BANKING SECTOR REFORMS

AnD THE IMPACT ON INDIAN ECONOMY

Class XII Economics Project

Jash Shah
Class : XII- D Roll No. 16
 INDEX
SERIAL NO. TITLE PAGE NO.

1. INTRODUCTION 1
2. LITERATURE REVIEW 6
3. OBJECTIVE AND SCOPE OF THE STUDY 7
4. RESEARCH METHODOLOGY 8
5. DATA ANALYSIS AND INTETRPRETATION 9
6. FINDINGS OF THE STUDY 25
7. CONCLUSION 30
8. SUGGESTIONS 31
9. BIBLIOGRAPHY 32
 1. INTRODUCTION TO THE STUDY
A retrospect of the events clearly indicates that the Indian banking
sector has come far away
from the days of nationalization. The Narasimham Committee
laid the foundation for the
reformation of the Indian banking sector. Constituted in 1991, the
Committee submitted two
reports, in 1992 and 1998, which laid significant thrust on
enhancing the efficiency and
viability of the banking sector. As the international standards
became prevalent, banks had to
unlearn their traditional operational methods of directed credit,
directed investments and
fixed interest rates, all of which led to deterioration in the quality
of loan portfolios,
inadequacy of capital and the erosion of profitability.
The recent international consensus on preserving the soundness of
the banking system has
veered around certain core themes. These are: effective risk
management systems, adequate
capital provision, sound practices of supervision and regulation,
transparency of operation,
conducive public policy intervention and maintenance of
macroeconomic stability in the
economy.
Until recently, the lack of competitiveness vis-à-vis global
standards, low technological level
in operations, over staffing, high NPAs and low levels of
motivation had shackled the
performance of the banking industry.
However, the banking sector reforms have provided the necessary
platform for the Indian
banks to operate on the basis of operational flexibility and
functional autonomy, thereby
enhancing efficiency, productivity and profitability. The reforms
also brought about
structural changes in the financial sector and succeeded in easing
external constraints on its
operation, i.e. reduction in CRR and SLR reserves, capital
adequacy norms, restructuring and
recapitulating banks and enhancing the competitive element in the
market through the entry
of new banks.
The reforms also include increase in the number of banks due to
the entry of new private and
foreign banks, increase in the transparency of the banks’ balance
sheets through the
introduction of prudential norms and increase in the role of the
market forces due to the deregulated interest rates. These have
significantly affected the operational environment of
the Indian banking sector.
To encourage speedy recovery of Non-performing assets, the
Narasimham committee laid
directions to introduce Special Tribunals and also lead to the
creation of an Asset
Reconstruction Fund. For revival of weak banks, the Verma
Committee recommendations
have laid the foundation. Lastly, to maintain macroeconomic
stability, RBI has introduced
the Asset Liability Management System.
A LOOK AT PAST
The Indira Gandhi government had nationalised 14 commercial
banks through the Banking
Companies (Acquisitions and Transfer of Undertakings)
Ordinance in 1969. The 1970 and
1980 Acts brought about after the nationalisation of 14 and 6
banks respectively were first
amended in 1994 to allow government to reduce its equity in
them to up to 49 per cent. The
20 nationalised banks became 19 subsequently after New Bank of
India merged with Punjab
National Bank. Only six of these 19 banks have so far accessed
the market and to gone for
public issues meet its additional capital needs. The government
holds majority or entire
equity of 19 nationalized banks currently.
Till now, banks could reduce equity only up to 25 per cent of the
paid up capital on the date
of nationalisation. Some banks like the Bank of Baroda have
returned equity to the
government in the past, but that has been within the prescribed 25
per cent cap.
The Nationalisation Act provides that the PSU banks cannot sell a
single share. This is the
reason why banks have been tapping the market to fund their
expansion plans. Also the Act
originally provided that the government must mandatorily hold
100 per cent stake in banks.
The 1994 amendments brought it down to 51 per cent, to help
induction of public as
shareholders.
At this stage, the government provided that all shares, excluding
government shares could be
transferred. This was necessary to permit the transfer of shares
when public shareholders sold
their stake in banks. The amendments remove restrictions on the
transfer of government
shareholding.
REFORMS IN BANKING SECTOR
As the real sector reforms began in 1992, the need was felt to
restructure the Indian banking
industry. The reform measures necessitated the deregulation of
the financial sector,
particularly the banking sector. The initiation of the financial
sector reforms brought about a
paradigm shift in the banking industry. In 1991, the RBI had
proposed to from the committee
chaired by M. Narasimham, former RBI Governor in order to
review the Financial System
viz. aspects relating to the Structure, Organisations and
Functioning of the financial system.
The Narasimham Committee report, submitted to the then finance
minister, Manmohan
Singh, on the banking sector reforms highlighted the weaknesses
in the Indian banking
system and suggested reform measures based on the Basle norms.
The guidelines that were
issued subsequently laid the foundation for the reformation of
Indian banking sector.
The main recommendations of the Committee were: -
i. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent
over a period of five
years
ii. Progressive reduction in Cash Reserve Ratio (CRR)
iii. Phasing out of directed credit programmes and redefinition of
the priority sector
iv. Deregulation of interest rates so as to reflect emerging market
conditions
v. Stipulation of minimum capital adequacy ratio of 4 per cent to
risk weighted assets by
March 1993, 8 per cent by March 1996, and 8 per cent by those
banks having
international operations by March 1994
vi. Adoption of uniform accounting practices in regard to income
recognition, asset
classification and provisioning against bad and doubtful debts
vii. Imparting transparency to bank balance sheets and making
more disclosures
viii. Setting up of special tribunals to speed up the process of
recovery of loans
ix. Setting up of Asset Reconstruction Funds (ARFs) to take over
from banks a portion
of their bad and doubtful advances at a discount
x. Restructuring of the banking system, so as to have 3 or 4 large
banks, which could
become international in character, 8 to 10 national banks and
local banks confined to
specific regions. Rural banks, including RRBs, confined to rural
areas
xi. Abolition of branch licensing
xii. Liberalising the policy with regard to allowing foreign banks
to open offices in India
xiii. Rationalisation of foreign operations of Indian banks
xiv. Giving freedom to individual banks to recruit officers
xv. Inspection by supervisory authorities based essentially on the
internal audit and
inspection reports
xvi. Ending duality of control over banking system by Banking
Division and RBI
xvii. A separate authority for supervision of banks and financial
institutions which would
be a semi-autonomous body under RBI
xviii. Revised procedure for selection of Chief Executives and
Directors of Boards of
public sector banks
xix. Obtaining resources from the market on competitive terms by
DFIs
xx. Speedy liberalisation of capital market
xxi. Supervision of merchant banks, mutual funds, leasing
companies etc., by a separate
agency to be set up by RBI and enactment of a separate
legislation providing
appropriate legal framework for mutual funds and laying down
prudential norms for
such institutions, etc.
Several recommendations have been accepted and are being
implemented in a phased
manner. Among these are the reductions in SLR/CRR, adoption
of prudential norms for asset
classification and provisions, introduction of capital adequacy
norms, and deregulation of
most of the interest rates, allowing entry to new entrants in private
sector banking sector, etc.
Keeping in view the need of further liberalisation the
Narasimham Committee II on Banking
Sector reform was set up in 1997. This committee’s terms of
reference included review of
progress in reforms in the banking sector over the past six years,
charting of a programme of
banking sector reforms required to make the Indian banking
system more robust and
internationally competitive and framing of detailed
recommendations in regard to make the
Indian banking system more robust and internationally
competitive.
This committee constituted submitted its report in April 1998.
The major recommendations
are:
i. Capital adequacy requirements should take into account market
risks also
ii. In the next three years, entire portfolio of Govt. securities
should be marked to market
iii. Risk weight for a Govt. guaranteed account must be 100
percent
iv. CAR to be raised to 10% from the present 8%; 9% by 2000
and 10% by 2002
v. An asset should be classified as doubtful if it is in the sub-
standard categ ory for 18
months instead of the present 24 months
vi. Banks should avoid ever greening of their advances
vii. There should be no further re-capitalization by the Govt.
viii. NPA level should be brought down to 5% by 2000 and 3%
by 2002.
ix. Banks having high NPA should transfer their doubtful and loss
categories to ARCs
which would issue Govt. bonds representing the realisable value
of the assets.
x. International practice of income recognition by introduction of
the 90-day norm
instead of the present 180 days.
xi. A provision of 1% on standard assets is required.
xii. Govt. guaranteed accounts must also be categorized as NPAs
under the usual norms
xiii. There is need to institute an independent loan review
mechanism especially
for large borrowal accounts to identify potential NPAs.
xiv. Recruitment of skilled manpower directly from the market be
given urgent
consideration
xv. To rationalize staff strengths, an appropriate VRS must be
introduced.
xvi. A weak bank should be one whose accumulated losses and
net NPAs exceed
its net worth or one whose operating profits less its income on
recap bonds is negative
for 3 consecutive years.
To start with, it has assigned a 2.5 per cent risk-weightage on gilts
by March 31, 2000 and
laid down rules for provisioning; shortened the life of sub-
standard assets from 24 months to
18 months (by March 31, 2001); called for 0.25 per cent
provisioning on standard assets
(from fiscal 2000); 100 per cent risk weightage on foreign
exchange (March 31, 1999) and a
minimum capital adequacy ratio of 9 per cent as on March 31,
2000.

2. LITERATURE REVIEW
Joshi (1986) in his study of all scheduled commercial banks
operating in India analyses the
profitability and profit planning relating to the period 1970-1982.
The study discusses and
trends in profits and profitability of commercial banks
nationalization. The factors leading to
the deterioration of profitability are highlighted.
Minakshi and Kaur (1990) attempted to measure quantitatively
the impact of the various
instruments of monetary policy on the profitability of commercial
banks. The study
empirically proves that pre-liberalization banking being highly
regulated and controlled
industry, has suffered a lot so far as profitability concerned. The
bank rates and reserve
requirements ratio has played a significant role in having a
negative impact on the bank’s
profitability.
Ojha (1992) in his study attempts to measure the productivity of
public sector commercial
banks in India. After identifying various measures of productivity
like total assets per
employee, total credit per employee, total deposits per employee,
pre-tax profits per
employee, net profit per employee, working funds per employee,
ratio of establishment
expenses to working funds and net interest per employee,
comparison is made with the banks
at the international level. The study concludes the Indian banks
have very less productivity
ratio compared with western countries. Since in his study a
comparison has been made of
Indian public sector banks, which have to perform other social
functions unlike western
commercial banks.
Rao (2007) studies how these reforms would help the banks,
specially the private sector ones.
He stated the following to conlude his study:
-The response of the banks to the reforms has been impressive.
The banks have been
adjusting very well to the new environment though gradually. The
reforms have not only
enhanced the opportunities for banks but at the same time through
challenges as well.
As a result of entry of new generation private sector banks, the
competitive pressures are
constantly on the increase.

3. OBJECTIVE AND SCOPE OF THE STUDY

OBJECTIVE OF 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 20 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 reform and the future prospects. The study will be confined
to the impacts of reforms
upon credit delivery, share of market of banks, profitability and
prudential regulations, and
the economy.
SCOPE OF THE STUDY
The study focuses on the banking sector as a whole. As the
reforms are a general initiative
for all banks to follow, the study is a macro perspective research.
The study also looks from a
macro level at the economy of India as the effects of the reforms
are being checked on it.

4. RESEARCH METHODOLOGY
The term research methodology can be defined as a process used
to collect data and
information for the purpose of making business decisions. The
methodology may include
publication research, interviews, surveys and other techniques.
Data Collection:-
The type of data that is used in the study is stated here.
For this study, we have relied totally on research papers and
various articles, thus the type of
data used here is SECONDARY data.

5. DATA ANALYSIS AND INTERPRETATION

The Narasimham Committee had argued for reductions in SLR on
the grounds that the stated
government objective of reducing the fiscal deficits will obviate
the need for a large portion
of the current SLR. Similarly, the need for the use of CRR to
control secondary expansion of
credit would be lesser in a regime of smaller fiscal deficits. The
committee offered the route
of Open Market Operations (OMO) to the Reserve Bank of India
for further monetary control
beyond that provided by the (lowered) SLR and CRR reserves.
Ultimately, the rule was
Reduction in the reserve requirements of banks, with the Statutory
Liquidity Ratio (SLR)
being brought down to 25 per cent by 1996-97 in a period of 5
years.
The committee recommended a Stipulation of minimum capital
adequacy ratio of 4 per cent
to risk weighted assets by March 1993, 8 per cent by March 1996,
and 8 per cent by those
banks having international operations by March 1994. Later, all
banks required attaining the
capital adequacy norm of 8 per cent, as per the Basle Committee
Recommendations, by
March 31, 1996.
To get a true picture of the profitability and efficiency of the
Indian Banks, a code stating
adoption of uniform accounting practices in regard to income
recognition, asset classification
and provisioning against bad and doubtful debts has been laid
down by the Central Bank.
Close to 16 per cent of loans made by Indian banks were NPAs -
very high compared to say
5 per cent in banking systems in advanced countries.
i. REDUCTION IN CRR & SLR
ii. MINIMUM CAPITAL ADEQUACY RATIO
iii. PRUDENTIAL NORMS
iv. INCOME RECOGNITION
The regulation for income recognition states that the Income on
NPAs cannot be booked.
Interest income should not be recognized until it is realized. An
NPA is one where
int erest is overdue for two quar ters or more. In respect of NPAs,
interest is not to be
recognized on accrual basis, but is to be treated as income only
when actually received.
Income in respect of accounts coming under Health Code 5 to 8
should not be recognized
until it is realized. As regards to accounts classified in Health
Code 4, RBI has advised the
banks to evolve a realistic system for income recognition based
on the prospect of
realisability of the security. On non-performing accounts the
banks should not charge or take
into account the interest.
v. ASSET CLASSIFICATION
Loans and advances account for around 40 per cent of the assets
of SCBs. However,
delay/default in payment of interest and/or repayment of principal
has rendered a significant
proportion of the loan assets non-performing. As per RBI’s
prudential norms, a Non-
Performing Asset (NPA) is a credit facility in respect of which
interest/installment has
remained unpaid for more than two quarters after it has become
past due
Regulations for asset classification :
Standard Assets: It carries not more than the normal risk attached
to the business and is not
an NPA.
Sub-standard Asset: An asset which remains as NPA for a period
exceeding 24 months,
where the current net worth of the borrower, guarantor or the
current market value of the
security charged to the bank is not enough to ensure recovery of
the debt due to the bank in
full.
Doubtful Assets: An NPA which continued to be so for a period
exceeding two years (18
months, with effect from March, 2001, as recommended by
Narasimham Committee II,
1998).
Loss Assets: An asset identified by the bank or internal/ external
auditors or RBI inspection
as loss asset, but the amount has not yet been written off wholly
or partly.
vi. PROVISIONING NORMS
Banks will be required to make provisions for bad and doubtful
debts on a uniform and
consistent basis so that the balance sheets reflect a true picture of
the financial status of the
bank. The Narasimham Committee has recommended the
following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out standings for
loss assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20
per cent to 50 per cent of the
secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
Banks should disclose in balance sheets maturity pattern of
advances, deposits, investments
and borrowings. Apart from this, banks are also required to give
details of their exposure to
foreign currency assets and liabilities and movement of bad loans.
These disclosures were to
be made for the year ending March 2000
In fact, the banks must be forced to make public the nature of
NPAs being written off. This
should be done to ensure that the taxpayer’s money given to the
banks as capital is not used
to write off private loans without adequate efforts and punishment
of defaulters.
vi i. DISCLOSURE NORMS
Liberalizing the policy with regard to allowing foreign banks to
open offices in India or
rather Deregulation of the entry norms for private sector banks
and foreign sector.
Keeping in view the urgent need to revive the weak banks, the
Reserve Bank of India set up a
Working Group in February, 1999 under the Chairmanship of
Shri M.S. Verma to suggest
measures for the revival of weak public sector banks in India.
THE VERMA PRESCRIPTION
 Identification of weak banks by using benchmarks for 7 critical
ratios
 Recapitalisation of 3 weak banks conditional on their achieving
specified
milestones
 Five-year freeze on all wage-increases, including the 12.25%
increase negotiated
by the IBA
 A 25% reduction in staff-strength, either through VRSs or
through wage-cuts
 Branch rationalisation, including the closure of loss-making
foreign branches
 Transfer of non-performing assets to an Asset Reconstruction
Fund
 Reconstitution of bank boards to include professionals,
industrialists and financial
experts
 Independent Financial Restructuring Authority to monitor
implementation of
vi i i. RATIONALISATION OF FOREIGN OPERATIONS
ix. RECONSTRUCTION OF WEAK BANKS
.ALM framework rests on three pillars
ALM Organisation:
The ALCO consisting of the banks senior management including
CEO should be responsible
for adhering to the limits set by the board as well as for deciding
the business strategy of the
bank in line with the banks budget and decided risk management
objectives.
ALM Information System
ALM Information System for the collection of information
accurately, adequately and
expeditiously. Information is the key to the ALM process. A good
information system gives
the bank management a complete picture of the bank's balance
sheet.
ALM Process
The basic ALM process involves identification, measurement and
management of risk
parameters. The RBI in its guidelines has asked Indian banks to
use traditional techniques
like Gap Analysis for monitoring interest rate and liquidity risk.
However RBI is expecting
Indian banks to move towards sophisticated techniques like
Duration, Simulation, VaR in the
future.
Banking is a business and not an extension of government. Banks
must be self-reliant, lean
and competitive. The best way to achieve this is to privatise the
banks and make the
managements accountable to real shareholders. If "privatisation"
is a still a dirty word, a
good starting point for us is to restrict government stake to 33 per
cent.
revival package
xi. REDUCTION OF GOVERNMENT STAKE IN PSBs
x. ASSET LIABILITY MANAGEMENT SYSTEM
The interest rate regime has also undergone a significant change.
For long, an administered
structure of interest rate has been in vogue in India. The 1998
Narasimham Reforms
suggested deregulation of interest rates on term deposits beyond a
period of 15 days. At
present, the Reserve Bank prescribes only two lending rates for
small borrowers. Banks are
free to determine the interest rate on deposits and lending rates on
all lendings above Rs.
200,000.
xii. DEREGULATION OF INTEREST RATES

Income and Expenses Profile of Banks

Interest Income
Interest Expenses
• Interest/discount on advances/bills
• Interest on investments
• Interest on balances with RBI and
other interbank funds
• Others
• Interest on deposits
• Interest on Refinance/interbank
borrowings
• Others
Other Income
Operating Expenses
• Commission, Exchange and
Brokerage
• Profit on sale of investments
• Profit on revaluation of investments
• Profit on sale of land, building and
other assets
• Profit on exchange transactions
• Income earned by way of dividends,
etc.
• Miscellaneous
 Payments to and provisions for
employees
• Rent, taxes and lighting
• Printing and stationery
• Advertisement and publicity
• Depreciation on Bank’s property
• Director’/Auditor’s fees and expenses
• Law charges, Postage, etc.
• Repairs and Maintenance,
 Insurance.
• Other expenses
 Till January 2015, RBI had kept the policy rates unchanged. As
inflationary
conditions eased, RBI softened the monetary policy by cutting the
Repo rates by
25 basis points in January 2015 (from 8% to 7.75%).
 The Reserve Bank of India (RBI) also adopted new Consumer
Price Index
(combined) as the measure for nominal anchor (Headline CPI) for
policy
communication.
 Banks being allowed to raise capital from the market to meet
capital adequacy norms
by diluting the government’s stake up to 52 per cent.
 Pradhan Mantri Jan Dhan Yojana launched to provide universal
access to banking
facilities with at least one basic banking account for every
household.
 Tightened norms to Asset Reconstruction Companies,
increasing the minimum
investment in security receipts to 15% from 5%.
 Currently 74% Foreign funding is allowed in private banking
(49% through automatic
and the rest via govt route)
 In order to improve the Governance of Public Sector Banks, the
Government intends to set up an autonomous Bank Board Bureau
with professionals as its members. It would be responsible for
search
and selection of heads of PSBs, as also for Non-Official Directors
on
the Boards of Banks. This would be an interim step
towards moving in the direction of having a Bank Investment
Company.
RBI norms for consolidated PSU bank accounts
The Reserve Bank of India (RBI) has moved to get public sector
banks to consolidate their
accounts with those of their subsidiaries and other outfits where
they hold substantial stakes.
Major Reform Initiatives Undertaken by Government in the
Banking Sector
(2014 onwards)
Towards this end, RBI has set up a working group recently under
its Department of Banking
Operations and Development to come out with necessary
guidelines on consolidated
accounts for banks. The move is aimed at providing the investor
with a better insight into
viewing a bank's performance in totality, including all its
branches and subsidiaries, and not
as isolated entities. According to a banker, earlier subsidiaries
were floated as external
independent entities wherein the accounting details were not
incorporated in the parent
bank's balance sheet, but at the same time it was assumed that the
problems will be dealt with
by the parent.
This will be a path-breaking change to the existing norms wherein
each bank conducts its
accounts without taking into consideration the disclosures of its
subsidiaries and other
divisions for disclosure. As per the proposed new policy
guidelines, the banks will be
required to consolidate their accounts including all its subsidiaries
and other holding
companies for better transparency.
THE GOVT HAS ALSO INITIATED THE FOLLOWING TO
STRENGTHEN THE
BANKING SECTOR:-
 The Government of India is looking to set up a special fund, as
a part of National
Investment and Infrastructure Fund (NIIF), to deal with stressed
assets of banks. The
special fund will potentially take over assets which are viable but
don’t have
additional fresh equity from promoters coming in to complete the
project.
 The Reserve Bank of India (RBI) plans to soon come out with
guidelines, such as
common risk-based know-your-customer (KYC) norms, to
reinforce protection for
consumers, especially since a large number of Indians have now
been financially
included post the government’s massive drive to open a bank
account for each
household.
 To provide relief to the state electricity distribution companies,
Government of India
has proposed to their lenders that 75 per cent of their loans be
converted to state
government bonds in two phases by March 2017. This will help
several banks,especially public sector banks, to offload credit to
state electricity distribution
companies from their loan book, thereby improving their asset
quality.
 The Reserve Bank of India (RBI), the Department of Industrial
Policy & Promotion
(DIPP) and the Finance Ministry are planning to raise the Foreign
Direct Investment
(FDI) limit in private banks sector to 100 per cent from 74 per
cent.
 Government of India aims to extend insurance, pension and
credit facilities to those
excluded from these benefits under the Pradhan Mantri Jan Dhan
Yojana (PMJDY).<
 The Government of India announced a capital infusion of Rs
6,990 crore (US$ 1.05
billion) in nine state run banks, including State Bank of India
(SBI) and Punjab
National Bank (PNB). However, the new efficiency parameters
would include return
on assets and return on equity. According to the finance ministry,
“This year, the
Government of India has adopted new criteria in which the banks
which are more
efficient would only be rewarded with extra capital for their
equity so that they can
further strengthen their position."
 To facilitate an easy access to finance by Micro and Small
Enterprises (MSEs), the
Government/RBI has launched Credit Guarantee Fund Scheme to
provide guarantee
cover for collateral free credit facilities extended to MSEs upto Rs
1 Crore (US$ 0.15
million). Moreover, Micro Units Development & Refinance
Agency (MUDRA) Ltd.
was also established to refinance all Micro-finance Institutions
(MFIs), which are in
the business of lending to micro / small business entities engaged
in manufacturing,
trading and services activities upto Rs 10 lakh (US$ 0.015
million).
 The central government has come out with draft proposals to
encourage electronic
transactions, including income tax benefits for payments made
through debit or credit
cards.
 The Union cabinet has approved the establishment of the US$
100 billion New
Development Bank (NDB) envisaged by the five-member BRICS
group as well as the
BRICS “contingent reserve arrangement” (CRA).
 The government has plans to set up a fund that will provide
surety to banks against
loans given to students for higher education.

FOLLOWING ARE VARIOUS CHARTS TO SHOW THE

CHANGES IN
THE BANKING SECTOR AS WELL AS THE ECONOMY
DUE TO
THE REFORMS UNDERTAKEN:
Changes in INTEREST RATES:
The above graph shows how interest rates have been liberalised
and are changed depending
upon the economical conditions. The RBI considers thr rate of
INFLATION before changing
the interest rates.

Changes in RATE OF INFLATION:

The above graph shows the rate of INFLATION on the wholesale
rates. Also it shows
inflation for various necessary commodities. If a closer look is
taken on both the above
graphs, we see that interest rates go down once inflation comes
down and vice versa. This
has to do with higher payments due to interest plus the inflation
over it. Thus, when inflation
goes down, so do the interest rates.
CREDIT OUTFLOW:
In the above graph, data for loans to various sectors is given.
Though the percentages do not
vary much, the amount conversion is exponential.

FINANCIAL INCLUSION:
The above graph shows the no. of accounts which were opened as
part of the financial
inclusion scheme of PMJDY. The statistics stated are till 31st
march, 2016.
ALL figures in CRORE
GROSS DOMESTIC PRODUCT Rate:-
The above graph shows the changes in GDP growth in India. The
data mostly states the GDP
rate on a quarter to quarter basis thus there are 4 bars for each
year.

FOREX Reserves:
The above graph shows the change and growth in the FOREX
reserves in India. The amounts
are in US$ millions. The latest reserves stand at US$ 355560
million at the end of the week
ending March 25th, 2016.
Stock Markets:
NIFTY
The above graph shows the changes in NSE till April 2016.
SENSEX
The above graph shows the changes in the BSE
From the above graphs and charts if we examine them, we see
how changes in banking sector
has fuelled the economic rise in India. The GDP growth and the
Stock Market growth is a
clear indication of the progress the country. With the current
reforms underway, they are
projected to help the banking sector to become leaner and cleaner
in terms of debt
restructuring and financing. This in turn would help India grow at
a faster pace, which
according to the RBI would be 7.9% for the Financial Year 2016-
17.
As of 4 February 2016:
Indicator
Current
rate
Inflation 6.00%
Bank rate 7.75%
CRR 4.00%
SLR 21.50%
Repo rate 6.50%
Reverse repo rate 5.75%
Marginal Standing facility
rate
7.75%
6. FINDINGS OF THE STUDY:
THE EFFECTS OF THE REFORMS ON THE ECONOMY
 Corporate governance: Capital markets have always had the
potential to exercise
discipline over promoters and management alike, but it was the
structural changes
created by economic reforms that effectively unleashed this
power. Minority
investors can bring the discipline of capital markets to bear on
companies by voting
with their wallets. They can vote with their wallets in the primary
market by refusing
to subscribe to any fresh issues by the company. They can also
sell their shares in the
secondary markets their by depressing the share price. Financial
sector set in motion
several key forces that made these forces far more potent than in
the past:
Deregulation: economic reforms have not only increased growth
prospects, but they
have also made markets more competitive. This means that in
order to survive
companies will need to invest continuously on large scale. The
most powerful impact
of voting with the wallet is on companies with large growth
opportunities that have a
constant need to approach the capital market for additional funds.
Disintermediation:
meanwhile, financial sector reforms have made it imperative for
firms to rely on
capital markets to a greater degree for their needs of additional
capital. As long as
firms relied on directed credit, what mattered was the ability to
manipulate
bureaucratic and political processes; the capital markets, however,
demand
performance. Globalization: globalization of our financial
markets has exposed
issuers, investors and intermediaries to the higher standards of
disclosures and
corporate governance that prevail in more developed capital
markets. Tax reforms:
tax reforms coupled with deregulation and competition have titled
the balance away
from black money transaction. It is not often realized that when a
company makes
profits in black money, it is cheating not only the government, but
also the minority
shareholders. Black money profits do not enter the books of
account of the company
at all, but usually go into the pockets of the promoters.
 Risk management: In the days when interest rate were fixed by
the government and
remained stable for long periods of time, interest rate risk was a
relatively minor
problem. The deregulation of interest rate as a part of financial
sector reforms has
changed all that and made interest rate highly volatile. For
instance, the rate of
interest on short term commercial paper was about 7.75-8.50% at
the end of 2008-
2009 dropped back 6.50-7.50% at the year of 2009- 2010 and
constant by 7.00-8.50%
at the year of 2013-14 .Companies which borrow short term to
fund their new
projects may face difficulties if interest rates go up[ sharply. It
may turn out that at
the higher cost of finance, the project is not viable at all. Worse,
companies may find
it difficult to refinance their borrowings at any price in times
when money is tight.
Many companies which borrowed in inter corporate deposit (ICD)
market in 2013-14
to finance acquisitions and expansion face this difficulty in 2013
and 2014 when the
ICD market dried up. Large scale defaults (euphemistically
described as rollover)
took place during this time. In the post reform era, corporate have
also been faced
with high volatility in foreign exchange rate. The rupee –dollar
rate has on several
occasions moved up or down by several percentage points in a
single days as
compared to the gradual, predictable changes of the eighties.
Indian companies have
found their dismay that foreign currency borrowings which
looked very cheap
because of low coupon rate of interest can suddenly become very
expensive if the
rupee depreciates against the currency in which the bond is
denominated.
 Capital stricter: At the beginning of the reforms process, the
Indian corporate sector
found itself significantly over-levered. This was because of
several reasons:
Subsidized institutional finance so attractive that it made sense for
companies to avail
of as much of it as they could get away with. This usually meant
the maximum debtequity
ratios laid down by th government for various industries. In a
protected
economy, operating (business) risk was lower and companies
could therefore afford
to take more risks on the financing side. Mostly of debt was
institutional and could
usually be rescheduled at little cost. Bond covenants: international
bond covenants are
quite restrictive specially for companies whose credit worthiness
is less than top
class. These covenants may restrict the investment and dividend
policies of the

companies may mandate sinking funds, may include cross-

default clauses and may
contain me- too clauses which restrict the future borrowing ability
of the company.
Bonds covenants have typically been quite lacks in India.
Moreover bond (and
debentures) trustees have been generally very lacks in the
performance of their duties.
 Cash flow discipline: Equity has no fixed service cost and year
to year fluctuations
in income are not very serious so long as over all enough is
earned to provide a
decent return to the shareholder. Debt on the other hand has a
fixed re payment
schedule and interest obligations. A company that is enabling to
generate enough cash
flow to meet this debt service requirement faces in solvency or
painful restructuring
of liability. Again, Indian companies have not experienced much
of this discipline in
the past because much of their debt was owed to banks and
institutions who have
historical been willing to re schedule loan quite generously.
Institutions may be less
willing to do so in future. More importantly, rescheduled is not an
easy option when
the debt is raised in the market from the public. Bonds are
typically rescheduled only
a part of bankruptcy proceeding or a BIFR restructuring. As the
next face of
economic reforms targets bankruptcy related laws, cash flow
discipline can be
expected to become far more stringent.
 Group structure and business portfolio: Indian business groups
have been doing
serious introspection about their business portfolio and about their
group structure
under the influence of academic like C.K. Prahalad, Indian
business groups which
have traditionally been involved in a wide range of business have
been contemplating
a shift to a more focused strategy. At the same time, they have
been trying to create a
group organizations structure that would enable the formulation
and implementation
of a group wide corporate strategy. In many cases they have not
gone beyond a
statement of intend
 Working capital management: Working capital management
has been impacted by
a number of the developments discussed above –operational
reforms in the area of
credit assessment and delivery, interest rate deregulation, change
in the competitive structure of the banking and credit system, and
the emergency of the money and debt
markets. Cash management has become an important task with
the facing out of the
cash credit system. Companies now have to decide on the optimal
amount of cash and
near cash that they need to hold, and also on how to deploy the
cash. Deployment in
tern involves decision about maturity, credit risk and liquidity.
During the tight
money this policy of this period, some companies were left with
to little liquidity
cash, while other found that their cash looked up in unrealizable
or illiquid assets of
uncertain value.
 Investment by foreign companies into the economy increased
and is going up due to
opening up and ease in FDI limits
 Inclusion of the deprived classes into the investment cycle due
to the PMJDY,
through which more than 20 crore bank accounts have been
opened thus helping not
just raise money but also include them in the money and credit
cycle.
 A healthy competition has been built between various banks.
Today, even private
banks are competing with the PSU banks as they are providing
world class services.
This is beneficial to the economy as the banks try hard to operate
in the sector and
compete for customers, both for raising deposits and giving loans.
 The monetary policy enacted has helped the Indian economy
survive the 2008-09
global economic crisis, where India was the only country where
not even a single
bank filed for bankruptcy due to the slowdown.
 Due to the reforms in the banking sector, debt recovery or
avoidance of debt has
increased. There are fewer instances of bad debts which are
needed to be written off
which are a healthy sign of the economy.
 The banking reforms have helped banks to venture into new
businesses like the
capital markets and money markets. Here banks are now playing
a positive role as
intermediaries and help raise funds for the investors who require
money. This has
helped to ease the capital raising process in the securities market.
 Forex reserves have gone up dramatically in the past years.
 The financial inclusion programme of the RBI has helped rural
parts to be better
equipped and be more integrated to the overall development of
the economy.

7. CONCLUSION
Reforms should be an ongoing process. They help the sector in
which they are implemented
to become robust and change as per the situations require.
Banking sector is the most
important part of any economy. It acts as the arterial system of the
economy which supplies
money wherever needed. Thus it should be reformed at regular
intervals so that it doesn’t
become obsolete. The economy runs on money. It can only work
properly if the banking
system is in perfect condition to fulfill the rising requirements
that arise.
It is due to the reforms and policies that the Indian banks are
known to be one of the most
financially sound institutions in the world even after surviving the
2008-09 global slowdown
and the 2015 slowdown.
Hence, reforms play an important part for any sector or country to
be sound and strong.

8. SUGGESTIONS
 A total restructuring of all the PSU banks is the need of the
hour. It will not only cut
down the huge bad debt they have, but would also reduce the
costs of staff and
operations. All the PSU’s should be clubbed under one big bank
which would act as
the guardian bank.
 A streamlining of services needs to be done by the banks to
raise the quality of the
services they provide.
 Better credit appraisal procedures need to be followed to avoid
bad debts. Strict
CIBIL and appraisal norms should be implemented.
 Banks should tap more into the service sector to earn income
thus depending less on
the interest income. This helps the banks to give more to the
customers and save more
for investments. Services like issuance of more credit and debit
cards, mutual funds
and provide more agency functions like trustee, trade credit,
providing various loans
etc.
9. BIBLIOGRAPHY
Magazine and Article:
-Banking Frontiers
-Reserve Bank of India bulletin
-Times of India
Web:
www.google.com
www.slideshare.com
www.rbi.org.in
www.wikipedia.org
www.indiatimes.com
www.thetimesofindia.com
BOOKS OR PAPERS
 Reforms In Indian Banking Sector - An Evaluative Study
of the Performance of Commercial Banks