Financial Sector

Financial Sector
39. A mature and well functioning financial system is essential for promoting savings, channelling investment into the most productive activities and ensuring an efficient payments mechanism. The East Asian financial crisis has highlighted the importance of prompt action to strengthen our financial system. The recently submitted Narasimham Committee Report has provided many recommendations which are being examined in consultation with RBI. However, I am happy to announce that decisions have been taken on some important recommendations.

The relatively high level of Non-Performing Assets (NPAs) in our public sector banks is a cause for concern. Net NPAs, averaging 9 percent in 1996-97, must be brought down to below 5 per cent by the year 2000-2001. As one way of reducing NPAs, Debt Recovery Tribunals will be strengthened and more Tribunals will be set up to cover all States.

A few banks have particularly high NPAs. These banks will be encouraged, on an experimental basis, to establish Asset Reconstruction Companies, which will takeover the NPAs of the bank at their realisable value and swap them with special bonds to be held by the bank. The Asset Reconstruction companies will concentrate on recovery of dues to realise the maximum value for the assets transferred to them.

To strengthen the underlying health of our banks, RBI is raising the minimum required Capital Adequacy Ratio for banks from the present 8 per cent to 9 per cent by March 31, 2000 and to 10 per cent by as early as possible thereafter. RBI will also announce certain other enhancements of prudential norms in regard to asset classifications, income recognition, risk weights, etc.

Our financial system today works under the burden of several archaic laws regarding transfers of and transactions in properties and financial instruments. An Expert Group is being set up to propose precise legal amendments in the key laws to make the provisions consistent with modern financial and banking practices.

40. Non-Bank Finance Companies (NBFCs) perform an important role in our financial sector. But regulation of this sector has to improve to protect unwary small investors. The Reserve Bank of India Act was amended last year with a view to laying down a framework for improved regulation of NBFCs. RBI has recently issued guidelines for registration as also for effective regulation of NBFCs. Our objective will be to develop a framework of prudential regulations and a supervisory system which will foster the development of a healthy financial system and also provide transparent disclosure norms leading to greater depositor awareness to enable the investors to take well informed investment decisions.

41. Along with reform of the banking sector, it is necessary to move forward with reforms in insurance which has hitherto been a public sector monopoly. In order to provide better insurance coverage to our citizens and also to augment the flow of long-term resources for financing infrastructure, I propose to open the insurance sector to competition from private Indian companies. The Insurance Regulatory Authority will also be converted into a statutory body. Necessary legislation will be introduced later in the year.