banking financial

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Banking & Financial Reforms

Group 3

Anantharaman N

Karthic R

Pranay Kumar

Apoorv S

Vijay V


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Introduction

Pre-Reform Banking Sector

Planned development, mixed economy

framework

Fiscal activism- Focus on long gestation projects

Lowered interest rates for govt. securities

Ad Hoc treasury bills High levels of fiscal deficits

Frequent increase in CRR


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Contd..

Issues

Segmented and underdeveloped financial markets

Complex structure of interest rates Lack of importance to transparency,

accountability and prudential norms


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Objectives of Reforms

Eliminate complexity

Enabling growth of financial market

Provide operational and functional autonomy Accommodate global growth

Opening of external sectors


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Pre liberalization periodAn Overview

Handcuffed institutions

Strong govt regulations

Preference for public sector institutions Stringent regulation in WCM

Exploitation of loopholes

The balance of payments crisis

Threat of insolvency


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Financial & Banking Sector Reforms

Tarapore Committee Recommendations

Set by RBI to lay road map to capital accountconvert ability in 1997, 5 member committee

Preconditions Fiscal consolidation

Mandated Inflation target

Strengthening of financial system

Account limit specification

Capital inflow should be converted to semi-liquidassets


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Tarapore Committee Recomendation

Capital Account Convertibility

Freedom to convert local financial assets into foreignfinancial assets and vice versa.

Undergone changes from the emerging marketeconomics

Portfolios or FDI

Key Lessons

Preparedness, Infrastructure Prolonged, over valued exchange rates

Gradual and phased liberalization


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Tarapore Committee Recomendation

Key Lessons cntd

Channelizing the investments

Regulatory and supervisory measures

Capital inflows should be put in semi liquid assets

CAC does not serve the main purpose of the majorproblems in the country

Transaction across countries help them to providea cheaper rates of interest

Improve the efficiency of the businesstransactions.


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Pending Reforms

Pension Sector

Help the elderly people from the economicdeprivation

Tier I &Tier II accounts

Contribution based reform

Govt cut down the salary components

Conditions of withdrawal

No mention about the tax benefits

Economical transaction of 2100 crore rupees


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Goods & Service Tax

To be implemented by april 2012

Replaces indirect taxes

GST is a comprehensive value added tax levied on goods and services (No differentiation)

Dual rate -- Central GST and State GST

Both the taxes would be applying on the same tax base

15 Million for the central and 1 Million for state

Low rate for unnecessary items and standard rate for general goods

Procurement Higher tax outgo, credit availability, exemptions

Distribution Tax efficiency, replacement by refund schemes

Commercial increase in rate of tax, increase in GST credit

Others Redesign ofIT system, registrations, Interoperability


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Land Acquisition

Acquisition, industrialization, infrastructure development

Provides better deal, higher compensation

Information exchange with authorities

Enables rehabilitation and relief to the person

Protection against forceful occupation

Law applicable for 50 acres in urban area and 100 acres inrural

Agitation and increased responsibility


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Direct tax code Replacement of the current tax system

Brackets and dividend distribution tax

Exemption investment limit

ITA to be follow the DTC Surcharge and cess are abolished

TE on LTA, Medical reimbursement

Impact on the tax savings

Impact on the home loans

Enforcement of tax legislation Strong and bold step to eliminate ambiguity

Tax benefits for foreign companies

GAAR,CFC to avoid aggressive tax avoidance plan


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Narasimham Committee

1991 RBI proposed the committee chaired by M. Narasimhamformer RBI governor to review the financial system

Review aspects relating to the structure, organization,procedure and functioning of the financial system

Constituted in 1991, the committee submitted two reports in1991 and 1992 which laid significant thrust on enhancing the

efficiency and viability of banking sector

The Narasimham committee laid the foundation for thereformation of the Indian Bank sector


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Why

Phenomenal increase in the geographic coverage of our

banking institution

Despite impressive quantitative achievement low efficiencyand productivity, bad portfolios performance and eroded

profitability

Several public sector banks and financial institutions wereincurring losses year after year


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Problems Faced

Higher rates of CRR(15%) and SLR(38.5%)

Directed credit programs

Political and Administrative interference

Subsidizing of credit

Mounting expenditures of banks


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Recommendations

Reduction of Statutory Liquidity Ratio (SLR) to 25% over a period of five

years

Progressive reduction in Cash Reserve Ratio (CRR) to 3-5%

Phasing out of directed credit programme and redefinition of the priority

sector

Stipulation of minimum capital adequacy ratio of 8% by March 1996

Adoption of uniform accounting practices in regard to income recognition,

asset classification and provisioning against bad and doubtful debts


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Continued

Setting up of special tribunals to speed up the recovery process of loans

Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a

portion of their bad and doubtful advances at a discount

Abolition of branch licensing

Liberalizing the policy with regard to allowing foreign banks to open

offices in India

Giving freedom to individual banks to recruit officers

Revised procedure for selection of Chief Executives and Directors of

Boards of public sector banks

Speedy liberalization of capital market

Enactment of a separate legislation providing appropriate legal framework

for mutual funds and laying down prudential norms for such institutions,

etc


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Committee On Banking Sector Reforms 1998

1998- Finance minister appointed Mr. Narasimham aschairman of one more committee

This committee was asked to review the progress ofbanking sector reforms to date and a programme onfinancial sector reforms to strengthen India's financialsystem and make it internationally competitive

The committee submitted its report to the government inApril 1998

The report covered issues like- capital adequacy,bank mergers, recasting bank board, and creation ofglobal sized banks


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Major Recommendations of Narasimham Committee

1998

Need for stronger banking system

Experiment with concept of narrow banking

Small local banks

Capital Adequacy Ratio

Review and update banking laws


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The Effect

Emergence of 9 new private sector banks

Opening up of vibrant capital market

Great impact on banks balance sheets both onassets and liabilities side


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Some Facts

Branch expansion: Increased from 8260 in

1969 to 71177 in 2006

Population served per branch has come down

from 64000 to 16000

A rural branch office serves 15 to 25 villages

within a radius of 16 kms

However, at present only 32,180 villages out

of 5 lakh have been covered


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Continued

Banking has moved from deposit and lending

to

Merchant banking

Mutual funds

Retail banking

ATMs

Internet banking

Venture capital funds


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Conclusion

Way Ahead

Consolidation

Adoption of Basel II

Risk Management

Improvement in customer service

banking financial

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