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Banking Sector Reforms In India Essay

1857 words - 8 pages

BANKING SECTOR REFORMS IN INDIA

.
Introduction:
Financial sector reforms introduced in the early 1990s as a part of the structural reforms
have touched upon almost all aspects of banking operation. For a few decades preceding the onset of banking and financial sector reforms in India, banks operated in an environment that was heavily regulated and characterized by sufficient barriers to entry which protected them against too much competition. The banking reform package was based on the recommendation proposed by Narsimhan Committee report (1992) that advocated a move to a more market oriented banking system, which could operate in an environment of prudential regulation and transparent ...view middle of the document...

Consequently, the RBI as part and parcel of the financial sector deregulation, attempted to enhance the transparency of the annual reports of Indian banks by, among other things, introducing stricter income recognition and assets classification rules, enhancing the capital adequacy norms, and by requiring a number of additional disclosures sought by investors to make better cash flow and risk
assessment.
Review literature:
Joshi (1986) in his study of all scheduled commercial banks operating in India
analyses the profitability and profit planning relating to the period 1970-1982. The study
discusses and trends in profits and profitability of commercial banks nationalization. The
factors leading to the deterioration of profitability are highlighted.
Minakshi and Kaur (1990) attempted to measure quantitatively the impact of the
various instruments of monetary policy on the profitability of commercial banks. The
study empirically proves that pre-liberalization banking being highly regulated and
controlled industry, has suffered a lot so far as profitability concerned. The bank rates and reserve requirements ratio has played a significant role in having a negative impact on the bank’s profitability.
Ojha (1992) in his study attempts to measure the productivity of public sector
commercial banks in India. After identifying various measures of productivity like total
assets per employee, total credit per employee, total deposits per employee, pre-tax
profits per employee, net profit per employee, working funds per employee, ratio of
establishment expenses to working funds and net interest per employee, comparison is
made with the banks at the international level. The study concludes the Indian banks have very less productivity ratio compared with western countries. Since in his study a
comparison has been made of Indian public sector banks, which have to perform other
social functions unlike western commercial banks.
Impact on Corporate Sector:
Corporate governance:
Capital markets have always had the potential to exercise discipline over promoters and
management alike, but it was the structural changes created by economic reforms that
effectively unleashed this power. Minority investors can bring the discipline of capital
markets to bear on companies by voting with their wallets. They can vote with their
wallets in the primary market by refusing to subscribe to any fresh issues by the
company. They can also sell their shares in the secondary markets their by depressing the share price. Financial sector set in motion several key forces that made these forces far more potent than in the past: Deregulation: economic reforms have not only increased growth prospects, but they have also made markets more competitive. This means that in order to survive companies will need to invest continuously on large scale. The most powerful impact of voting with the wallet is on companies with large growth opportunities that have a constant...

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