INTRODUCTION The Banking has come a long way from the

days of presidency banks. In pre-independence and post –independence

period and even after independence , banking was handicapped by the poor saving habits of people .

During the Second World War , there was a mushroom growth of bank offices.

During 1939-45,on an average a bank failed every sixth day which endangered the banking industry.

The position was controlled with enactment of the Banking Companies (Regulation)Act,1949.

Four Phases of Indian Banking

1. Foundation Phase2. Expansion Phase3. Consolidation Phase4. Reform Phase

FOUNDATION PHASE

The period upto first ‘nationalization of banks’ i.e. 1969.

Focus – laying of a foundation for sound banking system.

Setting up of required legal framework for consolidating the banking system.

Imperial Bank of India converted into the State bank of India.

Princely state banks converted into associate banks of the State Bank of India.

EXPANSION PHASE

• This phase started in mid 1960s but gained momentum in July 1969.

• A phase of ‘mass banking’.• The network of branches expanded at a

rapid speed.• Credit was directed into priority sector.• Banks emerged as important instrument

of socio- economic change but fast expansion created certain problems.

CONSOLIDATION PHASE

This phase started in 1985. The weakness of expansion phase

pushed banking into consolidation phase.

The RBI started some initiatives like relaxation in control.

AIM- was to overcome the weaknesses which emerged from fast expansion and too much of control of RBI.

REFORM PHASE

From 1947-1990, there was impressive widening of the banking system but at the end of 1990 there was a general consensus that banking system has not become sound enough.

In 1991, India faced a macro- economic crisis. Concerned Govt. of India appointed a high level

committee headed by Shri M.Narasimham. Another committee headed by Mr. Khan . Banking sector is centred around

recommendations from these experts.

NARASIMHAM COMMITTEE 1

The committee can be described as committee on financial sector reforms.

The committee was appointed to examine structure ,organisation and function of financial system.

The second committee also headed by M. Narasimham was for reviewing financial sector reforms .

RECOMMENDATIONS

1. SLR and CRR2. Higher interest rates on SLR and CRR3. Phasing out of Directed Credit4. Deregulate interest rates 5. Capital Adequacy Norms6. Adoption of Uniform Accounting Practices 7. Income Recognition 8. Provisions9. Transparency

10.Asset Re - construction Fund11.Structure of Banking System12.Branch Licensing13.Computerisation14.Control15.Development Financial

Institutions

NARASIMHAM COMMITTEE 2

M . Narasimham headed the committee on review of financial sector reforms . It submitted its report in April , 1998.

1. Need for a strong banking system2. Merger of strong banks3. Narrow banking for weak banks4. Confine area of local banks5. Review govt.’s role in public sector banks 6. Review capital adequacy norms

7.Review legislations 8.Lesser regulation and supervision9.Integrate lending activities10.Speed up computerisation11.Review personnel policies12.Safeguard against vigilance

enquiries13.Depoliticise bank boards14.System for asset liability and risk

management 15.Assets reconstruction company

(ACR)16.New watch dog for banks 17.Money market rate

KHAN COMMITTEE

(Working Group for Harmonisation of the Operations of Development Financial Institutions (DFI’s) and Banks)

The Khan Committee reviewed the role ,structure and operations of DFI’s and banks in the emerging operating environment and submitted its report in may 1998. It’s important recommendations are :

1. Need for a super regulator 2. Redefine priority sector3. Mergers between FI’s and banks 4. Co-ordination Committee5. Removal of certain restrictions6. Move towards universal banking7. Recommendations regarding state – level financial

institutions (SLI)8. Other recommendations

VERMA PANEL REPORT

The RBI set up the group to suggest measures for revival of weak public sector banks.

In summarised form the recommendations of the panel in each of the area can be summed up as follows:

1.OPERATIONAL RESTRUCTURING:a) Change in mode of operationsb) NPA managementc) Cost reduction2.ORGANISATIONAL RESTRUCTURING 3.FINANCIAL RESTRUCTURING

BASEL 2 NORMS

According to RBI’s declaration, Indian banks having foreign branches and foreign banks operating in India have to migrate to BASEL 2 norms from March 31,2008 while all other commercial banks excluding local area banks and Regional Rural Banks have been permitted to adopt BASEL 2 norms latest by March31, 2009. To prepare banks for implementation of BASEL 2 norms , a three -track approach has been adopted by the RBI with regard to capital adequacy rules

IMPACT OF REFORMS

The Govt. of India primarily relied on recommendations of various committee’s and working groups to start the process of reforms. The changes brought down by the process of reforms are discussed below:

1. Reduction in SLR AND CRR2.Higher Interest Rates on SLR and CRR 3.Deregulation of interest rates4.Change in the approach of banks5.Setting up of new banks

6.Turning into buyer’s market7.Capital adequacy norms8.Directed credit9.Prudential accounting standards10.Valuation of bank’s investment in govt .

securities11.Branch licensing12.Bank’s access to capital market13.Bank’s supervision14.Customer services15.Merger of banks16.Recovery tribunals17.Computerisation18.Narrowing down of distinction between banks

and financial institutions19.Reduction of non- performing assets

CHALLENGES AHEAD

The process of globalisation and liberalisation has presented certain challenges to the Indian banking . They are briefly discussed below:

1. Competition from global majors2. Competition from new banks3. Pressure on spread4. Changes in product pricing5. Relationship banking6. Self –regulation by banks7. Challenges from the structure of Indian economy8. Management of non- performing assets9. Managing technology