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21.7.2011

REFORMS IN THE BANKING SECTOR

1990s-economic reforms and overhauling of economic policies

Globalization means linking of the Indian economy with the world economy

Started with reorientation of approaches of public sector banks

I) Narasimhan committee report on progress and problems of

nationalized banks 1991

Achievements since 1969 :

 Spectacular branch expansion programme in the rural sector

 Noteworthy growth of deposits. By 1991 bank deposits constituted
20% of the financial assets of the household sector
 Rural penetration. Rural deposits as a proportion of total bank deposits
recorded a growth from 3% to 15% in the two decades under
consideration.
 Priority sector lending by commercial banks increased from 14% to
41% between 1969 to 1991-mainly nationalised banks
 30 crores bank accounts by 1991.Borrowal accounts from 4 lakhs to
3.5 crores(87 times). Great achievement for nationalised banks
 Reduction in regional disparities and thrust to underbanked and
unbanked areas

Problems faced by nationalized banks :

During the period productivity and efficiency declined leading to drop in

profitability.

 Directed investments-sound banking requires liquidity to be maintained.

The banking regulation act 1949 requires of the commercial banks the
maintenance of the liquid assets in the form of cash, gold, government
and government guaranteed securities under section 24 of the act.
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This requirement known as Statutory Liquidity Ratio(SLR) was initially

placed at 25% of the total demand and time deposit liabilities of the
banks. By 1991 RBI had raised this to 38.5%. The reasons given were :
a) A higher SLR meant reduced capacity of the banks to create
credit
b) A higher SLR channelized bank funds into long term investments
in government securities.

Both these were said to be anti-inflationary in effect. The Narasimhan

committee had slammed this as a tax on banking and saving. High SLR
reduced profitability as the interest on government securities was lower than
the market and limited the freedom of the banks to invest in agriculture,
industry and trade.

Hinted at the fraud by finance ministry through SLR on the banking system.
By using section 24 managed to get 38.5% of the aggregate bank deposits
for financing its own expenditure and that too at an interest rate lower that
that paid by banks to their depositors. From mid 70s government used it to
pay salaries of government employees through to 1980s.

Under the RBI act 1934every commercial bank under obligation to keep 5%
of demand liabilities and 2% of time liabilities in the form of cash with RBI.
This is known as cash reserve ratio (CRR). In 1962, the RBI act was
amended to empower the RBI to vary the CRR between 3% and 15% of the
total demand and time liabilities. In 1991 it stood at 15% which was the
statutory maximum. Taken together, the SLR and CRR claimed 53.5% of the
aggregate deposits of banks as cash with RBI plus investment in government
securities and securities of public sector financial institutions (approved
securities and directed investments, forced on banks). RBI paid interest at
10.5% which was lower than the market rate. This reduced the freedom of
banks to invest their funds profitably and received very low rates of interest
on investments.

 Directed credit-one of the objectives of bank nationalization was to attain

a balanced spread of bank credit geographically and functionally. Sectors
neglected were identified as priority sectors and a % of credit were
directed to these sectors. The banks were supposed to assess the
anticipated income of a loan proposal rather than insist on the security
offered.
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Two adverse effects of lack of financial discipline :

1) Bad debts increased as focus was on quantity rather than quality

2) Credit went to undeserving proposals. The technological revolution in
agriculture and small scale industries got stymied.
 Political and administrative interference-loan melas degenerated into
irresponsible lending. IRDP(Integrated rural development programme)
lending were based on lists rather than need based credit assessment.
20% of the agricultural and small scale industrial credit is of this ‘infected’
type.

Courts directed loans to sick industries.BIFR urged for refinance. As a result

of this public sector banks experienced a lowering of their incomes , bsd
debt, mounting arrears and diversion of funds, leading to unproductive uses.

 Subsidized credit-IRDP and priority sector lending should be at

concessional rates of lending. Banks were paying much higher rates of
interest to their depositors. To compensate banks were forced to charge
exorbitant interests to borrowings from industry and trade. Narasimhan
committee had felt that the savings of the public had been squandered.
 Growth of expenditure-explained by the Narasimhan committee as follows
:
 Need and potential viability not assessed while following branch
expansion programme
 Supervision, inspection and audit were replaced by outside lines of
command and detrimental to financial health of banks
 Indiscriminate growth and promotions inflated costs of operation
 Restrictive role of trade unions-skill upgradation, computerization led
to declining labour productivity
 Administering costs to loans to agriculture was high and loans given at
subsidized interest rates. The unit costs of banking got raised.
Government had to bail the bannks
 Profitability of Indian banks : less competitive strength of Indian banks.
SBI has shown consistent improvement. Other banks have shown
improvement after 1996-97.
II) Priority sector lending

Commercial banks passed the buck to cooperative sector for priority sectors
like agriculture and small scale industries. One of the reasons for
nationalization.
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A) The rationale of priority sector lending :

RBI directive to banks in 1980 for priority lending :

 40% of total bank credit(40% of this to agriculture)

 50% of agriculture lending to weaker sections
 12.5% of advances to small scale industries should be to rural artisans
 12% of bank credit should go to exporters

% of priority sector advances to total bank credit grew from 22% in 1971 to
34.5% in 2004.

In 1969 the 14 banks which were nationalized had 15% to priority sectors
and in 1997 it was 41%.

B) Problems posed by priority sector lending :

 Indiscriminate lending-lack of productive proposals and political
pressures for sanctioning
 High costs, low profits-very difficult to monitor utilization as there were
numerous accounts
 Hands tied-only 40-45% of total funds available and the priority loans
carried concessional rates and no guarantee of recovery.
 Regional imbalance-Bihar, UP, MP and Rajasthan found it hard to reach
40%. They overlent to priority sectors in advanced states. Further
eroded the prospects of profitability.
C) A review of priority sector lending –Narasimhan committee
recommended that which was not agreed by Government
 Priority sector should be redefined
 PSL(priority sector lending) should be restricted to 10%, review
after 3 years and gradually phased out

Indian Bank’s association(IBA) recommended 10% because of following

reasons : A

 Operating expenses for small loans very high

 Recovery process very slow
 Quality of assets very bad

B) Priority sector to be restricted to the core sector and other loans left to
individual commercial judgement
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C) in the process of selecting beneficiaries and granting of subsidies banks

should be involved through a representative

D) deregulation of interest rate on PSL and would divert funds and the
expertise of banks to the sector

E) debt recovery tribunal with powers to attach assets

III Social banking-banking operations aimed at achieving social objectives

A) Financing of poverty alleviation, employment and weaker section

schemes

Employment guarantee most powerful measure for overcoming poverty

 Schemes of differential interest rates : 162 districts in 1972

Public sector banks were asked to extend loans to weaker sections at

concessional rate of 4%. 1990 was peak. 43 lakh accounts and outstandings
of Rs 710 crores. By 1995 reduced to 20 lakh accounts and 640 crores.

 Integrated rural development programme(IRDP) :

1996-97 there were 19 lakh beneficiaries of which 11 lakhs were dalits and
tribals and the loans sanctioned to all the beneficiaries was worth Rs 1950
crores.

Mehta committee reviewed the IRDP and recommended :

 Extension of the scheme for purchase of land and animal husbandry

 An enhancement of the loan amount
 >25000 must have normal banking terms of mortgage
 Have special recovery officers
 PMs integrated urban poverty eradication programme(PIUPEP) :

Started in Jan 1996 with a plan to eradicate poverty by 2000. Implemented

in 400 centres and expected to reach all urban poor by 2000. The financial
assistance amounted to Rs 12000 pa per poor household. Came under
criticism because the urban poor is going on increasing because of rural to
urban migration.

 Other schemes :
 PMs rojgar yogana for educated unemployed youth(PMRY) :
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Launched on 2.10.1993 in few urban areas and extended to the rest of

the country in 1994. To provide sustained employment to about 10 lakh
educated unemployed urban youth(18-35 years). Only one member of
family can get benefit. The loan limit is Rs 1 lakh from a bank. 15%
subsidy is available. 5% margin money. Project hypothecated. SSC pass
or fail ITI pass are eligible. 206000 beneficiaries. In 1996-97 banks had
disbursed Rs 1540 crores for the implementation of the scheme.

 Scheme for urban micro enterprises(SUME)

The scheme covers unemployed urban-poor living below the poverty line.
It extends to all urban settlements not covered by IRDP. For getting the
benefit :

o Permanent resident >3 yrs in city

o Skill and aptitude
o Not borrower in any other scheme
o Should not be defaulter under similar scheme

Nagar parishads and municipal bodies are the nodal agencies and identify
potential beneficiaries and forward to banks. The banks provide a
composite loan <7500.25% subsidy on cost of the project is available in
addition to the limit. Rs 5000 limit for subsidy for SC/ST and women and
Rs 4000 for others

Initiated in 1990, covered 118000 micro enterprises in 1995-96 and bank

credit Rs 74 crores

C Bank credit to minority communities

13 lakhs borrowal accounts. Loans Rs 1212 crs till 1996-97

Poverty eradication relied on various schemes as economic development by

itself cannot eradicate poverty

D Schemes of liberation and rehabilitation of scavengers(SLRS) 1993

Funding of projects upto Rs 50000 for beneficiaries at 4% rate of interest,

20% of it would be subsidy

B) A critical review of social banking schemes

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 Misdirected efforts-poverty has a social, cultural and educational

aspect besides the economic one. Financial assistance alone cannot
eradicate poverty. Present emphasis is on human development. In this
regard anti poverty special schemes met with a failure.
 Unethical divergence of funds-Government had siphoned off the
savings deposited in the commercial banks
 Faulty implementation-babus could not identify persons below the
poverty line and appraise the proposals and finance required banking
experience.
 Misappropriation-60% never reaches the poor. 40% which reaches is
so that they may never again approach the bank. Nexus between
borrowers, middlemen and inefficient bank staff.
 Weakening of the banking fibre : unsound conceptualization and faulty
implementation
IV Lead bank scheme

1969 Dr D R Gadgil committee-83% of total credit supply was made by the

nationalized banks. Banking facilities are not available in 617 towns out of
2700 towns and 5000 villages were out of jurisdiction of banks.

‘area approach’ for bank expansion-‘district’ mentioned as the smallest

geographical unit for this scheme. 1969 Lead bank scheme-every
nationalized bank should concentrate on ‘district’ and act as ‘Lead bank’ as
per the Narasimhan committee.

336 districts of India were to be distributed amongst the nationalized banks.

SBI + 7 subsidiaries + 14 nationalised banks(22 altogether) and 3 private
banks were to implement this scheme. Applicable to all districts except the
metropolitan cities. Banks were expected to adopt a district for intensive
development.

A) Operation of the scheme :

Lead bank to prepare a blue print for all round economic development of the
district as a whole :

Advantages expected :

 Well knit banking system

 Branch expansion programme would be more effective
 Supervision and guidance to branches more effective
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 Dynamic relationship at district level between government and banks

 Integration of credit and other activities
 Location of major bottle necks in the development of the district could
be identified
 Lead bank tool to implement District plan
B) Progress of the lead bank scheme

Banks in dark for two years

Banking commission felt that the planning should be with the state govts

Banking should be supported by water supply, power, cheap and reliable

transport

Progress made so far :

Identifying potential centres good but formulation of plans has been slow

High power committee suggested separate cells to monitor. 13 state

governments as of July 1977 have agreed to do this.

By mid 90s the lead bank scheme covered 493 districts in the country

C) Problems faced by the lead bank scheme

 Understanding the role-banks thought the lead bank would open the
branch
 Coordination-the effective functioning of a committee can make the
coordination meaningful. Consultative committees were tried
 Expertise-extra financial knowledge is lacking
 Training and orientation of branch level staff-it is a creative banking
scheme so the spirit and context had to be understood
 Other infrastructure-only financial development will not do
D) A critical appraisal-scheme not well understood

V ) Service area approach Feb 1988 based on study in 1987

A Operation of the strategy-branch assigned to cluster of villages and bring

about economic development. Expected to serve as :

 Avoid duplication
 Avoid scattered lending
 Facilitate rural approachability
 Credit planning and monitor endues
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Involves the following five stages :

 Each rural and semi-urban branch identifies its service area

 Surveys for lending potential
 Prepares annual credit plan
 Coordinates for effective implementation for annual credit plan
 Continous system for monitoring

Expected to reap following advantages :

o Each branch concentrates on the development of the area

o Avoids duplication of efforts
o Well planned and organized lending programme
o End use remains loyal to proposal and impact on production is properly
assessed
o Able to motivate the branch manager

B Progress of the service area approach

Scheme launched on 1.4.1989 in all 445 districts. The amount targeted has
doubled in 6 years till 1995

C Problems experienced by service area approach

 Assignment of areas-already assigned villages were reassigned

 Problems related to the staff-mismatch of staff and functions.
Commuted from urban centres. Narasimhan committee had
recommended cadre of rural bankers
 Region wise differences-in undeveloped regions 15-20 villages had to
be attached to one branch
 Bank wise differences-led to disparities in development of different
areas
 Organizational problems-one man branches were struggling to cope

VI) Narasimhan committee I (committee on financial systems 1991)

A Observations of the committee-in view of global integration of financial

services

 Directed investments-reduction in SLR and CRR

 Directed credit programmes-fiscal rather than credit instruments are
preferable for promoting distributive justice. Gradual phasing out of
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directed credit favoured by the committee. Directed credit

programmes should cover redefined priority sector.(marginal farmer,
tiny sector of industry, small business and transport operators, village
and cottage industries, rural artisans and other weaker sections). The
credit target for this section should cover 10% aggregate bank credit.
Appraisal should be without interference and review after 3 years.
 The structure of interest rates-medium term objective is to move
towards market determined interest rates. The bank rate should be the
anchor rates/floor rate.
 Capital adequacy-under capitalised
 The pattern of banking structure-market driven and profitability main
concerns. The committee recommends :
1. 3-4 large banks including SBI could be international in character
2. 8-10 national banks with nation wide network to be engaged in
universal banking
3. Local banks with operations confined to a specific region
4. Rural banks (including RRBs) to predominantly finance
agriculture
 To cover the credit gaps-branch licensing should be discontinued and
instead of rural branches, national banks should set up their rural
subsidiaries with a compact area of operation, and on par with RRBs,
in their relation to NABARD.

B Recommendations of the committee :

1. SLR to 25% over a period of 5 years

2. Preferential refinance of bank credit to agriculture and small industry
to be reintroduced. Credit instrument of enhancing productivity
3. Concessional rates of interest for priority sector loans of small sizes
should be phased out
4. Interest rates should be deregulated with efforts to reduce fiscal
deficit-otherwise the burden of interest payments on the budget would
increase
5. All banks should reach capital adequacy of 8% of the risk weighted
assets in a phased manner
6. Banks with a consistent record of profitability should be allowed to tap
the capital market
7. Interest on NPAs should not be booked as income on accrual basis
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The non performing assets (NPAs) would be defined as an advance ,

whereas on the balance sheet date category wise :

 Term loans-interest remains past due for more than 180 days
 Term Overdraft/cash credit-account remains out of order for more
than 180 days
 Bills purchased/discounted-bill overdue and unpaid for more than 180
days
 Other a/cs : amount to be received remains past due for more than
180 days
Past due=outstanding beyond 30 days from due date
8. For provisioning against bad and doubtful debts bank advances have
been classified into four groups

Standard assets Satisfactory and regular

Sub standard assets Classified as NPAs for a period upto
2 years
Doubtful assets NPAs remaining npas for more than
2 years including loans
Loss assets Accounts where loss has been
identified but the amount has not
been written off
The basis of provisioning should be as under :
For loss assets Write off or 100% outstandings be
provided for
For doubtful assets Provide for 100% of security short
fall and 20-50% of secured portion
For substandard assets A general provision of 10% of total
outstandings

The provisions made for doubtful assets should be allowed as deduction for
Income tax purposes

9. Supported Tiwari committee to constitute Special Tribunals for Recovry

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10. Setting up of assets reconstruction fund. After completing its

task of collecting dues and redeeming bonds, the ARF would wind itself
up
11. Rehabilitation of sick units procedure, computerization of
banking activity

VII ) Important banking sector reforms since 1991-92

A) Need and objective of reforms

Need :

 Concomitant of trade and industrial policy liberalization to increase

competitiveness and efficiency
 Strength of financial sector can be improved by improving financial health
and efficiency
 Market orientation through innovative services and products
 Physical / geographical expansion to be matched by qualitative
improvement
 Challenges of globalization call for a thorough reform of the financial
sector

Objectives :

 Improve accountability and profitability

 Improve policies
 Infuse competitive vitality
 To achieve balanced growth of financial institutions
 Ensure effective and appropriate supervision

B ) Important reforms 1991-98(Restructuring of banks not accepted)

1. Cash reserve ratio : interest paid raised to 4% from 3.5% under the II
tier formula
2. Statutory liquidity ratio : 38.5%. SLR is 25% uniform on all net
demand and time liabilities(MDTL)
3. Interest rates : reduced to four categories from six
Banks are allowed to fix their Prime lending rates(PLRs) on term loans
of 3 years and above
4. Domestic deposit rates : Effective 22.4.1992 domestic deposit rates
were subject to only one ceiling rate . Effective Oct 1995 banks were
permitted to fix their own interest rates on domestic deposits with a
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maturity of over 2 years. 22.10.97 for 30 days and over were

authorized. Effective signal rate and reference rate.
5. Private sector banks : Population per branch reduced due to increase
in rural and semi-rural branch expansion. Urban branches have
expanded after the emphasis on private sector banks
6. Profit orientation : The nationalization phase saw a phenomenal
growth in rural branches of banks. From 22% of the banking network,
the proportion of rural branches increased to more than 50% in 1991.
Branch expansion in the reform period came through semi-urban,
urban and metro branches. Banks have cumbersome account opening
procedures.
7. Liberal branch policy : Banks following prudential norms and
containing NPAs within limits specified by RBI have been given
considerable leeway in the opening of new branches. One loss making
branch can be closed if served at rural centres by two commercial
banks excluding RRBs.

VIII) Further reforms : narasimhan committee II (1998) committee on

banking sector reforms

1. Strengthening the banking system : public sector banks have the lions
share
2. Risk control : covered by bringing it into scope of CAR(capital
adequacy ratio)

Market risk –only commodity risk is gold. 5% risk weight suggested.

Government guaranteed advances-different weights suggested for central
and state advances.

International standards-assets will be treated as substandard if it stays in

the category for 18 months by the year 2000 and for 12 months in the year
2001.

3. Capital adequacy ratios : to be raised 9% by the year 2000 and to

10% by 2001
4. Structural issues :
a) ARC and venture fund : Assets transferred to ARC which would issue to
the banks NPA swap bonds for realizable value of assets transferred.
Or, government guarantee banks may issue bonds which will form part
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of tier II capital. This may be given SLR eligibility for investment by

banks.
b) Narrow banking : Weak bank is where cumulative loss + NPAs> net
worth-reduce incremental credit deposit ratios.
c) Ownership issues : Government equity in banks need to be transferred
to public.

Regulatory control of UCBs : present dual control needs to be ended and

brought under RBI.

5. Integration of financial markets :

Interbank call money market : Call money markets need to be restructured

into a pure interbank market where primary dealers only will be allowed with
banks for borrowing and lending.

6. Integration of money and forex markets : these are integrated to a

considerable extent. Once MIBOR(Mumbai interbank offered rate)
becomes an accepted reality , the integration shall further improve.
7. Coordinated development of financial markets : BFRS Board of
financial regulation and supervision suggested for creation.

An evaluation : RBI has given guidelines to implement the following

recommendations :

 Risk weight of 5% for government approved securities. These are

not totally risk free
 CAR 9% to be achieved by 2000 and 10% by 2002
 A general provision of 1% on standard assets to be maintained.
0.25% by March 2000.
 Foreign exchange open position limit to carry 100% risk weight
 The risk weight for government guaranteed advances to be same
for other advances
 The government guaranteed advances which have turned sticky to
be classified as NPAs from April 2000

Cleaning up of balance sheet should be followed by steps to prevent re-

emergence of NPAs

Recommended disclosure in a phased manner of the maturity pattern of

assets and liabilities. Need to institute an independent loan review
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mechanism especially for large borrowal accounts and to identify potential

NPAs.

IX Bank supervision and management of NPAs-watch on systemic risk and

collapse of total banking system.

Follows following objectives :

 Risk each bank undertakes

 Resources available to manage that risk and adequacy
 Risks in credit, market , operational and management

Provisioning was left to bank managements

Narasimhan committee laid down three aspect of norms :

1. Income recognition
2. Asset classification
3. Provisioning
A) Income recognition : NPA fails to generate income

For term loan the interest will be in arrears for two out of four quarters then
it will be a NPA. Arrears means 30 days overdue.

While performing assets are classified as standard assets, NPAs are

substandard assets

B) Asset classification :
 Standard assets-performing assets
 Sub-standard assets-outstandings more than two quarters
 Doubtful assets –NPA > 2 years
 Loss assets-loss proved or NPA>3 yrs
C) Provisioning : for NPAs and Investments

Banks have to provision in the following manner :

Standard assets-no provision

Sub standard assets-10% of total outstanding

Doubtful assets (upto 1 yr doubtful) -100% of unsecured plus 20% of

secured position
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Doubtful assets (upto 1-3 yr doubtful) -100% of unsecured plus 30% of

secured position

Doubtful assets (>3 yr doubtful) -100% of unsecured plus 50% of secured

position

Loss assets=100% outstanding

D) Management of NPAs :
 Regular monitoring of the performance of each loan asset
 Early identification of problem assets for the success of remedial action
 Effective followup of recovery

NPAS %/total advances is critical indicator of the quality of bank’s loan

portfolio-hence performance assigned highest weightage in the system

NPAs of public sector banks-had declined from 17.84% in Mar 1997 to

15.89% in Mar 1999

Key indicator-16% are NPAs

E) Competitiveness of banks : Narasimhan committee’s view :

Following have been implemented :

1) Capitalization of public sector banks as per international standard for

their healthier growth
2) Operational freedom
3) International standards of income recognition, asset classification and
provisioning
4) Competition promoted by allowing private sector
5) Profitable nationalized banks were allowed to access capital markets
6) RBI control on interest rates were reduced
7) To invest heavily on system automation, reducing transaction costs
8) New prudential norm
 From 1st April 2000
 Full disclosure and transparency and effective supervision of
banking operations
 Detailed instructions for asset liability management

IT and electronic funds transfer have emerged as twin pillars of modern

banking development
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The causes of low levels of competitiveness of banks are as follows :

 Inadequate bank automation

 Slightly weak commercially oriented inter-bank platform
 Lack of a planned electronic payment systems backbone
 Inadequate telephone infrastructure
 Inadequate marketing effort
 Lack of clarity and certainty on legal issues
 Lack of data warehousing network

Removal of these will improve the competitiveness

F) Interest rate deregulation : banks should be allowed to formulate

sound policies
G) CAR-capital adequacy ratio-CAR at the heart of banking supervision.
Debt 50% of core capital. Core capital should not be less than 50% of
total capital. Tier II capital should be limited to 100% of core capital.
H) Risk adjusted assets :

The lower level of capital adequacies will force them to concentrate on

government securities. Will have to resort to capital issues to increase their
core capital(Tier I). Tier II capital mainly comprises of hidden reserves,
revaluation reserves, subordinated debts(mainly loans by government)
general provisions

X) An overview of recent policy measures

April 1997
CRR and SLR on interbank borrowings removed
Bank rate reduced to 11%
9% interest rate for deposits less than 30 days(2% less than 11%)
5% ceiling for banks investment in corporate debt removed
FIs allowed to raise short term funds and lend working capital to
corporate
Banks allowed to borrow US $ 10 Mn from overseas branches
June 1997
Bank rate reduced to 10% from 11%
October 1997
Bank rate reduced to 9% from 10%
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CRR to be reduced by 2% in eight phases of 0.25% each, spreading

from Oct 97 to Mar 98. This was estimated to augment liquidity by
Rs 12 Bn for each phase
Banks to be paid interest on eligible CRR balances at the rate of 4%
against earlier effective rate of around 3.5%
Interest rates on deposits of 30 days and above were deregulated
and delinked from bank rate
Banks allowed to fix separate prime term lending rates(PRLTs) in
respect of term loans of 3 years and above
November 1997
Postponement of phased CRR reduction in view of comfortable
liquidity and developments in foreign exchange markets
December 1997
CRR increased by 0.5% to 10%
A minimum interest of 20% on overdue export bills (for the overdue
period), a 15% surcharge on lending rate for bank credits for
imports
January 1998
Bank rate increased by 2% to 11%
CRR raised by 0.5% to 10.5%
March 1998
Bank rate reduced by 0.5% to 10.5%
CRR reduced by 0.5% to 10%
April 1998
Bank rate reduced by 0.5% to 10% on April 3 rd and to 9% on April
29th
Minimum period of maturity reduced from 30 days to 15 days
To encourage banks to mobilize long term foreign exchange
deposits and to discourage short term deposits , interest rates on
FCNR(B) deposits of one year and above increased by 50 basis
points and on such deposits below one year decresed by 25 basis
points.
Bank rate has been reduced from 10% to 9%
Interest rate on pre-shipment export credit has now been reduced
from 12% to 11%
Banks are allowed to advance upto Rs 2 Mn for advances made
against de-materialised securities subject to a minimum margin of
25%
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Recent developments :

o Implementation of asset liability management system(ALM) : Banks

must cover 60% of their assets by April 1999. The banks are expected
to cover 100% of their assets and liabilities by April 2000.
o Disclosure norms –banks should disclose in balance sheets maturity
pattern of advances, deposits, investments and borrowings. RBI
proposes to come out with top 100-150 defaulters of loans in each
bank.

Emerging opportunities for banks

o Depository participants : demat facilities by banks

o Housing loans-banks are allowed to lend 3% of their incremental
deposits to housing sector. Can cause asset liability mismatch for
banks due to the long duration.
o Insurance-banks will have to tie up with international insurance
companies
o Net banking-enhance technology and provide value added services like
banking through internet
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