MODULE I

BANKING LEGISLATION AND REFORMS

Introduction

The Banking Regulation Act, 1949 came into force on March 16, 1949. Till
1949, There was no separate Act for Banking in India. So it was controlled
by the provisions of Indian Companies Act 1913. It contained various
aspects related to Banking Companies in India. This is regulatory act its
purpose is to:

 Provide safety in the interest of depositors

 Prevent misuse of powers by managers of banks

This Act does not supersede but supplement to Companies Act, 1956
Initially named Banking Companies Act, 1949 but from March 1, 1966, the
name of the Act was changed to Banking Regulation Act, 1949. The Central
Banking Enquiry Committee recommended the need of a separate
legislation to control banks due to mushroom growth of banks with
inadequate capital, dishonest management, speculative business etc.
Accordingly , a bill was introduced in the Parliament in March 1948 and
was passed in February 1949. The act came in to force with effect from 16 th
March 1949. The act was initially known as the Banking companies Act
1949. In order to cover the co-operative banks also, it was renamed as the “
Banking Regulation Act, 1949” with effect from March 1,1966.

Provisions of Banking Regulation Act ,1949

Section 5B: Defines 'Banking'

Section 5C: Defines 'Banking Company' as 'a company which transacts the
business of banking in India

Section 6: Forms of business in which banking Companies may engage

Section 7: Use of words "bank", "banker", "banking" or "banking company"

 Section 10BB: Power of Reserve Bank to appoint chairman of a banking
company o

Section 11: Requirement as to minimum paid up capital and reserves

Section 18: Cash Reserve

Section 21: Power of Reserve Bank to control advances by banking

companies, Rate of interest

Section 21A: Rate of interest charged by banking companies cannot be

subject to scrutiny of courts. Section 22: Licensing of banking companies

Section 23: Restrictions on opening new and transfer of existing branches

etc.

Section 27: Monthly returns to Reserve Bank

Section 28: Reserve Bank's power to make public certain information in

the interest of the public

Sections 29, 30, 31: Audit

Section 35: Authority to inspect every banking company and its branches

Section 35A: Power of RBI to issue directions which every banking

company in India has to follow Section 36AA: RBIs power to remove
managerial power from persons of office..

Section 36AB: RBIs power to appoint additional directors

Section 37: Suspension of business

Section 47A: RBIs power to impose penalty

Section 58A of Companies Act, 1956 empowers companies to accept

deposits from the public

Banking: Sec 5 (b) of the Act defines Banking as, “Accepting for the
purpose of lending or investment, of deposits of money from the public,
repayable on demand or otherwise, and withdrawable by cheque , draft,
order or otherwise.”
Features of Banking:

As per the above definition, following are the salient features of banking
business:

1. Dealing in Money and Credit: A bank is an institution which deals in

money. The banks accept deposits from the public and advancing them as
loans to the needy people. The deposits may be of different types – current,
fixed, saving etc. accounts.

2. Credit Creation: The banks are the institutions that can create credit
i.e., creation of additional money for lending. Thus, "creation of credit' is
the unique feature of banking.

3. Acceptance of Deposit: A bank accepts money from the people in the

form of deposits which are usually repayable on demand or after the expiry
of a fixed period. It gives safety to the deposits of its customers. It also acts
as a custodian of funds of its customers.

4. Deposits must be withdrawn able: The deposits (other than fixed

deposits) made by the public can be withdraw able by cheques, draft or
otherwise, i.e., the bank issue and pay cheques. The deposits are usually
withdrawn able on demand.

5. Individual / Firm / Company: A bank may be a person, firm or a

company. A banking company means a company which is in the business of
banking.

6. Commercial in Nature: Since all the banking functions are carried on

with the aim of making profit, it is regarded as a commercial institution. A
bank is a profit seeking institution having service oriented approach.

7. Agency and Utility Services: A bank provides various banking

facilities to its customers. They include general utility services and agency
services.

8. Connecting Link: A bank acts as a connecting link between borrowers

and lenders of money. Banks collect money from those who have surplus
money and give the same to those who are in need of money.
9. Banking Business: A bank's main activity should be to do business of
banking which should not be subsidiary to any other business.

10. Name Identity: A bank should always add the word "bank" to its
name to enable people to know that it is a bank and that it is dealing in
money.

Banking Company: Sec 5 (c) of the Act defines Banking as,“A company
which transacts the business of banking in India.”

Explaination: Any company which is engaged in the manufacture of goods

or carries on any trade and which accepts the deposits of money from
public merely for the purpose of financing its business as such
manufacturer or trader shall not be deemed to transact the business of
banking within the meaning of this clause."

As per Section 5(b) of the Banking Regulation Act, 1949 , "banking" means
the accepting, for the purpose of lending or investment, of deposits of
money from the public, repayable on demand or otherwise, and
withdrawable by cheque, draft, order or otherwise.

As per Section 5(d) of the Banking Regulation Act, 1949, "company" means
any company as defined in Section 3 of the Companies Act, 1956 and
includes a foreign company within the meaning of Section 591 of that Act.

Section 7 in BANKING REGULATION ACT,1949

Use of words “bank”, “banker”, ‘‘banking’’ or “banking company”.:
(1) No company other than a banking company shall use as part of its
name  any of the words “bank”, “banker” or “banking” and no company
shall carry on the business of banking in India unless it uses as part of its
name at least one of such words.
(2) No firm, individual or group of individuals shall, for the purpose of
carrying on any business, use as part of its or his name any of the words
“bank”, “banking” or “banking company”.

Forms of business permitted for a banking company(sec.6/1)

Forms of business in which banking companies may engage under section
6(1) of banking regulation act 1949 are as:
 (1) In addition to the business of banking, a banking company may engage
in any one or more of the following forms of business, namely:-
a) the borrowing, raising, or taking up of money
b) the lending or advancing of money either upon or without security
c) the drawing, making, accepting, discounting, buying, selling,
collecting and dealing in bills of exchange, hundies, promissory
notes, coupons, drafts, bills of lading, railway receipts, warrants,
debentures, certificates, scrips and other instruments and securities
whether transferable or negotiable or not
d) the granting and issuing of letters of credit, traveller's cheques and
circular notes;
e) the buying, selling and dealing in bullion and specie
f) the buying and selling of foreign exchange including foreign bank
notes; the acquiring, holding, issuing on commission, underwriting
and dealing in stock, funds, shares, debentures, debenture stock,
bonds, obligations, securities and investments of all kinds;
g) the collecting and transmitting of money and securities;
h) the providing of safe deposit vaults
i) the receiving of all kinds of bonds, scrips or valuables on deposit or
for safe custody or otherwise
2) acting as agents for any Government or local authority or any other
person or persons; the carrying on of agency business of any description 16
including the clearing and forwarding of goods, giving of receipts and
discharges etc
3) contracting for public and private loans and negotiating and issuing
the same;
4) the effecting, insuring, guaranteeing, underwriting, participating in
Managing and carrying out of any issue, public or private, of State,
municipal or other loans or of shares, stock, debentures, or debenture stock
of any company, corporation or association and the lending of money for
the purpose of any such issue;
5) carrying on and transacting every kind of guarantee and indemnity
business
6) Managing, selling and realising any property which may come into the
possession of the company in satisfaction or part satisfaction of any of its
claims
7) acquiring and holding and generally dealing with any property or any
right, title or interest in any such property which may form the security or
part of the security for any loans or advances
8) ) undertaking and executing trusts
9) undertaking the administration of estates as executor, trustee or
otherwise
10) establishing and supporting or aiding in the establishment and support
of associations, institutions, funds, trusts and conveniences calculated to
benefit employees or ex-employees of the company
11) the acquisition, construction, maintenance and alteration of any
building or works necessary or convenient for the purposes of the company
12) selling, improving, managing, developing, exchanging, leasing,
mortgaging, disposing of or turning into account or otherwise dealing with
all or any part of the property and rights of the company
13) acquiring and undertaking the whole or any part of the business of any
person or company, when such business is of a nature enumerated or
described in this sub- section
14) doing all such other things as are incidental or conducive to the
promotion or advancement of the business of the company
15) any other form of business which the Central Government may, by
notification in the Official Gazette, specify as a form of business in which it
is lawful for a banking company to engage.

Business prohibited for a Banking company :

a) Prohibition about trading:

Sec. 8 states that a banking company cannot deal directly or indirectly
in buying or selling or banking of goods except of its legitimate
banking business.

A banking company cannot also form a subsidiary company except

for the purpose of undertaking and executing trusts, trustees or
otherwise and providing of safe deposit vaults, or carry on business of
banking exclusively outside India or such other purposes as are
incidental to the business of banking if the Reserve Bank grants a
written permission.
 b) Prohibition about non banking assets:

Section 9 of the Banking Regulation Act, 1949,no banking company

shall hold any immovable property howsoever acquired, except for its
own use for any period exceeding 7 years. The RBI may extend this
period by another five years, if it is satisfied that such extension
would be in the interest of the depositors of the banking company.
The banking company is required to dispose of such property within
the above mentioned period. But property for its own use can be held
by a banking company on a permanent basis

Banking Regulation Act Provision - Management (Sec. 10):

Sec. 10(a) states that not less than 51% of the total number of members of
the Board of Directors of a banking company shall consist of persons who
have special knowledge or practical experience in one or more of the
following fields:

(a) Accountancy; (b) Agriculture and Rural Economy; (c) Banking; (d)
Cooperation; (e) Economics; (f) Finance; (g) Law; (h) Small Scale Industry.

The Section also states that at least not less than two directors should have
special knowledge or practical experience relating to agriculture and rural
economy and cooperation. Sec. 10(b)(1) further states that every banking
company shall have one of its directors as Chairman of its Board of
Directors.

Provisions of Capital - Section 11

Banking Companies Incorporated In India:

1. If it has,
 a) A place of business in more than one state, should have an aggregate
minimum paid up capital and reserves of Rs 5,00,000.

b) Place or Places of Businesses in more than one state and any such
place is or places of businesses are in Bombay or Calcutta or both should
have an aggregate minimum paid up capital and reserves of Rs 10, 00,000.

2. a) If it has all its business places in one state but none in Bombay or
Calcutta In Respect of the principal place of business it should have an
aggregate of minimum paid up capital and reserves of Rs 1,00,000.

b) in respect of each of its other places of business situated in the district

of principal business Rs 10,000.

c) in respect of each place of business situated elsewhere in the state

outside the same district Rs 25,000. Subject to an overall limit of 5,00,000.

3. If it has only one place business and that also not in Bombay or Calcutta,
the aggregate value of paid up capital reserve should be Rs 50,000.

4. If it has all its places of business in one state, and one or more of which is
or are situated in the city of Bombay or Calcutta, it should have an
aggregate minimum paid capital and reserves of Rs 5, 00,000, plus in
respect of each place of business situated outside the city of Bombay or
Calcutta Rs 25,000 Subject to a limit of Rs 10, 00,000.

Banking Companies Incorporated Outside India:

If it has,

a) A place of business in Bombay or Calcutta or Both, should have an

aggregate minimum paid up capital and reserves of Rs 20,00,000.
b) If it has No Place of Business in Bombay or Calcutta , should have an
aggregate minimum paid up capital and reserves of Rs 15,00,000.

Banking Regulation Act Provision- Capital Structure (Sec. 12):

According to Sec. 12, no banking company can carry on business
in India, unless it satisfies the following conditions:
(a) Its subscribed capital is not less than half of its authorised capital, and
its paid-up capital is not less than half of its subscribed capital.

(b) Its capital consists of ordinary shares only or ordinary or equity shares
and such preference shares as may have been issued prior to 1st April 1944.
This restriction does not apply to a banking company incorporated before
15th January 1937.

Banking Regulation Act Provision-  Payment of Commission,

Brokerage etc. (Sec. 13):
According to Sec. 13, a banking company is not permitted to pay directly or
indirectly by way of commission, brokerage, discount or remuneration on
issues of its shares in excess of 2.5% of the paid-up value of such shares.

Payment of Dividend: (sec.15)

According to Sec. 15, no banking company shall pay any dividend on its
shares until all its capital expenses (including preliminary expenses,
organisation expenses, share selling commission, brokerage, amount of
losses incurred and other items of expenditure not represented by tangible
assets) have been completely written-off.

Banking Regulation Act Provision - Reserve Fund/Statutory

Reserve (Sec. 17):
According to Sec. 17, every banking company incorporated in India shall,
before declaring a dividend, transfer a sum equal to 20% of the net profits
of each year (as disclosed by its Profit and Loss Account) to a reserve fund.
The Central Government may, however, on the recommendation of RBI,
exempt it from this requirement for a specified period.

Banking Regulation Act Provision # 8. Cash Reserve (Sec. 18):

Under Sec. 18, every banking company (not being a Scheduled Bank) shall,
if Indian, maintain in India, by way of a cash reserve in Cash, with itself or
in current account with the Reserve Bank or the State Bank of India or any
other bank notified by the Central Government in this behalf, a sum equal
to at least 3% of its time and demand liabilities in India.

The Reserve Bank has the power to regulate the percentage also between
3% and 15% (in case of Scheduled Banks). Besides the above, they are to
maintain a minimum of 25% of its total time and demand liabilities in cash,
gold or unencumbered approved securities. But every banking company’s
asset in India should not be less than 75% of its time and demand liabilities
in India at the close of last Friday of every quarter.

Banking Regulation Act Provision - Liquidity Norms on liquid

assets (Sec. 24):
According to Sec. 24 of the Act, banking companies must maintain
sufficient liquid assets in the normal course of business. The section states
that every banking company has to maintain in cash, gold or
unencumbered approved securities, an amount not less than 20% of its
demand and time liabilities in India. This percentage may be changed by
the RBI from time to time according to economic circumstances of the
country. This is in addition to the average daily balance maintained by a
bank.

Maintenance of Assets in India (Sec.25):

Under section 25 of the Banking Regulation Act , every banking company,

whether Indian or Foreign,carrying on business in india should have , at the
close of business on the last Friday of every quarter ,assets in India
equivalent to at least 75% of its total demand and time liabilities in India.

Powers of the Reserve Bank of India:

Reserve Bank of India Act 1934 and the Banking Regulation Act 1949
confer wide powers on RBI to regulate and supervise the affairs of banking
institutions in India. The important powers of RBI are below:

a) Licensing of Banking Companies: As per sec:22 of Banking

Regulation Act 1949, it is essential for every banking company to hold
a license issued by the Reserve Bank. The reserve bank of India is
required to conduct an inspection of the books of the banking
company and issue a licence ,if it is satisfied all the conditions
prescribed.these are the conditions:

 The company is or will be in a position to pay its present or

future depositors in full as their claims accrue
 The affairs of the company are not being, or are not likely to be,
conducted in a manner detrimental to the interests of its present
or future depositors
 The general character of the proposed management of the
company will not be prejudicial to the public interest or the
interest of its depositors
 The company has adequate capital structure and earning
prospects
 The public interest will be served by the grant of a licence to the
company to carry on banking business in India
 Having regard to the banking facilities available in the proposed
principal area of operations of the company, the potential scope
for expansion of banks already in existence in the area and other
relevant factors the grant of the licence would not be prejudicial
to the operation and consolidation of the banking system
consistent with monetary stability and economic growth
 the fulfillment of any other condition which is necessary to
ensure that the carrying on of banking business in India by the
 company will not be prejudicial to the public interest or the
interests of the depositors

Before granting any banking license to a company incorporated outside

India, the RBI may seek fulfillment of following additional conditions:

 The carrying on of banking business by such company in India will be

in the public interest
 The Government or law of the country in which it is incorporated
does not discriminate in any way against banking companies
registered in India

b) Cancellation of the license: The Reserve Bank may cancel a license

granted to a banking company under sub-section 4 of Section 22 of the
Banking Regulation Act, 1949:

 If the company ceases to carry on banking business in India; or

 If the company at any time fails to comply with any of the conditions
imposed upon it under sub-section 1 of Section 22 of the Banking
Regulation Act, 1949
 if at any time, any of the conditions referred to in sub-section (3) or
3(A) of Section 22 of the Banking Regulation Act, 1949

However before cancelling a licence on the ground that the banking

company has failed to comply with or has failed to fulfill any of the
conditions referred to therein, the Reserve Bank, unless it is of opinion that
the delay will be prejudicial to the interests of the company’s depositors or
the public, shall grant to the company on such terms as it may specify, an
opportunity of taking the necessary steps for complying with or fulfilling
such condition
Any banking company aggrieved by the decision of the Reserve Bank
cancelling a licence under this section may, within thirty days from the date
on which such decision is communicated to it, appeal to the Central
Government
c) Permission for opening branches: Section 23 in BANKING
REGULATION ACT,1949

(1) Without obtaining the prior permission of the Reserve Bank—

 (a) no banking company shall open a new place of business in
India or change otherwise than within the same city, town or village, the
location of an existing place of business situated in India; and

(b) no banking company incorporated in India shall open a new place of

business outside India or change, otherwise than within the same city, town
or village in any country or area outside India, the location of an existing
place of business situated in that country or area

(2) Before granting any permission under this section, the Reserve Bank
may require to be satisfied by an inspection under section 35 or
otherwise as to the financial condition and history of the company, the
general character of its management, the adequacy of its capital
structure and earning prospects and that public interest will be served
by the opening or, as the case may be, change of location, of the place
of business.

(3) The Reserve Bank may grant permission under sub-section (1) subject
to such conditions as it may think fit to impose either generally or with
reference to any particular case.

(4) Where, in the opinion of the Reserve Bank, a banking company has, at

any time, failed to comply with any of the conditions imposed on it under
this section, the Reserve Bank may, by order in writing and after affording
reasonable opportunity to the banking company for showing cause against
the action proposed to be taken against it, revoke any permission granted
under this section.

d) Power to control advances: The Section 21 of Act allows RBI to

control loans and advances extended by banking companies.  RBI may
issue directions in respect of following items to banking companies
and every banking company has to necessarily comply with its
directions:

 To specify the purposes for which advances may or may not be made.
 The margins to be maintained in respect of secured advances
 The maximum amount of advances that can be made to particular
company, firm, association of persons or individual having regard to
the paid-up capital, reserves and deposits of a banking company.
 The maximum amount of guarantee that can be made by banking on
behalf of particular company, firm, association of persons or
individual having regard to the paid-up capital, reserves and deposits
of a banking company.
 The rate of interest and other terms and conditions on which
advances may be made or guarantees may be given.

e) Power to inspect banking companies: Under section 35, the RBI

may, either at its own initiative or as per the suggestions of the Central
Government, inspect any banking company and its books and
accounts.

f) Power to issue directions: Section 35A of the Banking Regulation

Act, 1949 vests power in the RBI to give directions to banks and can
take action:

 to prevent the affairs of any banking company being conducted in a

manner detrimental to the interests of the depositors or in a manner
prejudicial to the interests of the banking company
 to ensure better governance and control

g) Power to advise: Under Section 36 of Banking Regulation Act, the

RBI is empowered to caution or prohibit any banking company
regarding any transaction or class of actions.
h) Power to control top management: The RBI has wide powers of
overall control over the top management of banks. The RBI’s prior
approval is necessary for appointment or reappointment or
termination of appointment of chairman, managing director, manager
or chief executive officer.
i) Power to supersede Board of Directors: The Consultation with
Central Government, the RBI may supersede the board of directors of
a banking company for a period of 6 months, which may be extended
upto one year. Such a step can be taken if it feels that the affairs of the
bank are being conducted in such a manner detrimental to the interest
 of the depositors. The RBI shall appoint an administrator to discharge
all functions of the board during the period of suspension.
j) Power to inspect associate enterprise: The supervisory powers
of the RBI have been extended to cover the associate enterprises of the
banking companies also. It can inspect such enterprises and its books
and accounts can call for necessary information about such
enterprises.
k) Power to regulate acquisition of shares of a banking
company and to raise ceiling on voting rights: The Reserve
Bank of India has stipulated the banking companies that before
making any transfer of shares of banking company which involves
transfer of five percent or more of share capital or voting rights, it
must obtain prior approval of RBI.

The act also empowers the RBI to enhance the ceiling or voting
rights from 10% to 26% in a phased manner

Objectives behind the enactment of Banking Regulation Act 1949

a) special Legislation: The provision of the Indian Companies Act 1913 was
found inadequate and unsatisfactory to regulate banking companies in
India. Therefore a need was felt to have a specific legislation having
comprehensive coverage on banking business in India.
b) To prevent failures of banks: Due to inadequacy of capital many banks
failed and hence prescribing a minimum capital requirement was felt
necessary. The banking regulation act brought in certain minimum
capital requirements for banks.
c) To eliminate stiff competition: One of the key objectives of this act was
to avoid cut throat competition among banking companies. The act was
regulated the opening of branches and changing location of existing
branches.
d) To ensure balanced developments of banks: To prevent indiscriminate
opening of new branches and ensure balanced development of banking
companies by system of licensing.
e) To facilitate efficient administration of banks: Assign power to RBI to
appoint, reappoint and removal of chairman, director and officers of the
banks. This could ensure the smooth and efficient functioning of banks
in India.
f) To protect the interest of depositors : To protect the interest of
depositors and public at large by incorporating certain provisions, viz.
prescribing cash reserve and liquidity reserve ratios. This enable bank to
meet demand depositors.
g) To strengthen the Banking system: Provider compulsory amalgamation
of weaker banks with senior banks, and thereby strengthens the banking
system in India.
h) To control foreign banks: Introduce few provisions to restrict foreign
banks in investing funds of Indian depositors outside India
i) To help quick liquidation: Provide quick and easy liquidation of banks
when they are unable to continue further or amalgamate with other
banks.

Narasimham Committee Report on the Financial System

Reforms(1991)

The Government of India appointed a committee under the

chairmanship of Sri.M .Narasimham to examine all aspects relating to
the structure,organization,functions,and procedures of the financial
system in India.

The committee was entrusted with the following objectives:

 1) To examine the existing structure of the financial system and its
various components and to make recommendations to improve
the efficiency and effectiveness of the system
2) To recommend measures for improving and modernizing the
organizational systems, procedures and managerial policies
3) To recommend measures for infusing greater competitive
vitality in to the system
4) To examine the cost, composition and adequacy of the capital
structure of various financial institutions and to make
recommendations
5) To review relative roles of different types of financial
institutions in the financial system, and to make
recommendations
6) To review the existing supervisory arrangements relating to
various entities in financial sector and to make
recommendations
7) To review existing legislative framework and to suggest
necessary amendments

Suggestions and Recommendations

The major suggestions and recommendations of the committee are:

1. Licensing of branches: Banks given freedom to open new branches and

upgrade extension counters on attaining capital adequacy norms and
prudential accounting standards. They are permitted to close non-viable
branches other than in rural areas.
2. Reduction in the SLR and CRR: The committee recommended the
reduction of the higher proportion of the Statutory Liquidity Ratio 'SLR' and
the Cash Reserve Ratio 'CRR'.

Both of these ratios were very high at that time. The SLR then was 38.5%
and CRR was 15%.
 It was a hindrance in the productivity of the bank thus the committee
recommended their gradual reduction. SLR was recommended to reduce
from 38.5% to 25% and CRR from 15% to 3 to 5%.

3. Structural Reorganizations of the Banking sector:

 The committee recommended that the actual numbers of public sector banks
need to be reduced.

 Three to four big banks including SBI should be developed as international

banks.

 Eight to Ten Banks having a nationwide presence should concentrate on

national and universal banking services.

 Local banks should concentrate on region-specific banking. Regarding the

RRBs (Regional Rural Banks), it recommended that they should focus on
agriculture and rural financing.

 They recommended that the government should assure that henceforth there
won't be any nationalization and private and foreign banks should be
allowed liberal entry in India.

4.Capital Adequacy Ratio: To improve the inherent strength of the Indian

banking system the committee recommended that the Government should raise
the prescribed capital adequacy norms. This would also improve their risk
taking ability.The committee targeted raising the capital adequacy ratio to 9%
by 2000 and 10% by 2002 and have penal provisions for banks that fail to meet
these requirements

5. Deregulation of interest rates: the interest rates on loans and deposits of

banks and financial institutions should be de-regulated

6. Freedom to Foreign banks to open offices: The Government should permit

foreign banks to open offices in India either as branches or as subsidiaries.
Foreign banks and Indian banks should allowed to set up joint ventures for
carrying merchant banking, leasing, investment banking and other forms of
financial services

7.Set up new banks in private sector: The RBI should permit the setting up of
new banks in the private sector, provided they satisfy all the norms and
conditions prescribed by the RBI. Further, there should be no difference in
treatment between public sector banks and private sector banks.

8. Liberalisation of capital markets: The capital markets in India should be

liberalized. The office of the “Controller of Capital Issues” should be
discontinued. There should be no need to get prior permission from any agency
to issue capital. The capital market should be opened for foreign portfolio
investments.

9. Raising capital through the capital market: Profitable banks and banks with
good reputation should be permitted to raise capital from the public through the
capital market.

10.Directed credit programmes: The directed Credit programmes should be

abolished gradually. The priority sector should be redefined to include only the
weakest section of the rural community.

11. income recognition: No income in respect of non performing assets should

be recognized in the accounts.

12. Special tribunals for recovery of loans: Since banks face many difficulties
regarding recovery of loans advanced by them, special tribunals should be set
up to speed up the process of recovery.

13. banks should be free to recruit their officers: instead of having common
recruitment system, individual bank should be free to make their own
recruitment of officers. There is no need for setting up a banking service
commission for centralized recruitment of officers.

14. Removal of dual control: The present system of dual control over the
banking system by the RBI and Banking Division of Ministry of finance should
be discontinued. The RBI should be the primary agency for the regulation of the
banking system

15. Setting up of Asset Reconstruction Fund(ARF): An Asset Reconstruction

Fund should be constituted to take over from the nationalized banks and
financial institutions, a portion of their bad and doubtful debts at a discount.
The capital of the ARF should be subscribed by the public sector banks and
financial institutions.
16. Classification of assets: The assets of banks should be classified in to four
categories, namely, a) standard assets,b) sub standard assets, c) Doubtful assets
and d) Loss assets

17. Appointment of CMD: the appointment of Chairman and managing director

of the banks should be depoliticised and professional competence should be the
prime consideration in such selections. The security of tenure for the CMD
should be ensured

18. Computerisation of banking activities: The committee recommended that

computerisation has to be recognized as an indispensible tool for improvement
in customer service, for betterment of the work environment for the
employees,and for implementing better control systems.,

Narasimham Committee Recommendations on Banking Sector

Reforms(1998)

In 1998, yet another committee under the chairmanship of M Narasimham the

13th RBI Governor of India was appointed. The committee is known as
“Committee on Banking Sector Reforms”. The committee was set up to
strengthen the financial institutions. The committee was tasked with progress
review of  banking reforms since 1992. The committee submitted its report on
23rd April 1998 to the then Finance Minister Yashwant Sinha.

1. Capital adequacy norms: Pending the emergence of markets in India

where market risk can be covered, it would be desirable that capital
adequacy requirements take into account market risk in addition to
credit risks.

2. In the next three years, the entire portfolio of Government securities

should be marketed to market and this schedule of adjustment should
be announced earliest.. It would be appropriate that there should be a 5%
weight for market risk for Govt. and approved securities.

3. The risk weight for a Government guarantee advance should be the

same as for other advances.
4. There is an additional capital requirement of 5% of the foreign exchange open position
limit. Such risks should be integrated into the calculation of risk weighted assets. The
Committee recommends that the foreign exchange open position limits should carry a
100% risk weight..
5. An asset can be classified as doubtful if it is in the substandard category for 18
months in the first instance and eventually for 12 months and loss if it has been so
identified but not written off.

6.  Banks and financial institutions should avoid the practice of “evergreening” by

making fresh advances to their troubled constituents only with a view to setting
interest dues and avoiding classification of the loan in question as NPAs.

7. The average level of net NPAs for all banks should be reduced to below 5% and
3% by the year 2000 and 2002, respectively, and net NPAs to 3% and 0% by
these dates.

8. Banks should introduce calculation of interest as monthly rests.

9. There should be 100% computerization of bank’s operations. Unless 100%

computerisation is made, it may not be feasible to implement the
recommendation.

10. It is also necessary to tone up the legal machinery for speedy disposal of collateral
taken as security for the advance.

11. Banks should bring out revised Operational Manual and update them regularly.

12. The Committee believes that it would be appropriate to go beyond the earlier
norms and set new and higher norms for capital adequacy. The Committee
accordingly recommends that the minimum capital to risk assets ratio be
increased to 10% from its present level of 8%.

13. Banks and financial institutions should avoid the practice of "evergreening" by
making fresh advances to their troubled constituents only with a view to settling
interest dues and avoiding classification of the loans in question as NPAs

14.An Independent loan review mechanism should be instituted

especially for large borrowers accounts and to identify potential NPAs

15.Appropriate Voluntary Retirement Scheme with incentives should be

introduced to rationalize staff strength

Kapoor Committee Report on Co-operative Banking Reforms

(1999)