ABM ECONOMIC REFORMS – PART 1 | ADVANCED BANK MANAGEMENT IMPORTANT TOPIC

ABM ECONOMIC REFORMS – PART 1

In this article, we will discuss the important topic of Economic reforms in the Banking sector for the ABM DEC 2023 exams.

In this article on the 1st paper of Advanced Bank Management from CAIIB DEC 2023 Exams, we will be discussing the Economic Reforms that have transpired in the Indian Banking Sector. As a banker, it is essential that you know about the reforms and the reason why they were required. So, keeping that in mind, we will first discuss the ABM paper then move on to the topic & then discuss the applicable ABM Study Material 2023 for Certified Associate of the Indian Institute of Bankers Exams!

ABM | IIBF CAIIB DEC 2023 EXAMS

The first compulsory paper of the CAIIB exam is Advanced Bank Management & it will fall due on November 27, 2023. So, you must be prepared for the ABM paper before that time. To ensure your success in the ABM exam this December 2023, you should have covered your whole Syllabus of CAIIB & have practiced the Mock Tests. And we will guide you through the whole study process that should be followed to ensure that you pass the CAIIB Examinations this 2023.

ADVANCED BANK MANAGEMENT | ECONOMIC REFORMS – PART 1

Quantity has not that much of a concern in the idea of ‘progress in rural banking in India’ when compared to the quality of rural banking services. Where the matter was mostly concerned with making it more be suitable for rural areas with tailor-made credit packages along with close monitoring of service disbursement to farmers in villages and provide technical guidance and marketing support to them. 

History | Banking Sector Reforms in India | Pre Independence: 

Todays, Indian Banking system has been the product of or we can say it started with:

• The establishment of ‘General Bank of India’ in 1786. 
• Then the East India Company established ‘primary Presidency Bank’ in Kolkata in 1806. 
• Then in 1840 and 1843, two banks, named, Bank of Bombay and Bank of Madras came into existence.
• Reserve Bank of India (RBI) was established on April 1, 1935, through the Reserve Bank of India Act, 1934 with the purpose to regulate the issue of bank notes & to keep the reserves to maintain monetary stability in India. 

History | Banking Sector Reforms in India | Post Independence: 

Even though India had achieved the freedom, the existing banks were mainly urban-oriented and rural population found them unreachable. Today, there is still a large section of the rural population which has to borrow money from money lenders. That one of the reasons for why the Indian government decided to nationalize all the major banks in India & the first Nationalization took place in 1969 and the second in 1985.

The Reasons behind the Banking Reforms in India: 

The need for reforms arose on account of uncertain political situation, persistent fiscal imbalance, the balance of payments crisis, double-digit inflation, etc. There was decrease in the growth of real GDP as the prevalent lower industrial growth and partly it was because of the slowdown in agricultural activities. 

The reason for the industrial slowdown was lower government investment; non-availability of inputs due to import compress, recession prevailed in the industrial economy due to the downfall of demand in the markets of Kuwait and Iraq when the Gulf crisis surfaced, and the collapse of the erstwhile Soviet Union.

Before starting with the reforms, take a look at the current Banking Structure of Banks:

Structure of the Indian Banking System

• Non-scheduled Banks

• Scheduled Banks

1. Commercial Banks
   1. Public Sector Banks
      1. State Bank Group
      2. Other Nationalized Banks
   2. Regional Rural Banks
   3. Private Sector Banks
      1. Indian Banks
      2. Foreign Banks
2. Cooperative Banks
   1. State Cooperative Banks
   2. Central Cooperative Banks
   3. Primary Credit Societies

The Reforms that took place in the banking sector were introduced on the basis of the recommendations of various committees, mainly of which are:

• 1991, The first Narasimhan Committee 

• 1996, The Verma Committee

• 1997, The Khan Committee

• 1998, The Second Narasimhan Committee

FIRST PHASE OF ECONOMIC REFORMS: 

In the first phase, all the banking sector reforms were directed towards improving the policy framework, institutional framework & financial health: 

Change in Policy Framework 

In order to improve the policy framework, the Cash Reserve Ratio (CRR) was reduced to its initial level, the Statutory Liquidity Ratio (SLR) was phased out, interest rates were deregulated, lending was expanded to priority sectors, and lending rates were linked to advances’ sizes.

Improving Financial Health 

Efforts were also directed to improve the financial accuracy of the banking sector by prescribing prudential norms. Moreover, steps were taken to reduce the proportion of Non-Performing Assets (NPAs). 

Improvements in the Institutional Framework was done by way of: 

1. Recapitalization, 
2. Strengthening the supervisory system, and 
3. Creating a competitive environment.

SECOND PHASE OF ECONOMIC REFORMS: 

After the first phase of the bank sector reforms, came the second wave, known as second generation reforms. Their main focus was on strengthening the very establishment of the banking system in 3 ways: 

1. By reforming the structure of the banking industry, 
2. technological up gradation, and 
3. human resource development. 

Prudential Regulation 

2 types of banking regulations have been identified i.e. economic and prudential. 

We will read about them in the second part of this article.

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