Financial Sector Reforms: The Unfinished Agenda

Summary

Delivered as the A. D. Shroff Memorial Lecture on Banking in September 1993 and published by the A. D. Shroff Memorial Trust, M. Narasimham — former Reserve Bank Governor and chairman of the Government’s Committee on the Financial System — takes stock of India’s still-incomplete liberalisation, two years after the 1991 crisis. He frames the lecture as a tribute to Shroff’s prescient insistence that a centralised command economy and a pluralist democratic polity do not cohere, and argues that the new economic policy follows from four decades of disappointing results under directed planning rather than from any imported orthodoxy. Within the broader reform programme, he singles out the financial sector as the area where reform has lagged: progress in industry, trade and the exchange rate has been real, but agriculture and labour have hardly been touched, and banking reform has proceeded in an ad hoc, piecemeal fashion when the Narasimham Committee’s own recommendations were designed as an integrated, jig-saw whole.

The lecture’s analytical centre is the 1992 securities scam, which Narasimham reads not as a reason to slow reform but as evidence that India had built an over-administered yet under-regulated banking system in which detailed scrutiny of internal minutiae crowded out attention to productivity, profitability and prudential supervision. He defends the steps already taken — capital adequacy norms, transparent accounting and provisioning standards, reductions in SLR and CRR, branch-licensing liberalisation and private-bank entry — while warning that without recapitalisation through a vehicle such as the Assets Reconstruction Fund, banks will be unable to clean their books or access the capital market. He pushes back firmly against the official reluctance to redefine and cap priority-sector lending, insisting that the Committee never opposed credit to agriculture or small industry but objected to subsidised, quantity-driven directed lending that bred non-performing assets and forced cross-subsidisation through high interest rates on the rest of the economy.

A second cluster of arguments addresses interest rates, internal organisation and ownership. Narasimham welcomes the move towards market-determined rates, calls the Tandon and Chore quantitative norms anachronistic in a prudentially supervised market environment, and urges modernisation of internal audit and computerisation. He defends the entry of private and foreign banks against the post-scam political backlash, criticises the Banking Regulation Act’s one-per-cent voting cap and rules on cross-directorships and the chairman-cum-CEO model as regulatory hangovers from the social-control era, and argues that the most important pending recommendation is the granting of genuine operational flexibility and internal autonomy to bank managements within a rule-based rather than discretionary regulatory framework. The booklet covers the lecture itself plus the Trust’s front matter, with the closing few pages of the address falling outside the rendered chunk.

Key points

• Narasimham positions financial-sector reform as the unfinished portion of an integrated 1991-onwards liberalisation programme, contrasting real progress in trade, industry and the exchange rate with stalled agriculture, labour and banking reforms.

• He treats the Committee on the Financial System’s recommendations as a jig-saw whole and criticises the Government’s ad hoc, piecemeal implementation as ‘incrementalism rather than a sequencing of reform as part of an integrated programme.’

• The 1992 securities scam is diagnosed as the product of an ‘over-administered but underregulated’ system, not a case for slowing liberalisation; Narasimham argues the scandal sharpens, rather than blunts, the reform imperative.

• He defends the Committee’s proposed Assets Reconstruction Fund and urges authorities to find some workable mechanism to take impaired assets off bank books so banks can recapitalise from the market.

• On priority-sector credit, he rejects the charge that the Committee opposed lending to agriculture and small industry, insisting that subsidised, quantity-driven directed credit hurt borrowers, banks and the wider ‘high cost economy’.

• He calls for market-determined interest rates, abolition of the Tandon and Chore quantitative norms, and a re-examination of consortium lending, which he likens to a cartel.

• He criticises the Banking Regulation Act’s one-per-cent voting-rights cap, the rules on cross-directorships and the mandated chairman-cum-CEO model as anachronisms from the social-control phase and pushes back against the post-scam backlash on foreign banks.

• The most important pending reform, he argues, is operational autonomy and internal flexibility for bank managements within a transparent, rule-based — rather than discretionary — supervisory framework.