The period between 1992 and 2008 witnessed significant reforms in the Indian banking sector, aimed at improving its efficiency and competitiveness. Here are the key reforms implemented during this period:
- The Banking Regulation Act (1993):
The Banking Regulation Act was amended in 1993 to strengthen the supervisory mechanisms for banks. The amendments included provisions for prudential norms, which required banks to maintain a minimum level of capital and maintain asset quality, among others. The amendments also led to the establishment of the Board for Financial Supervision (BFS), which was responsible for supervising banks and ensuring their compliance with the prudential norms.
- Capital Adequacy Norms:
The Narasimham Committee report of 1991 recommended the introduction of capital adequacy norms for banks, which were subsequently implemented in 1992. Banks were required to maintain a minimum level of capital in proportion to their risk-weighted assets. This ensured that banks had sufficient capital to absorb losses in the event of a crisis.
- Liberalization of Interest Rates:
In 1994, the Reserve Bank of India (RBI) deregulated the interest rates on loans and deposits offered by banks. This led to an increase in competition among banks, as they were free to set their own interest rates based on market forces.
- Entry of New Private Sector Banks:
The RBI issued guidelines for the entry of new private sector banks in 1993. This led to the entry of several new private sector banks, which increased competition and innovation in the banking sector.
- Merger of Weak Banks:
The RBI initiated the process of merging weak banks in 1995. This led to the closure of several non-viable banks and the merger of others, which improved their efficiency and performance.
- Non-Performing Assets (NPAs) Resolution:
The NPAs of banks increased significantly during the 1990s. To address this issue, the RBI introduced the Debt Recovery Tribunals (DRTs) in 1993. The DRTs were responsible for the speedy resolution of NPAs through a legal process.
- Technology Upgradation:
The RBI encouraged banks to adopt technology to improve their efficiency and customer service. This led to the implementation of online banking, ATM services, and other technological innovations in the banking sector.
- Consolidation of Public Sector Banks:
In 2008, the government announced a plan to consolidate public sector banks. The plan involved the merger of State Bank of India with its associate banks, which created a large banking entity with a significant market share.
These reforms led to significant improvements in the Indian banking sector, such as increased competition, improved efficiency, and strengthened supervisory mechanisms. The reforms also enabled the banking sector to withstand the global financial crisis of 2008, which had a relatively limited impact on the Indian banking system.