Banking - Yojana

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allied activities should reach a
l~velof at least 60% percent of
the total direct lending to
agriculture.
Formal Announcement
The formal announcement of
the first initiatives of financial
sector reforms in 1991-92
consequent to the second report
of the Narasimhan Committee,
1988 a considerable ground has
been covered in putting in place a
financial system which can meet
the requirement of a more
competitive and open economy.
The rationale of the financial
sector reforms relates to
distortions, which were due,
according to the committee, to two
causes' viz direct investment and
credit programmes and Political
interference. A number of reform
measure have been taken since
19~9-92to remove or minimize the
distortion in the banking sector.
Similarly, a number of reforms
have also been made in respect of
Development Financial
Institutions and the Money and
Capital Markets. The RBI has
continued to bring about reforms
in the Indian Money Market like
reducing the differences between
various sections of money market
as also the differences in the rate
of interest. A secondary market has
been developed. Newinstruments
and banking of credit have been
introduced. The Money Market
Mutual funds and the Discount
and Finance House of India Ltd.,
have been set up. The efficiency of
the aforesaid radical reforms has
been very impressive. They have
changed the face and prospects of
Indian financial system.The future
agenda in the on-going reform
process should address the
challenge at a high level of the
NPA. Various options for tackling
this problem should be tried
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.including the creation of a limited
ARFfor the small and weak banks.
In a liberalising economy,
banking and financial sector
reforms assume high priority. It
needs no stressing that the entire
structure of developed and
d~veloping society has banks at
their very base. More the
development spread of corporate,
technical, industrial section, more
and more is the need of banking
and finance issuing' from them.
. The development in banking and
their proper operation in the social
perspective of the societyisa sound
guarantee of progress and
prosperity and its spread all the
world over. The globalisation
requires adhering to standards and
yardsticks that are universally
applicable. It has to be understood
and appreciated that, the Indian
banking industry is no longer an
isolated entity. It is increasingly
being affected by the dynamic and
highly competitive global banking
environment. The banking has
now become a global concept and
entity.The banks are facing several
challenges due to competition,
disintermediation and customers
demands. They, not only need to
reduce operating costs, but also
design innovative strategies to
attract and retain customers and
react quicklyand flexiblyto market
changes. Hard decisions have to be
taken to resolve the huge backlog
of Non-performing assets (NPAs).
About 16% percent of the total
advances exists, in public sector
banks.
The burden ofNPAs wasmainly
from direct lending, nearly a
fourth of total gross NPAs were
priority sector advances, where
debt forgiveness has severely
damaged the repayment culture.
Debt recovery tribunals and Asset
Recovery Companies. (ARC),
ARCs both were hampered by the
absence of a strong system of bad
debt resolution.
Public sector banks were created
as instruments of social banking.
A New policy "Sodal" banking is
sought to be replaced by profit
banking. Adoption of rigid and
alien banking accounting norms
has made the position difficulties
for the number of public sector
banks. Social lending purpose
cannot affect the profitability of •
the banks.
Financial Fragility
However, the indiscriminate
financial liberalisation in many
countries resulted in financial
fragility and, in many cases,
erupted into full fledged financial
crises. In the light of this
experience, India carefully
undertook certain reforms
measures in the finance sector
along with the general economic
reforms. These include easing of
high pre-emption requirements
such as SLR and CRR, relation of
Credit 'Control measures,
deregulation of interest rate
structure and ensuring prudential
norms. comparable to
international standards. In tune
with the neo-'classical theory,
competition is sought to be
fostered in financial sector by
permitting liberal entry offoreign
financial institutions and
developing local area banks. Abov.
all, the institutional set up requir.ed
for effective functioning of the
financial sectpr under the
liberalised conditions is also
strengthened. These institutions
accustomed to work under highly
controlled conditions, back
necessary expertise tq manage the
crises situations arising ~nder the
liberalised conditions. Hence,
India must calculate careful
measures before going in for full-
YOJANAJuly2002