Which of the following was a key feature of financial sector reforms under NEP 1991?
Show answer & explanation
Correct answer: C
Explanation
Answer: (C) Establishment of Private Sector Banks
Explanation:
- Under the New Economic Policy (NEP) of 1991, the primary objective of financial sector reforms was to make the banking system more efficient, competitive, and modern. To achieve this, the recommendations of the M. Narasimham Committee (1991) were implemented.
- Entry of the Private Sector: The most prominent feature of these reforms was opening up the banking sector to the private sector. Prior to this, the banking sector was dominated by the government; however, following the reforms, licenses were granted to new private banks such as HDFC, ICICI, and Axis Bank.
- Change in RBI's Role: The role of the Reserve Bank of India (RBI) shifted from that of a 'Regulator' to that of a 'Facilitator.' Banks were now granted the autonomy to make independent decisions in various matters.
- Increase in FDI Limit: The limit for Foreign Direct Investment (FDI) in banks was raised, facilitating the inflow of global technology and capital into the Indian banking system.
- Deregulation of Interest Rates: Banks were granted significant freedom to determine their deposit and lending rates based on market conditions.
Additional Points:
- Reduction in SLR and CRR: Under the reforms, the Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) were reduced to ensure that banks had more funds available for lending.
- Capital Adequacy Norms: The adoption of internationally accepted 'Basel Norms' was initiated for Indian banks.
- Branch Expansion: The requirement for banks to obtain prior permission from the RBI to open new branches was liberalized.
Potential Exam Questions and Answers:
Question: The financial sector reforms of 1991 were based on the recommendations of which committee?
Answer: The Narasimham Committee.
Question: What was the main change in the RBI's role following the reforms?
Answer: The RBI became a 'Facilitator' rather than a 'Controller.'
Question: What were the three main pillars of the 1991 policy?
Answer: Liberalization, Privatization, and Globalization.