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Major banking sector reforms on the anvil - Views on News from Equitymaster
 
 
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  • Oct 19, 1999

    Major banking sector reforms on the anvil

    According to newspaper reports, the Government of India plans to make amendments to the major Acts the Banking Regulation Act, the Banking Companies (Acquisition and Transfer of Undertaking) Amendment Act, the Debt Recovery Tribunal Act and the Sick Companies Industries Act. The move is aimed at kick starting the banking sector reforms.

    The amendments will seek to denationalise the public sector banks (by bringing the government holding to 33%), set up Reserve Bank of India as the sole regulator and speed up the process of debt recovery (by increasing the number of tribunal benches to 15).

    Indian banking sector reforms have been long over due (Several measures were initiated as per the recommendations of the Narasimhan Committee report on the banking sector.). The lack of political will has over the last couple of years stifled all radical measures proposed for the sector. This time the government seems to be more determined in carrying out the reforms, and is atleast making the right noises. This in itself is a great improvement over previous years when the reforms were mentioned only in whispers.

    A vibrant banking sector is the need of the hour for the Indian economy. With non-performing assets in excess of 15% (estimates for hidden losses are not available), low levels of capitalisation and ridiculously low productivity levels (vis a vis banks in developed countries), the banking sector is exposed to the risk of bankruptcy. The government needs to initiate reforms to consolidate the sector and endure its survival in a more competitive scenario that is already beginning to emerge in the Indian economy.

    A denationalisation of the banks will firstly give the banks a free hand in conducting business. This will enable to pay industry level salaries and thereby attract quality staff. Apart from this, the banks would be freed from the clutches of politicians, who often use banks to implement populist schemes. On the other hand, the sell off of equity in these banks will raise large amounts of resources for the government, which is currently facing a burgeoning fiscal deficit.

    Amendments in the acts will also simplify procedures for the mergers and acquisition in the industry, thereby hastening the much-delayed consolidation of the banking industry. The increase in the debt recovery tribunal benches will speed up the process of debt recovery and reduce the risk of moral hazard.

    The reforms proposed for the sector are path breaking and will go a long way in improving the future prospects of the public sector bank.

     

     

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