Banking Reforms Since 1991


 
 
Concept Explanation
 

Banking Reforms Since 1991

Banking Reforms Since 1991 : Let us get acquainted with some of the important reforms in the banking sector in India.

  • Reduced CRR and SLR: The Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) have been gradually reduced during the economic reforms period in India. By law, in India, the CRR remains between 3-15% of the net demand and time liabilities. It is reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, the SLR is also reduced from earlier 38.5% to current minimum of 25% level. This has left more loanable fund with commercial banks, solving the liquidity problem.
  • Deregulation of Interest Rate: During the economic reforms period, interest rates or commercial banks were deregulated. Banks now enjoy freedom of fixing the lower and upper limits of interest on deposits. The slab level for this purpose has been reduced from Rs. 20 lakh to just Rs. 2 lakh. 
  • Fixing Prudential Norms: In order to induce professionalism in operations, the RBI fixed prudential norms for commercial banks in areas such as classification of assets, provisions for bad debts, maintaining international standards in accounting practices, etc. It helped banks in reducing and restructuring Non-Performing Assets (NPAS). 
  • Introduction of CRAR: Capital to Risk Weighted Asset Ratio (CRAR) was introduced in 1992. It resulted in an improvement in the capital position of commercial banks. Almost all the banks in India have reached the Capital Adequacy Ratio (CAR) above the statutory level of 9%.
  • Operational Autonomy: As part of the reforms, commercial banks enjoy operational freedom. If a bank satisfies the CAR, it gets freedom in opening new branches, upgrading the extension counters, closing down existing branches, and they get liberal lending norms.
  • Banking Diversification: The Indian banking sector is now well diversified. Many of the banks have stared new services and new products. Some of them have established subsidiaries in merchant banking, mutual funds, insurance, venture capital, etc. which have led to diversified sources of income of them.
  • New Generation Banks: Many new generation banks have successfully emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI Bank have given a big challenge to the public sector banks leading to a greater degree of competition.
  • Improved Profitability and Efficiency: The productivity and efficiency of many commercial banks has improved. It has happened due to the reduced non-performing loans, increased use of technology, more computerisation and some other relevant measures adopted by the government.
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