority sector advances constitute only 30 percent of gross bank credit during that
period. However, gradual increase in the proportion of NPAs in the non-priority sectors could
indicate that NPAs are increasingly occurring on borrowal accounts of industrial sector
during the recent years. Table 13 shows sector-wise NPAs Bank Group-wise at the end
March 2004 and 2005.
Table 13: Sector-wise NPAs Bank Group-wise (As on end March)
(In percent)
Sector Public Sector Banks Old Private Sector New Private Sector Banks
banks
2002 2004 2005 2002 2004 2005 2002 2004 2005
1 2 3 4 5 6 7 8 9 10
A)Priority 44.49 47.54 49.05 39.35 40.95 42.09 9.35 11.44 8.91
Sector
 Agriculture 13.84 14.44 6.06 6.54 7.18 2.13 2.87 2.28
SSI 18.73 17.62 21.15 19.52 18.71 6.74 6.79 3.77
Others 11.92 15.48 12.14 14.88 16.20 0.48 1.78 1.60
B)Public 1.97 1.22 0.94 0.18 0.18 0.19 0.33 1.11 0.74
Sector
C)Non-priority 53.54 51.25 49.98 60.46 58.87 57.72 90.32 87.45 90.34
Sector
Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.00 100.0
(A+B+C) 0 0 0 0 0 0 0 0
Source: Report on Trend and Progress of Banking in India, various issues.
The above table indicates that both public sector banks and old private sector banks
have higher NPAs caused by the priority sector lending in 2004 and 2005. But the new
private sector banks have far less NPAs created by the 40 percent of total credit priority
sector norm. In fact the NPA figure in the priority sector lending of new private sector banks
are merely 11.44 percent and 8.91 percent of the total credit for the year 2004 and 2005
respectively. They are accumulating NPAs mainly from the non-priority sector with 87.45
percent and 90.34 percent of their total credit going bad or doubtful in 2004 and 2005
respectively. It is also clear that gradually contribution of non-priority sector to the gross
NPAs are increasing. The reason for higher NPAs by the priority sector in public sector banks
is mainly due to the social obligations of these banks which always associated with them. The
Committee on Capital Account Convertibility (CAS) in 1997 had identified the strengthening
of banking sector as very important. The progress in the reduction of the NPAs has been very
slow over the years. Given the slow progress in reducing NPAs, the govt. announced in 2002
the creation of asset management companies. More recently, legal constraints on the seizure
of defaulters had been removed by the Securities and Contract Empowerment Bill, 2002,
which was expected to expedite the recovery process. Other initiative like one time settlement
of dues is also in operation but this is a compromise scheme for the banks.
The process of strengthening banking sector through reforms in prudential norms and
supervision has made considerable progress. However, placing the public sector banks at par
with internationally competent banks has not been achieved so far. This requires structural
and institutional reforms. Again institutional reform is intrinsically linked ownership and
governance issues, on which progress has yet to take place (Kohli, 2005).
However, in spite of all the progresses in banking sector reforms, some weaknesses
remain and need urgent attentions. Some important weaknesses are like large volume of
NPAs, high operational costs, dependence on interest income, slow technological up
gradation, relatively low level of human skills, etc. The provisions against bad loans are
lower for public sector banks (0.9 percent) in 1999-00 compared to foreign banks
(2.1percent). This has to be increased and is urgently required for strengthening banks
balance sheets. Further, the commercial banks should try to earn non-interest revenue and
that too on a sustainable basis. This has become more important with the declining interest
revenue due to fall in rate of interest. Banks can gather revenues from borrowing and
investments in market abroad or through services to the corporate sectors in setting or
expanding business overseas. In this way banks in India can exploit the potential gains from
liberalized economy if they possess the required capacities Ahluwalia (2002).

Privatization of banks

The gradual privatization of public sector banks has been an important component of
banking sector reforms in India. This has been prompted more by the need to raise capital to
meet the revise capital adequacy norms, rather than a conscious policy decision on the part of
the govt. to withdraw from banking operations (Kohli, 2006). In 1994, the committee on
Banking Sector Reforms (CBSR) suggested to dilute the govt.s shareholding in public sector
banks to 51 percent. But still the govt. has to recapitalize public sector banks to large extent
through budgetary support. In 2001, govt. ownership in banks was further reduced to 33
percent with the condition that no individual shareholder can hold more than1 percent of the
shares.

However, the privatization of public sector banks in India is not yielding the expected
result. By 1998, only 9 public banks (out of 20) had gone for public equity to strengthen their
capital base. The dismal performance of these banks in raising capital from the market could
be gauged from the fact that in 1998-99 the minimum shareholding of govt. was 66 percent.
By March 2001, 11 public sector banks were listed at the National Stock Exchange, but the
share of top 5 banks accounted for 95 percent of the total traded shares of them. Majority
ownership of public sector banks by govt. has been a symbol of faith in India and it is an
important point in the process of privatization. The CBSR had suggested functional
autonomy of public sector banks for sound banking system in India. But this has not been
possible due to govt. accountability to parliament. Therefore, the govt. will unlikely to
distance itself sufficiently from management by delegating all powers of supervision to an
entirely independent non-govt. board of directors. This has been delaying the process of
privatization of public sector banks in India.
 Table 14: Turnover details of banks in National Stock Exchange
(Amount in INR/ Million)
Public Sector Banks Private Sector Banks Total

Year Amount % to total Amount % to total Amount % to total

turnover turnover turnover
2002-03 164065 2.7 42622 0.7 206686 3.4
2003-04 117661 10.7 224965 2.0 1401126 12.7
Source: Report on Trend and Progress of Banking in India, various issues
The major resistance in the privatization of the public sector banks has been the
opposition from the employees and the officers of these banks. The large and powerful trade
unions are resisting tooth and nail the policy of privatizing these banks (Talwar, 2003).
Further, the general economic slowdown of Indian economy during second half of the last
decade of the 20th century had slowed down the pace of banks privatization process. People
did not feel attracted enough to buy the shares of the public sector banks due to the market
slowdown. Another reason for the slow progress of the privatization of public sector banks in
India has been the poor performance of the majority of these banks. Except two or three
major public sector banks, performance of the other has been very poor (Chakraborty, 2006).
Different studies undertaken to evaluate the performance of these banks in respect of
profitability, volume of NPAs, capital adequacy ratio, etc. reveal that public sector banks
perform very badly in the above stated parameters. Though the situations have changed,
somewhat, over the years, but still a lot of to be done by the public sector banks to improve
their performance. People are apprehensive regarding banks performance in the future and as
a result they do not feel excited enough to invest in public sector banks.

But few argue that privatization is not the only solution for the woes of public sector
banks (Chakraborty, 2006). It is the existence of corporate control along with autonomy on
managerial decisions and not the ownership issue that will make a difference in the situation
(Sarkar, 1998). With the rise in the level of competition, public sector banks are already
trying very hard to keep their market shares intact. It has been argued that many a time the
issue of privatization is made on the basis of perception and not based on facts. It also argued
by many that there is no strong systematic evidence that private banks are doing better than
the public sector banks during the emerging market (Mathur, 2002).
Findings of the study
Following are the major findings from the discussions made above-
1) The number of Scheduled Commercial Banks in India has increased by not a very
significant manner during the period of reforms.
2) The number of bank branches has also not increased much and the population per bank
branch office has in fact increased during the reform period.
3) The per capita deposits and credits of the Scheduled Commercial Banks have gone up by
6 to 7 times during the period.
4) The borrowing made from the foreign sources by Indian firms, which are costlier
compared to domestic sources prior to reforms, becomes cheaper due to the banking
sector reforms undertaken in India.
5) In recent years all the commercial bank groups operating in India have been able to fulfill
the priority sector norms laid down by RBI and competitions and opening up of the
banking sector has not affected this at all.
6) Public sector banks still comprise the largest share of commercial banks (almost 90
percent) even if various new private (domestic and foreign) banks have entered the Indian
market.
7) In terms of share of gross profit and net profit of SCBs, the public sector banks are far
ahead of private sector banks in India.
8) Almost all the major Scheduled Commercial Banks operating in India have been able to
fulfill the Basel I norms and by March 2008 all banks are to follow the Basel II norms. In
2005, 86 SCBs out of 88 in India have maintained CRAR above 9 percent.
9) The volume of NPAs has also come down by a very significant amount during the
banking sector reform period. The NPAs of the public sector banks are generally higher
than the private sector banks in India.
10) Non-priority sector NPA comprises the largest share in the total NPA of private sector
banks (around 90 percent for new private sector banks and about 60 percent for old
private sector banks)) whereas that is for the public sector is about 50 percent.
11) The banking sector in India has given a measured responds to the reforms in terms of
profitability of banks as almost all the commercial banks have been able to increase the
volume of profits.
12) Last but not the least the banking sector reforms has failed measurably in India when it
comes to the privatization of the public sector banks as only 11 out of 20 banks have gone
public by 2001 and faired very badly at the stock markets.
Conclusion
It has been observed that the banking sector in India has provided a mixed response to
the reforms initiated by the RBI and the Govt. of India since the 1991. The sector has
responded very positively in the field of enhancing the role of market forces, regarding
measures of prudential regulations of accounting, income recognition, provisioning and
exposure, introduction of CAMELS supervisory rating system, reduction of NPAs and
regarding the up gradation of technology. But at the same time the reform has failed to bring
up a banking system which is at par with the international level and still the Indian banking
sector is mainly controlled by the govt. as public sector banks being the leader in all the
spheres of the banking network in the country.
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