The document discusses banking reforms and Basel norms in India. It provides details on the recommendations of the Narasimhan Committee which led the government to undertake various banking reforms since 1991. This included lowering statutory liquidity and cash reserve ratios, implementing prudential norms, capital adequacy norms, deregulating interest rates, facilitating debt recovery, allowing private sector banks, and giving more operational freedom. It also explains the Basel accords formulated by the Basel Committee on Banking Supervision to establish common international standards for banking regulations and supervision, including Basel I focusing on credit risk and Basel II refining this with three pillars around capital, supervision, and disclosure.

1. COMMERCIAL
BANKING SYSTEMS
By Nayana U.K.

2. BANKING SECTOR
REFORMS

3. What is banking
reforms ?
It is the reform of the Indian banking sector under the objectives of
solving the chronic nonprofit earning problems and strengthening of the
overall health of the public sector banks to face international
competitions. It was done in line with the recommendations of the
Narasimhan Committee formed in this purpose

4. To promote the healthy development of the financial sector,
the Narasimhan committee made recommendations.
Recommendations of Narasimhan Committee
1. Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at the top and at bottom rural
banks engaged in agricultural activities.
2. The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by
RBI.
3. A phased reduction in statutory liquidity ratio.
4. Phased achievement of 8% capital adequacy ratio.
5. Abolition of branch licensing policy.
6. Proper classification of assets and full disclosure of accounts of banks and financial institutions.
7. Deregulation of Interest rates.
8. Delegation of direct lending activity of IDBI to a separate corporate body.
9. Competition among financial institutions on participating approach.
10. Setting up Asset Reconstruction fund to take over a portion of the loan portfolio of banks whose recovery has become difficult.

5. Banking reforms measures of
Government
On the recommendations of Narasimhan Committee, following measures were undertaken by
government since 1991: –
1. Lowering SLR and CRR
The high SLR and CRR reduced the profits of the banks. The SLR had been reduced from 38.5% in
1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade
etc.
The Cash Reserve Ratio (CRR) is the cash ratio of banks total deposits to be maintained with RBI.
The CRR had been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to
release the funds locked up with RBI.
2. Prudential Norms: –
Prudential norms have been started by RBI in order to impart professionalism in commercial banks.
The purpose of prudential norms includes proper disclosure of income, classification of assets and
provision for Bad debts so as to ensure that the books of commercial banks reflect the accurate and
correct picture of financial position.
Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs).
Funding for this purpose was placed at Rs. 10,000 crores phased over 2 years.

6. 3. Capital Adequacy Norms (CAN): –
Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April
1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained
the ratio of 8%. It was also attained by foreign banks.
4. Deregulation of Interest Rates
The Narasimhan Committee advocated that interest rates should be allowed to be determined by
market forces. Since 1992, interest rates have become much simpler and freer.
Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject
to minimum floor rates and maximum ceiling rates.
The interest rate on domestic term deposits has been decontrolled.
The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been
reduced.
The rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.
The interest rates on deposits and advances of all Co-operative banks have been deregulated
subject to a minimum lending rate of 13%.

7. 5. Recovery of Debts
The Government of India passed the “Recovery of debts due to Banks and
Financial Institutions Act 1993” in order to facilitate and speed up the recovery of
debts due to banks and financial institutions. Six Special Recovery Tribunals have
been set up. An Appellate Tribunal has also been set up in .
6. Competition from New Private Sector Banks
Banking is open to the private sector.
New private sector banks have already started functioning. These new
private sector banks are allowed to raise capital contribution from foreign
institutional investors up to 20% and from NRIs up to 40%. This has led to
increased competition.

8. 7. Access To Capital Market
The Banking Companies (Acquisition and Transfer of Undertakings) Act was
amended to enable the banks to raise capital through public issues. This is subject to
the provision that the holding of Central Government would not fall below 51% of paid-
up-capital. SBI has already raised a substantial amount of funds through equity and
bonds.
8. Freedom of Operation
• Scheduled Commercial Banks are given freedom to open new branches and upgrade
extension counters, after attaining capital adequacy ratio and prudential accounting norms.
The banks are also permitted to close non-viable branches other than in rural areas.

9. 9. Local Area Banks (LABs)
In 1996, RBI issued guidelines for setting up of Local Area Banks, and it gave Its approval
for setting up of 7 LABs in private sector. LABs will help in mobilising rural savings and in
channelling them into investment in local areas.
10. Supervision of Commercial Banks
• The RBI has set up a Board of financial Supervision with an advisory Council to strengthen
the supervision of banks and financial institutions. In 1993, RBI established a new
department known as Department of Supervision as an independent unit for supervision of
commercial banks.

11. BASEL NORMS

12. What are Basel
norms?
Basel is a city in Switzerland. It is the headquarters of Bureau of International Settlement (BIS), which
fosters co-operation among central banks with a common goal of financial stability and common
standards of banking regulations.
Every two months BIS hosts a meeting of the governor and senior officials of central banks of
member countries. Currently there are 27 member nations in the committee. Basel guidelines refer to
broad supervisory standards formulated by this group of central banks - called the Basel Committee
on Banking Supervision (BCBS). The set of agreement by the BCBS, which mainly focuses on risks to
banks and the financial system are called Basel accord. The purpose of the accord is to ensure that
financial institutions have enough capital on account to meet obligations and absorb unexpected
losses. India has accepted Basel accords for the banking system. In fact, on a few parameters the RBI
has prescribed stringent norms as compared to the norms prescribed by BCBS.

13. Basel I
In 1988, BCBS introduced capital measurement system called Basel capital
accord, also called as Basel 1. It focused almost entirely on credit risk. It defined
capital and structure of risk weights for banks. The minimum capital requirement
was fixed at 8% of risk weighted assets (RWA). RWA means assets with different
risk profiles. For example, an asset backed by collateral would carry lesser risks
as compared to personal loans, which have no collateral. India adopted Basel 1
guidelines in 1999.
Basel II
In June ’04, Basel II guidelines were published by BCBS, which were considered to be
the refined and reformed versions of Basel I accord. The guidelines were based on three
parameters, which the committee calls it as pillars. - Capital Adequacy Requirements:
Banks should maintain a minimum capital adequacy requirement of 8% of risk assets -
Supervisory Review: According to this, banks were needed to develop and use better
risk management techniques in monitoring and managing all the three types of risks that
a bank faces, viz. credit, market and operational risks - Market Discipline: This need
increased disclosure requirements. Banks need to mandatorily disclose their CAR, risk
exposure, etc to the central bank. Basel II norms in India and overseas are yet to be fully
implemented.