FINANCIAL SECTOR REFORMS

The process of economic reforms initiated in 1991 had redefined the role of government in the economy—in coming times the economy will be dependent on the greater private participation for its development.21 Such a changed view to development required an overhauling in the investment structure of the economy. Now the private sector was going to demand high

investible capital out of the financial system. Thus, an emergent need was felt to restructure the whole financial system of India.

The three decades after nationalisation had seen a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain weaknesses were found to have developed in the system during the late eighties, it was felt that these had to be addressed to enable the financial system to

play its role ushering in a more efficient

and competitive economy.22 Accordingly, a high level committee on Financial System (CFS) was set up on 14 August, 1991 to examine all aspects relating to structure, organisation, function and procedures of the financial system—based on its recommedations, a comprehensive reform of the banking system was introduced in the fiscal

1992–93.23

The CFS based its recommendations on certain assumptions 24 which are basic to the banking industry. And the suggestions of the committee became logical in light of this assumption, there is no second opinion about it. The assumption says that “the resources of the banks come from the general public and are held by the banks in trust that they are to be deployed for maximum benefit of the depositors”. This assumption automatically implied:

(i) That even the government had no business to endanger the solvency, health and efficiency of the nationalised banks under the pretext of using banks, resources for economic planning, social banking, poverty alleviation, etc.

(ii) Besides, the government had no right to get hold of the funds of the banks at low interest rates and use them for financing its consumption expenditure (i.e., revenue and fiscal deficits) and thus defraud the depositors.

The recommendations of the CFS (Narasimham Committee I) were

aimed at:

(i) ensuring a degree of operational flexibility;

(ii) internal autonomy for public sector banks (PSBs) in their decision making process; and

(iii) greater degree of professionalism in banking operation.

Recommendation of CFS

The CFS recommondation25 could be summed up under five sub-titles: