Important Banking Sector Reforms and Acts in India

The Banking Sector is an important part of the economy. It monitors and regulates the smooth functioning of the Indian economy. The banking sector reforms ans acts are to promote the efficiency and productivity of the banking system in India.

They aim to increase growth and development. They also maintain stability and adequacy in the financial market. Let us learn more about Important Banking Sector Reforms and Acts.

History and Development of Banking Sector in India

The modern banking of India came into place in the late 18th century. The Bank of Bombay, Bank of Bengal, and Bank of Madras are the first three banks to function well in India. They later merged and became the Imperial Bank of India.

Post-independence it became the State Bank of India in 1955. The Reserve Bank of India entered the system in 1935 and became the monitor and regulator of the Banking System of India in 1949. The Banking Regulation Act of 1949 changed the functioning of the commercial banking sector.

Though RBI was regulating the banking economy, most of the banks except SBI were private banks. By the 1960s, the banking sector was contributing a good share to the Indian economy. It became important to regulate and control to maintain the balance in the economy.

This led to the introduction of the Nationalization of Banks Act 1964. This act led to the nationalization of 14 major commercial banks in India. Though this process took place in 1969 with the president’s approval.

In 1991, P. V. Narasimha Rao introduced Liberalisation, Privatisation, and Globalisation Policy. This led to the addition of Global banks in the country. The foreign direct investment opened up too. This also led to a relaxation in many previous policies of the government.

The licensing, taxation, formation process, etc became more flexible for banking companies.

In the 1990s, the Government of India formed a high-level committee to improve the functioning of financial institutions in India. They introduced different acts and reforms to strengthen the banking system. India has seen many such committees.

The Banking System of India has important acts and reforms from two phases. The first phase revolves around basic policy and institutional frameworks. And the second phase revolves around structuring and developing the industry with advancements.

The two committees that shaped the banking system of India are –

1. The Narasimham Committee 1991 – First Phase

It was the first committee of India to suggest acts and reforms for an improved banking system. M. Narasimham was the chairman of this committee, thus justifying the name. This committee was formed right after the economic crisis.

It suggested – Autonomy in Banking, Reforms in the role of RBI, Change in CRR and SLR, Recovery of Debts, Freedom of Operation, Local Area Banks, Prudential Norms, and Entry of Foreign Banks.

2. The second Narasimham Committee 1998 – Second Phase

This again was headed by M Narasimhan, the 13th governor of RBI. This committee is an extension of the first one. The idea was to overview the reforms introduced after the first committee.

It suggested – Development Finance Institution, Stronger banking system, the idea of Non-performing assets, Capital adequacy and tightening of provisioning norms, and, Rural and Small Industrial Credits.

Many other committees followed – The Verma Committee, The Khan Committee, AK Bhuchar Committee, The Urjit Patel Committee, The Vaghul Committee, etc.

Importance of Banking Sector Reforms and Acts

• These banking reforms aim to remove the external restriction on banks like high-interest rates, reserve requirements (CRR and SLR), and frequent change in interest rates. They want to make the banking system more adaptive and flexible.
• They are to smoothen the process of bank formation in India. It is to promote healthy competition for better productivity. Foreign direct investment is another area they focus on to improve the economy.
• The merging of banks across India is their focus again. It is done to improve efficiency and productivity. These reforms have improved the overall functioning of the banking system in the country.

List of Important Banking Sector Reforms and Acts of India

Conclusion

This article will help you study Acts and Reforms in the Banking Sector of India. They are usually asked in the general awareness section of competitive exams. Exams like UPSC, SSC, RRB, and Banking focus on this topic to test the financial knowledge of the individual.

The general knowledge section is comparatively easy and high scoring in nature. Aspirants can use this article to learn basic information related to important banking acts in India. Serious reading and revision can help students score well in the exams.