Reforms helped banks better operational efficiency

BS Banking Bureau

The freedom given to banks came in handy for them to lend below their respective prime lending rates and gave them a cushion to react to market developments at a time when corporates are turning to debt, and credit offtake itself is not picking up.

For instance, banks had all the leeway to quote favourable rates to exporters and other creditworthy borrowers.

Recounting how the focus of banking sector reforms this year was to create an enabling environment for growth, the Economic Survey 2001-02 says banks could address the concerns of senior citizens by giving them higher interest rates.

Correspondingly, banks were given the freedom to tune their operational efficiency by cutting down excess manpower.

The voluntary retirement schemes implemented by the banks in 2000-01 led to the reduction of the workforce by 1,01,300, till December 31, 2001. This constituted 11.7 per cent of the total workforce in the banking industry as on March 31, 2000.

As the Banking Service Recruitment Boards were abolished, banks got freedom to hire their own staff. However, they still have to strictly follow the central government's reservation guidelines.

On the funding side, reforms focused on augmenting the lendable resources of banks. The cash reserve ratio was cut by 200 basis points to stand at 5.5 per cent by December 29, 2001.

Banks have also been given the freedom to change the composition of working capital limits by enhancing the cash credit component beyond 20 per cent or the loan component beyond 80 per cent in the case of working capital limits of Rs 100 million and above.

At the same time, the Reserve Bank of India is also tightening screws on the banking industry in terms of recognising non-performing assets.

Effective March 31, 2004, loans remaining overdue by over 90 days (one quarter) will be classified as NPAs, as opposed to the current norm of 180 days (two quarters).

Banks have been advised to make additional provisions from the year ending March 31, 2002 to smoothen the transition to the new norms.

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