Banking Sector Reforms Second Coming

N A Mujumdar ARE we suffering from reforms fatigue? That could be one possible explanation why the report of the Committee on Banking Sector Reforms (BSR) submitted in April 1998 has not attracted as much attention as the report of the Committee on Financial System (CFS) submitted in November 1991, Interestingly enough, both the committees were chaired by M Narasimham and if there were apprehensions that the BSR report would largely regurgitate the issues in the CFS report, they are entirely unjustified, The fact that, the major recommendations of the CFS report were guided by the availability, as it were, of the Washington or Basle software, rather than India-specific issues, has been concretely demonstrated earlier. ' This article seeks to show that the BSR report is no different, The most conspicuous weakness of the BSR report is its failure to diagnose the core problem currently being faced by public sector banks (PSBs): they have become largely dysfunctional virtually abdicating normal banking responsibilities. That explains the present paradox of high liquidity coexisting with large unsatisfied demand for credit. While the banking system's resources go abegging, the economy ' s growth potential remains not fully exploited. That is the tragedy of PSBs. Unless this core problem is tackled first, the second dose of banking reforms recommended by the BSR report would lose much of its relevance, The same lack of imaginativeness is also reflected in the recommendations relating to non-performing assets (NPAs) and rural credit. Although the report begins by making appropriate noises about an efficient financial system being critical "to support higher investment levels and accentuate growth" (p I), sadly, the growth perspective is missing from the major recommendations. If the Reserve Bank of India (RBI) were to draw up a meaningful agenda for making PSBs subserve the growth objectives, it has to look elsewhere for advice.