Which of the following is not associated with financial sector reforms in India initiated after 1991 ?

Correct — option (3), F.R.B.M. Act (Fiscal Responsibility and Budget Management).

The stem asks which item is not part of the financial sector reforms begun after 1991 — the reforms of banks and financial markets.

In the RBI's account, the reform agenda for banking and the financial sector was driven mainly by the reports of two committees chaired by M. Narasimham, in 1991 and 1998. Capital adequacy norms, prudential norms for non-performing assets and the SARFAESI Act all belong to this track.

The FRBM Act, 2003 belongs to a different track: fiscal reform. It sets rules for the Union Government's own deficits and debt, not for how banks are regulated.

There is one overlap. In line with the FRBM Act, the RBI stopped subscribing to primary issues of Government securities from April 2006. That changed the RBI's role, but the Act's purpose is fiscal discipline.

The idea to remember: financial sector reforms concern banks and markets; fiscal reforms concern the government's budget.

Why the others are wrong

• (1)
  Capital adequacy — Capital adequacy is a core financial sector reform. Following the Basel norms, the RBI decided in April 1992 to introduce the capital to risk-weighted assets ratio (CRAR) for banks.

  The ratio was fixed at 8% at first and raised to 9% in March 2000. It makes banks hold capital in proportion to the risk in their loans and investments.

• (2)
  Non-performing assets — NPA rules are part of the same reform track. Prudential norms on income recognition, asset classification and provisioning decide when a loan counts as non-performing and how much a bank must set aside for it.

  The norms were tightened over time; the 90-day delinquency norm for classifying NPAs applied from March 2004.

• (4)
  SARFAESI Act — The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 is a financial sector reform aimed at bad loans.

  It empowers secured creditors to enforce their security interest without the intervention of a court or tribunal, giving lenders a faster way to recover dues from defaulters.

India's reforms after 1991 ran on several tracks, and two are easy to mix up.

Financial sector reforms strengthen banks and financial markets: capital adequacy norms, prudential rules for recognising bad loans, exposure limits, disclosure, and laws that help lenders recover dues, such as the SARFAESI Act, 2002.

Fiscal reforms discipline the government's own finances: tax reform, control of subsidies, and rule-based limits on deficits and debt. The Union's FRBM Act, 2003 is the central fiscal rule. States passed their own versions, such as Rajasthan's FRBM Act, 2005.

Key facts

• The Committee on the Financial System (1991) and the Committee on Banking Sector (1998), both chaired by M. Narasimham, mainly drove the reform agenda for India's banking and financial sector, in the RBI's account.
• The RBI decided in April 1992 to introduce the capital to risk-weighted assets ratio for banks; it was 8% initially and raised to 9% in March 2000.
• The 90-day delinquency norm for classifying non-performing assets was adopted with effect from March 2004.
• The SARFAESI Act, 2002 empowers secured creditors to enforce security interest without the intervention of a court or tribunal.
• In line with the FRBM Act, the RBI withdrew from primary issues of Government securities by April 2006.

Common traps

• The FRBM Act changed the RBI's role in the government bond market, so it can look like a financial sector law. Its purpose is fiscal: limiting the government's deficits and debt.
• NPA norms and the SARFAESI Act both deal with bad loans but at different stages. NPA norms decide when a loan is classed as bad and what to provide for it; SARFAESI lets lenders enforce security to recover it.
• Capital adequacy is a bank's ratio of capital to risk-weighted assets. It is not a government ratio like the fiscal deficit to GDP fixed under FRBM laws.

UnlockIAS will link similar questions from RAS Pre 2023 here once that paper is published on this site.

• practice — not a real PYQ

  Which of the following Acts is a fiscal reform measure rather than a financial sector reform measure?

  • (a)SARFAESI Act, 2002
  • (b)Fiscal Responsibility and Budget Management Act, 2003
  • (c)Insolvency and Bankruptcy Code, 2016
  • (d)Recovery of Debts Due to Banks and Financial Institutions Act, 1993
  Answer(2) — The FRBM Act sets limits on the government's deficits and debt. Options (1), (3) and (4) all deal with how lenders recover dues or resolve failed borrowers, which is financial sector reform.
• practice — not a real PYQ

  When the RBI introduced the capital to risk-weighted assets ratio (CRAR) for banks after its decision of April 1992, the ratio was initially fixed at –

  • (a)6 per cent
  • (b)8 per cent
  • (c)9 per cent
  • (d)12 per cent
  Answer(2) — CRAR started at 8%, in line with the international benchmark. Option (3), 9%, is the level it was raised to in March 2000. Options (1) and (4) do not match either stage.