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Reforms in the financial sector

Prior to the economic reform the banking sector had restrictions in the following:
  • Quantitative restrictions on credit flows
  • High Cash Reserve Ratio (CRR)
  • Keeping significant part of loan fund for the priority sector under Statutory Liquidity Ratio (SLR)
  • Administered interest rate structure
The reforms in the financial sector cover the banking sector reforms, capital reforms and insurance sector reforms. The major reforms relating to the banking sector are
  • Cash Reserve Ratio (CRR) was lowered from 15% during pre-reforms to 4.5% in June 2003, but raised to 5% and 7.5% respectively in 2004 and 2007. In January 2009, it was reduced again to 5%, but raised in stages to 6% in April 2010. At present (Sept. 2013) it is at 4%. (See chart 1) 
  • Statutory Liquidity Ratio (SLR) was reduced from 38.5% in 1990-92 to 24% in 2008, but raised to 25% in 2010. This led to better credit creation. At present it is at 23% (See chart 2)
  • Prime Lending Rates (PLR) of banks for commercial credit are now to be decided by banks. Since April 2001, PLR has been converted into a benchmark rate for banks.
  • Bank rate has been reduced from 8% to 6% from April 2003 (at present April, 2012 it is 9%)
  • Rate of interest on savings deposits of commercial banks has been reduced from 4.5% to 3.5% and again raised to 4% in April 2011.
  • RBI issued guidelines for licensing of new banks in the private sector in 1993.
  • Banks have been advised to tone up their credit risk management system to reduce Non- Performing Assets (NPA’s).
  • Recovery of debts due to Banks and other Financial Institutions Act, 1993, and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act were passed.
  • Credit Information Bureau was established to identify bad risks.
  • To mitigate the fear of systemic risks in the banking sector, the RBI has emphasized transparency, diversification of ownership and strong corporate governance practices.
  • A methodology for entry of foreign banks consistent with WTO has been released by the RBI.
  • In March 2008, the Basel II Framework has been operationalized by banks. In 2005, RBI issued detailed guidelines for mergers/amalgamations in respect of private sector banks and the principles governing dividend payments were also liberalised.
  • Based III is supposed to strengthen bank capital requirements by increasing bank liquidity and decreasing bank leverage. It has been introduced in 2013 and banks are requised to implement it by 2019.

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