Important Banking Sector Acts and Reforms In India

Banking Acts and Reforms

• Reserve Bank of India Act, 1934: This act establishes the Reserve Bank of India (RBI) as the central banking institution in India. The RBI Act defines the objectives and functions of the RBI, such as controlling the monetary policy, issuing and managing currency, regulating the banking system, and managing foreign exchange reserves. It grants the RBI the authority to issue directives and guidelines to banks and financial institutions.
• Banking Regulation Act, 1949: The Banking Regulation Act is a crucial legislation that regulates and supervises the banking sector in India. It empowers the Reserve Bank of India (RBI) to regulate banks and their operations. The act defines the powers and functions of the RBI, licensing of banks, provisions for capital requirements, and regulations related to the management and administration of banks. It also establishes the Deposit Insurance and Credit Guarantee Corporation (DICGC) to insure bank deposits.
• Negotiable Instruments Act, 1881: The Negotiable Instruments Act provides a legal framework for negotiable instruments such as promissory notes, bills of exchange, and cheques. It governs the transferability, rights, and liabilities of parties involved and rules for their discharge and enforcement. This act is important for the banking sector as cheques are widely used as a means of payment and settlement.
• Prevention of Money Laundering Act, 2002: Money laundering poses a serious threat to the financial system and economy. The Prevention of Money Laundering Act (PMLA) aims to prevent money laundering and the financing of terrorism. It establishes the Financial Intelligence Unit (FIU) as the central agency for receiving, analyzing, and disseminating information related to suspicious transactions. The act imposes obligations on banks and financial institutions to maintain records, report transactions, and verify customer identities.
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002: The SARFAESI Act provides a legal framework for the securitization and reconstruction of financial assets and the enforcement of security interests. It enables banks to take possession of and sell assets of defaulting borrowers to recover outstanding dues without the intervention of the court. This act empowers banks to issue notices, take possession of secured assets, and enforce security interests.
• Insolvency and Bankruptcy Code (IBC), 2016: The IBC is a comprehensive legislation that addresses insolvency and bankruptcy proceedings for individuals, partnership firms, and corporate entities. It aims to provide a time-bound and efficient resolution process for stressed assets. The IBC establishes the Insolvency and Bankruptcy Board of India (IBBI) to regulate insolvency professionals and entities involved in insolvency proceedings.
• Foreign Exchange Management Act (FEMA), 1999: FEMA is a crucial act that governs foreign exchange transactions, external trade, and payments in India. It replaced the earlier Foreign Exchange Regulation Act (FERA). FEMA empowers the RBI to regulate and control foreign exchange transactions, capital flows, and external borrowings. It also governs foreign direct investment (FDI) and overseas direct investment (ODI) in India.

Current Scenario in Banking Reforms

The reforms in the Indian banking sector have been introduced to increase the efficiency, stability, and effectiveness of banks. Some of these recent reforms are:

The National Asset Reconstruction Company Limited (NARCL) was announced in the Union Budget 2021-22 to create a “bad bank” to manage non-performing assets (NPAs) of ₹500 crore (approximately $62.63 million) and above. NARCL, a government-owned entity, was incorporated on July 7, 2021. Public Sector Banks hold the majority stake, with Private Banks holding the remaining share, and Canara Bank acting as the Sponsor Bank. NARCL is registered with the Reserve Bank of India (RBI) as an Asset Reconstruction Company under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

India Debt Resolution Company Ltd. (IDRCL): NARCL has been incorporated under the Companies Act and has applied to the Reserve Bank of India for a license as an Asset Reconstruction Company (ARC). NARCL has been set up by banks to aggregate and consolidate stressed assets for their subsequent resolution. PSBs will maintain 51% ownership in NARCL.

Digital Rupee: The central bank’s digital currency (CBDC), the RBI’s digital rupee, was announced in the Union Budget 2022-23, and The Reserve Bank of India (RBI) launched the first pilot of Digital Rupee- Retail segment (e₹-R) on December 01, 2022. A CBDC is a digital representation or token of a nation’s legal currency.

National Bank for Financing Infrastructure and Development (NaBFID):

The Government of India (GOI) set up NaBFID in April 2021 as India’s fifth All India Financial Institution in the country to support the development of long-term non-recourse infrastructure financing in India, including the development of the bonds and derivatives markets necessary for infrastructure financing. NaBFID has both developmental and financial objectives.

List of important banking sector acts and year

Check here the list of important Banking Sector acts and year are:

1. Reserve Bank of India Act- 1934

2. Banking Regulation Act- 1949

3. Negotiable Instruments Act, 1881

4. Prevention of Money Laundering Act- 2002

5. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act -2002

6. Insolvency and Bankruptcy Code (IBC)- 2016

7. Foreign Exchange Management Act (FEMA)1999

Banking sector reforms in India

Banking sector reforms in India refer to the initiatives and measures taken by the government and regulatory authorities to strengthen and improve the functioning of the banking industry in the country. These reforms aim to enhance transparency, efficiency, and stability of the banking sector, promote financial inclusion, and ensure the availability of adequate credit for economic growth. Some key elements of banking sector reforms in India include:

• Liberalization: The reforms began in the 1990s with the liberalization of the Indian economy. This involved reducing government control, allowing private and foreign banks to enter the sector, and promoting competition.
• Capital Adequacy: The Basel norms, specifically Basel I, II, and III, were adopted to improve the capital adequacy of banks. These norms mandate banks maintain a minimum level of capital to absorb potential losses and ensure financial stability.
• Asset Quality: Steps were taken to address the issue of non-performing assets (NPAs) or bad loans. The Insolvency and Bankruptcy Code (IBC) was introduced to expedite the resolution of stressed assets and improve recovery mechanisms.
• Governance and Risk Management: Reforms focused on enhancing corporate governance practices in banks to ensure transparency, accountability, and effective risk management. Measures like the establishment of the Banking Codes and Standards Board of India (BCSBI) were taken to strengthen customer protection.
• Financial Inclusion: Initiatives such as the Pradhan Mantri Jan Dhan Yojana (PMJDY) aimed at ensuring financial inclusion by providing access to banking services to unbanked sections of society. The use of technology, such as mobile banking and digital payments, has been promoted to enhance financial access.
• Regulatory Framework: The Reserve Bank of India (RBI) plays a crucial role in implementing banking sector reforms. It has introduced various regulations and guidelines to strengthen prudential norms, risk management, and supervision of banks.
• Merger and Consolidation: To create stronger and more efficient banks, the government has encouraged the merger and consolidation of public sector banks. This aims to improve operational efficiency, reduce costs, and enhance the ability to meet capital requirements.
• Financial Technology (FinTech) and Innovation: The banking sector reforms also promote the adoption of financial technology and digital innovation. This includes the development of payment systems, fintech startups, and regulatory sandboxes to encourage experimentation and foster innovation.

Banking Sector Reforms Since 1991

The banking sector reforms in India after 1991 aimed to liberalize and modernize the banking system, enhance efficiency, and promote financial stability. Several committees were formed to recommend measures and suggest reforms. Let’s discuss the key committees and their recommendations:

Narsimha Committee l

• Committee was Headed by M. Narasimham, former RBI Governor.
• The committee suggested measures to strengthen the banking system, including reducing government interference, increasing the role of the RBI in supervising banks, and enhancing transparency.
• It recommended the reduction of statutory liquidity ratio (SLR) and cash reserve ratio (CRR), which were high reserve requirements for banks, to improve their liquidity.
• The committee also recommended the recapitalization of weak banks, the strengthening of bank management, and the introduction of prudential norms.

H. Khan Committee

• Headed by R. H. Khan, former Deputy Governor of the Reserve Bank of India (RBI), this committee examined the financial system’s effectiveness for the small-scale sector and the role of primary dealers.
• The committee made recommendations to improve credit delivery to the small-scale sector and enhance the functioning of primary dealers.

Narsimham Committee ll

• This committee was a follow-up to Narsimham Committee I and aimed to review the progress of reforms.
• The committee emphasized the need for structural reforms, consolidation of the banking sector, and the establishment of strong and autonomous regulatory bodies.
• It recommended reducing the government’s stake in public sector banks (PSBs) to less than 33% and enhancing corporate governance standards in PSBs.

Raghuram Rajan Committee

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

Financial Sector Legislative Reforms Commission (FSLRC)

The FSLRC was headed by Justice B. N. Srikrishna and tasked with reviewing and restructuring 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

• Led by P. J. Nayak, this committee was constituted to examine the governance of PSBs.
• The committee 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.
• It suggested reducing government interference and advocated for a greater role of the board in key decisions, including appointments and capital allocation.

Nachiket Mor Committee

• This committee, headed by Nachiket Mor, was formed to examine the Comprehensive Financial Services for Small Businesses and Low-Income Households.
• The committee recommended measures to increase financial inclusion, such as the establishment of payment banks, small finance banks, and the creation of a universal electronic bank account (Jan Dhan Yojana).
• It proposed the concept of “payment banks” to provide basic banking services, including payments and remittances, to underserved sections of society.

Indradhanush Framework

The Indradhanush framework was introduced in 2015 by the Government of India to revitalize and reform public sector banks (PSBs) in the country. The Indradhanush framework aimed to improve the efficiency, transparency, and governance of PSBs and strengthen their ability to support economic growth. The framework aimed to address key areas of banking sector reforms, encapsulated by the seven pillars of Indradhanush, which are:

• Enhancing the selection process of top management positions in PSBs to attract skilled professionals.
• Setting up the BBB as an autonomous body to provide guidance and enhance governance in PSBs.
• Injecting capital into PSBs to strengthen their balance sheets and enable them to meet Basel III capital adequacy norms.
• Implementing measures to address the issue of non-performing assets (NPAs) and stressed assets in PSBs.
• Granting more autonomy to bank boards and empowering them with greater decision-making authority.
• Framework of Accountability: Introducing a framework to hold the management of PSBs accountable for their performance.
• Enhancing transparency, risk management, and governance practices in PSBs.

HR Khan Committee

• Led by H. R. Khan, former Deputy Governor of RBI, this committee was formed to examine the existing framework for monetary policy in India.
• The committee 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

The 4R framework was introduced in 2017 as part of the government’s strategy to address the issue of mounting bad loans in the banking system. The framework focused on four key elements:

• Recognition: Prompt identification and classification of stressed assets as NPAs to accurately assess the extent of the problem.
• Recapitalization: Injecting capital into banks to improve their financial health and enhance their lending capacity.
• Resolution: Establishing mechanisms for the timely resolution of stressed assets through processes like the Insolvency and Bankruptcy Code (IBC) and other resolution frameworks.
• Reforms: Undertaking structural reforms to improve the governance, risk management, and operational efficiency of banks.

The 4R framework aimed to address the issue of stressed assets, promote transparency and accountability, and strengthen the resilience of the banking sector.

EASE (Enhanced Access and Service Excellence) Framework

EASE is an initiative launched in 2018 to improve public sector banks (PSBs) in India. Key features of the EASE framework include:

Governance Reforms

• Strengthening the governance structure of public sector banks.
• Enhancing the effectiveness of boards and improving transparency.
• Bolstering risk management practices.

Responsible Banking

• Encouraging PSBs to align their activities with national development goals.
• Promoting social objectives and environmental sustainability.

Credit Offtake

• Improving credit processes and streamlining lending procedures.
• Promoting digital lending platforms.
• Enhancing credit access for small and medium-sized enterprises (SMEs), agriculture, and retail borrowers.

Deepening Financial Inclusion

• Expanding banking services in unbanked and underbanked areas.
• Leveraging technology for greater reach and accessibility.
• Providing affordable banking services to all sections of society.

Customer Responsiveness

• Adopting a customer-focused approach in PSBs.
• Simplifying processes and leveraging technology for seamless banking experiences.

Responsible Banking Index

• Introducing an index to assess and rank PSBs on responsible banking practices.
• Evaluating governance, credit, and customer service parameters.
• Promoting healthy competition and continuous improvement.

Bimal Jalan Committee

• Chaired by Bimal Jalan, this committee was constituted to review the economic capital framework of the Reserve Bank of India. The committee recommended transferring a portion of RBI’s surplus reserves to the government and revising the framework for determining RBI’s capital requirements.
• It aimed to strike a balance between the central bank’s need for capital buffers and the government’s fiscal requirements.