Banking Sector Reforms: Key Committees, Basel Norms, and More

Introduction

Banking sector reforms refer to the systematic changes and improvements made to the banking industry by regulatory authorities and policymakers to enhance efficiency, transparency, and stability. These reforms often involve updating regulations, introducing new technologies, improving governance practices, and promoting financial inclusion. Banking sector reforms in India have been crucial in modernizing the financial system, increasing competition, and fostering economic growth.

Committees on Banking Sector Reforms

• Over the years, several committees were formed to recommend measures and suggest reforms to strengthen the banking sector. Let’s delve into the key committees and their significant recommendations:

• Narasimham Committee I (1991): 

  • Headed by M. Narasimham, former RBI Governor, this committee suggested measures to strengthen the banking system. 
  • The recommendations included reducing government interference, increasing the role of the RBI in supervising banks, and enhancing transparency. 
  • The committee also proposed reducing the statutory liquidity ratio (SLR) and cash reserve ratio (CRR) to improve banks’ liquidity. 
  • It emphasized the need for the recapitalization of weak banks, strengthening bank management, and introducing prudential norms.

• R. H. Khan Committee (1997):

  • Chaired by R. H. Khan, former Deputy Governor of the RBI, this committee examined the effectiveness of the financial system for the small-scale sector and the role of primary dealers. 
  • It made recommendations to improve credit delivery to the small-scale sector and enhance the functioning of primary dealers.

• Narasimham Committee II (1998):

  • Following up on Narasimham Committee I, this committee focused on reviewing the progress of reforms. 
  • It emphasized the need for structural reforms, consolidation of the banking sector, and the establishment of strong and autonomous regulatory bodies. 
  • The committee recommended reducing the government’s stake in public sector banks (PSBs) to less than 33% and enhancing corporate governance standards in PSBs. 
  • Moreover, the committee suggested the adoption of international accounting standards and the introduction of risk-based supervision.

• Raghuram Rajan Committee (2008):

  • Chaired by Raghuram Rajan, former Chief Economist of the IMF, this committee was appointed to examine financial sector reforms in India. 
  • It provided recommendations to strengthen the banking system, enhance financial inclusion, and promote financial stability.

• Financial Sector Legislative Reforms Commission (FSLRC) (2011):

  • Headed by Justice B. N. Srikrishna, the FSLRC aimed to review and restructure the legal and regulatory framework of the financial sector in India. 
  • It aimed to consolidate and streamline the laws governing the financial sector, including banking, insurance, securities, and pensions.

• PJ Nayak Committee (2014):

• • Led by P. J. Nayak, this committee examined the governance of PSBs. 
  • It highlighted the need for reforms in the governance structure, such as strengthening the board’s role, empowering bank management, and professionalizing the appointment process of top executives. 
  • The committee recommended reducing government interference and advocated for a greater role of the board in key decisions, including appointments and capital allocation.

• Nachiket Mor Committee (2014):

• • This committee, chaired by Nachiket Mor, was formed to examine comprehensive financial services for small businesses and low-income households. 
  • It recommended measures to increase financial inclusion, such as establishing payment banks, small finance banks, and the creation of a universal electronic bank account (Jan Dhan Yojana). 
  • The concept of “payment banks” was proposed to provide basic banking services, including payments and remittances, to underserved sections of society.

• HR Khan Committee (2015):

  • Led by H. R. Khan, former Deputy Governor of the RBI, this committee examined the existing framework for monetary policy in India. 
  • It made recommendations on issues such as inflation targeting, monetary policy transmission and improving the decision-making process of the RBI’s Monetary Policy Committee (MPC).

• 4R Framework (Recognition, Recapitalization, Resolution, and Reforms):

• • Introduced in 2017, the 4R framework was part of the government’s strategy to address the issue of mounting bad loans in the banking system. 
  • It focused on recognizing stressed assets as non-performing assets (NPAs) promptly, recapitalizing banks to improve their financial health, establishing mechanisms for the timely resolution of stressed assets, and undertaking structural reforms to improve the governance, risk management, and operational efficiency of banks.
• Verma Committee: Viewed consolidation will lead to pooling of strengths and lead to overall reduction in cost of operations.
• CAMEL Parameters: Capital adequacy (C) + Assets quality (A) + Management Efficiency (M) + Earning Quality (E) + Liquidity (L).
• Mission Indradhanush: 7-pronged approach to resolve issues faced by PSBs and improve their overall performance by ABCDEFG. (PJ Nayak Committee)
  • Appointment: To check the excessive concentration of power and smooth functioning of the banks – Induction of talent from the Private Sector into the public banks, separation of the posts of Chief Executive Officer and the Managing Director
  • Bank Board Bureau: The BBB separates the functioning of the PSBs from the government by acting as a middleman.
  • Capitalisation: Due to the high NPAs and the need to meet the provisions of the Basel III norms, capitalization of banks by inducing Rs. 70000 crores were planned.
  • De-stressing: PSBs and strengthening risk control measures and NPAs disclosure.
  • Employment: Providing greater flexibility and autonomy to PSBs in hiring manpower.
  • Framework of Accountability: Assessment of the banks through measuring the key performance indicators (KPI).
  • Governance Reforms: Gyan Sangam, a conclave of PSBs and financial institutions. Bank Board Bureau for transparent and meritorious appointments in PSBs.

Basel Norms 

• The Basel Accords are 3 series of banking regulations (Basel I, II, and III) set by the Basel Committee on Bank Supervision (BCBS). 
  • Presently the Indian banking system follows Basel II norms. [UPSC 2015]
• Under Basel III, a bank’s tier 1 and tier 2 assets must be at least 10.5% of its risk-weighted assets. 
  • Tier 1:  Primary funding source of the bank; Consists of shareholders’ equity and retained earnings. 
  • Tier 2:  includes revaluation reserves, hybrid capital instruments and subordinated term debt, general loan-loss reserves, and undisclosed reserves.
• Tier 2 capital is considered less reliable than Tier 1 capital because it is more difficult to accurately calculate and more difficult to liquidate

Conclusion

• Various committees, such as the Narasimham Committee and the P.J. Nayak Committee, have provided insightful recommendations for enhancing the efficiency, competitiveness, and stability of banks. 
• The adoption of Basel norms, particularly Basel III, has imposed stringent capital adequacy and risk management standards on banks, contributing to a safer and more resilient banking environment.
• These reforms underscore the commitment to fostering a sound and robust banking sector that can support sustainable economic growth and financial stability.