banking sector reforms in india an...

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CHAPTER II BANKING SECTOR REFORMS IN INDIA AN OVERVIEW CONTENTS 1. Commercial Banking in India 2. Regulations in the Banking Sector a) The Nationalisation Era b) The Liberalisation Era i) First Phase of Reforms ii) Second Phase of Reforms 3. Implications of Reforms (Progress) 4. Other Developments: An Overview a) Technology in Banks b) Bancassurance in India c) Consolidation in the Banking Sector d) SARFAESI ACT, 2002 e) Corporate Governance in Banks f) Banking Ombudsman Scheme g) Financial Inclusion h) Committee on Financial Sector Reform headed by Dr. Raghuram Rajan Conclusion References

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Page 1: BANKING SECTOR REFORMS IN INDIA AN OVERVIEWshodhganga.inflibnet.ac.in/bitstream/10603/35256/12/12_chapter2.pdf · BANKING SECTOR REFORMS IN INDIA – AN OVERVIEW CONTENTS 1. Commercial

CHAPTER II

BANKING SECTOR REFORMS IN INDIA –

AN OVERVIEW

CONTENTS

1. Commercial Banking in India

2. Regulations in the Banking Sector

a) The Nationalisation Era

b) The Liberalisation Era

i) First Phase of Reforms

ii) Second Phase of Reforms

3. Implications of Reforms (Progress)

4. Other Developments: An Overview

a) Technology in Banks

b) Bancassurance in India

c) Consolidation in the Banking Sector

d) SARFAESI ACT, 2002

e) Corporate Governance in Banks

f) Banking Ombudsman Scheme

g) Financial Inclusion

h) Committee on Financial Sector Reform

headed by Dr. Raghuram Rajan

Conclusion

References

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CHAPTER II

BANKING SECTOR REFORMS IN INDIA:

AN OVERVIEW

Commercial banks are considered as the financial intermediaries who help

the channelisation of liquidity along different economic activities in tune with the

overall development process in the different sectors of the domestic economy.

This financial intermediation is done through four transformation mechanisms:

1) liability-asset transformation

2) size transformation

3) maturity transformation and

4) risk transformation.

This intermediation process promotes accumulation of savings and

investment and as such fosters economic growth of a country. The development of

banking institutions in developing countries reduces the risk of potential savers and

provides required liquidity to potential entrepreneurs. This augments the growth

process. Thus the financial development has a dual effect on the economy:

a) it increases the efficiency of capital accumulation and

b) it raises the rate of savings and investment1

Thus banks are considered not merely as dealers of money but also the

leaders of development. Moreover, banks not only provide financial resources for

the growth of the economy, but also influence the direction in which these

resources are to be utilised. So they are considered as the storehouses of the

country’s wealth and the reservoirs of resources necessary for the development of

different sectors of the economy. 2

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Commercial Banking in India

Commercial banking system constitutes the largest segment of the Indian

financial sector. It has been treated as the traditional provider not only of working

capital but – because of the absence of a vibrant debt market – of term loans too.

At the top of the Indian Banking system there are the commercial banks headed by

the Reserve Bank of India. Major commercial banks are under public sector

system. These public sector banks constitute about 75–80% of the monetary

activities and the rest is shared by other private and foreign banks and financial

institutions.

Contrary to the universal situation of competition of banks with other

participants in the financial system, in India banks were protected from

competition from other players in the system, especially after their nationalisation

in 1969. Both the Reserve Bank of India and Government of India framed rules,

guidelines and directives regarding mobilization of deposits and deployment of

mobilized funds. As the mode of deployment of banks’ resources was outside the

control of banks, they became passive in their lending activities. The whole

financial system, comprising mainly banks and financial institutions, functioned as

a sellers’ market with borrowers having hardly any choice about the sources of

their funds or terms on which such funds were made available to them. The whole

arrangement was thus an antithesis of a competitive financial system.3

From the 1980s onwards evidences were shown that in the Indian Banking

sector everything was not going well. The philosophy of development banking

also did not encourage professionalism in the financial sector and this resulted in

accumulation of banking assets, the quality of which was of dubious character.

And this is the total result of long standing neglect of financial professionalism and

deterioration of the economic health of the industrial corporate sectors where the

banks have had heavy exposure.4 All this had affected the profitability of majority

of the banks and the capital base of the banks. Consequently, the real sector of

the economy is affected by the sickness in the financial sector. Cross country

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evidence suggests that though economic fraud and mismanagement are responsible

for the insolvency of many banks, macro economic factors such as trade cycles,

policy mistakes and inadequate risk management have created the conditions for

financial imbalances which have led to insolvency in a large number of banks.5

That is why the government intervenes from time to time whenever signs of

sickness appear in the banking sector.

Many big banks in the public sector suffered losses in the early years of

1990s. The main reason in almost all cases had been the existence of large amount

of non-performing assets. The latter is the accumulated result of long neglect of

the prudential functioning of banks and a chronic imbalance in the efficient

combination of different factors of production, particularly capital and labour. The

government has redefined the priorities in the banking sector and introduced strict

income recognition norms to improve the bottom line of their balance sheets. The

philosophy of development banking has been substituted by the neo-classical

concept of profitability. The introduction of income recognition has revealed the

accumulated huge amounts of nonperforming assets and provisioning against this

NPA has eroded the capital base of many banks, especially public sector banks.

Regulations in the Banking Sector

The regulations governing the Indian banking industry have brought about

revolutionary changes in that sector. Based on these regulations the Indian

banking history can be divided into two important eras:

Nationalisation Era

Liberalisation Era

Though the regulations that were introduced during these two eras were

distinct from each other, in both eras the banking industry had to re-engineer its

operational policies to meet the situations. During the nationalisation era, banks

were required to help economic-growth-oriented activities by increasing the

volume of credit given especially to the neglected sectors. As against this, during

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the liberalisation era, though economic growth is the primary aim, the focus is

shifted to quality of assets and services. Keeping profitability in a highly

competitive environment is the challenge before the banks during this era.

THE NATIONALISATION ERA

In 1969, by the nationalization of country’s 14 major commercial banks, the

nationalisation era was started. Six more banks were nationalised in 1980.

The Banking Companies (Acquisition and Transfer of Undertakings) Act

1969 was enacted to nationalise 14 banks based on their size, resources, coverage

and organisation. The aim of nationalisation was to give priority to the credit

requirements of the neglected sectors like small scale sector, agricultural sector etc.

Before nationalisation these sectors were totally neglected in order to cater to the

needs of large corporate houses. After nationalisation the credit facility was

extended at subsidised rates to business units other than large business units.

Wholesale banking was replaced by retail banking. There has been an all-round

growth in the branch network, rural expansion, deposit mobilisation, credit

disbursals, and employment opportunity and in removing the regional imbalances

in the economy.

Subsequent to nationalisation the branch network of banks increased

tremendously. The number of branches increased from 8262 in June 1969 to more

than 60,570 in June 1992. Out of this, 57 percent were in rural areas. In 1969 it

was only 23 percent. The expansion in branch network and new techniques of

deposit mobilisation has raised the number of deposit accounts and the amount

mobilised. From a figure of Rs.4,669 crores during July 1969, the aggregate

deposits of Scheduled Commercial Banks reached Rs. 2,35,753 crores by the end

of March 1992. There was an overall growth in advances also. It increased from

mere Rs.3,599 crores to Rs.1,31,530 crores during this period.6

But nationalisation of banks was not without its drawbacks. The credit

facilities extended to the priority sector at concession rates became a burden for

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commercial banks. Credit disbursals without proper supervision led to the

deterioration in the quality of loan assets of the banks. The quality of credit assets

falls as loan sanctioning became more a mechanical process rather than credit

assessment decision.7 The loan appraisal was very little during the ‘loan melas’.

Subsidised lending to priority sectors and investment in low yielding securities

adversely affected the profitability of the banks. Due to rapid branch expansion

there was an increase in fixed costs. There was strain on the managerial resources

also. In most of the cases, the branches added more costs than returns. The quality

of service and productivity and efficiency of the banks showed a downward trend.

Inefficiency in banking sector means inefficiency in economic growth.

The root causes for the lackluster performance of banks, formed the

elements of the banking sector reforms. Some of the factors that led to the dismal

performance of banks were:

greater emphasis on directed credit;

regulated interest rate structure;

lack of focus on profitability;

lack of transparency in the banks’ balance sheet;

lack of competition;

lack of grasp of the risks involved;

excessive regulations on organisation structure and managerial resource and

excessive support from government.8

By the beginning of 90s, most of the public sector banks were unprofitable.

Nobody was bothered about the fundamental financial strength of these banks.

Many of these banks remained undercapitalised. All these factors necessitated a

review of our policy.

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THE LIBERALISATION ERA

The need for restructuring the real economy was felt in the beginning of

1990s. The negative balance of payment position in 1991 compelled the

government to introduce the liberalisation policies in external sectors, as per the

recommendations of Dr. Rangarajan Committee on economic affairs. The basic

objectives of this policy change were that, the economic activity be determined

increasingly by market forces of demand and supply, the integration of the Indian

economy with the global economy, and the gradual elimination of the elaborate

system of governmental control and regulation of different sectors of the economy.

As a result, effort to restructure banking industry was also initiated.

Further, in response to the growing and persistent inefficiencies of the banking and

financial system, the Government of India set up a nine member Committee on

Financial System headed by Shri. M. Narasimham, the former Governor of RBI,

on August 14, 1991, which was later known as Narasimham Committee I. The

terms of reference of the Committee were to examine all aspects relating to the

structure, organisation and functioning of the Indian Banking system and the

capital markets.

First Phase of Reforms

The committee submitted its report in November 1991 and it was placed

before the Parliament in December 17, 1991. Its recommendations constitute a

landmark in the evolution of banking policy in the country. It centred around

transforming Indian banking from a highly regulated to a more market-oriented

system, albeit in a phased manner. Many of the recommendations of CFS are in

line with banking policy reforms implemented by a number of developing

countries since the seventies. Its recommendations were aimed at improving the

productivity, efficiency and profitability of the banking system by providing it with

greater operational flexibility and functional autonomy in decision making and by

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infusing competitiveness and higher degree of professionalism in to banking

operations in order to achieve efficiency and effectiveness of the financial system.

Since a healthy and sound banking and financial system is a pre-requisite for a

healthy economy, many of the recommendations made by the Committee were

accepted and implemented. Really the banking sector reforms conform to the

global initiatives of the Bank for International Settlements9 in terms of micro and

macro prudential norms.

The following are the important recommendations made by the

Narasimham Committee I for making necessary reforms in the banking system as

well as in the financial system:

1. Establishment of a four tier hierarchy for the banking structure consisting of 3

or 4 large banks including the State Bank of India at the top which should be

international in character, 8 to 10 national banks with a network of country

wide branches, local banks for regional operations and rural banks at the

bottom, mainly engaged in financing agriculture and related activities.

2. The Government should announce that there would be no further

nationalisation of private commercial banks in future and private banks

should be treated at par with public sector banks. There should not be any

ban on setting up new banks in the private sector.

3. Branch licensing should be abolished and the freedom to open and close

branches be given to individual banks.

4. The Government should be more liberal in allowing foreign banks to open

more offices in India keeping in line with the foreign investment policy.

Joint ventures between foreign banks and Indian banks could also be

permitted particularly in regard to merchant and investment banks.

5. Foreign operation of Indian banks should be rationalised.

6. The statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) should

be progressively reduced to 25% and 10% respectively over a time period.

The SLR instrument should be deployed in conformity with the original

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intention of regarding it as a prudential requirement and not be viewed as a

major instrument for financing the public sector.

7. The directed credit programme should be re-examined at least in case of

those who were able to stand on their own feet. The priority sector should be

redefined to comprise the small and marginal farmers, the tiny sector of

industry, small business and transport operators, village and cottage

industries, rural artisans and other weaker sections. The target for this

redefined sector should be fixed at 10% of aggregate credit.

8. Interest rate should be further deregulated so as to reflect emerging market

conditions. Similarly, the interest rate on Government borrowing may also be

gradually brought in line with market determined rates.

9. Banks and financial institutions should achieve a minimum of 4 percent

capital adequacy ratio in relation to risk weighted assets by March 1993, of

which Tier I Capital should not be less than 50 percent. The BIS standard of

8 per cent capital ratio should be achieved by March 1996.

10. Profitable Public Sector Banks should be permitted to approach the capital

market for enhancement of their capital through issue of fresh capital to the

public. In respect of other banks, the Government could meet the shortfall in

their capital requirements by direct subscription to their capital by providing a

loan.

11. Banks and financial institutions should adopt uniform account practices

particularly in regard to income recognition and providing against doubtful

debts. In respect of doubtful debts, provisions should be created to the extent

of 100 percent of the security shortfall and loss assets.

12. With regard to income recognition, no income should be recognised in the

accounts in respect of non-performing assets.

13. An Asset Reconstruction Fund (ARF) may be established to take over from

the banks and financial institutions a portion of the bad and doubtful debts at

discounts so that they could recycle the funds realised through this process

into more productive assets.

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14. The balance sheets of the banks and financial institutions should be made

transparent and full disclosure be made in the balance sheets as recommended

by the International Accounting Standards Committee.

15. Debt Recovery Tribunals should be constituted so as to provide institutional

legal support to speed up the process of recovery of NPAs.

16. Government guidelines relating to matters of internal administration of banks

should be withdrawn so as to ensure the independence and autonomy of the

banks. Also common recruitment system for bank officers should be

abolished.

17. Greater use of computerised systems is needed to improve customer service

and control systems and for the betterment of work environment for the

employees.

So the major recommendations of the Committee are: Deregulation of

entry of new banks, Indian and foreign, deregulation of interest rates, gradual

reduction in reserve pre-emption levels, lesser emphasis on priority sector lending,

introduction of capital adequacy and prudential norms, improving accounting

practices, allowing public sector banks to access the capital market, liberalised

branch expansion policy, setting up of Asset Reconstruction Funds, greater

autonomy to public sector banks, granting autonomy in the recruitment of staff, et

al.

Second Phase of Reforms

After seven years of liberalisation, a Committee on Banking Sector

Reforms was constituted by then Finance Minister Shri. P. Chidambaram under the

Chairmanship of Sri. M. Narasimham in January 1998. The committee, known as

Narasimham Committee II, submitted its report on April 23, 1998 to the then

Finance Minister Shri. Yaswant Sinha. The Committee, which proposed to review

the Indian banking sector reforms, has reiterated many of its previous

recommendations. In the light of post-reform experience, it has also given some

new suggestions for the second phase of reforms. The suggestions in brief:

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1. The Committee suggested that pending the emergence of markets in India

where market risks can be covered, it would be desirable that capital adequacy

requirements take into account market risks in addition to the credit risks

2. In the next three years, the entire portfolio of the Government Securities should

be marked to market and there should be 5% weight for market risk for

Government and other approved securities.

3. The risk weight for Government guaranteed advance should be same as for

other advances.

4. The minimum capital to risk assets ratio (Capital to Risk Weighted Assets

Ratio – CRAR) should be increased to 10% from its current level of 8%. An

intermediate minimum target of 9% be achieved by the year 2000 and the ratio

of 10% by 2002.

5. The banks which are in a position to access the capital market at home or

abroad should be encouraged to do so.

Asset Quality, NPA and Directed Credit

6. An asset should be classified as doubtful, if it is in the substandard category for

18 months in the first instance, and subsequently for 12 months, and as loss, if

it has been so identified, but not written off.

7. The committee has noted the NPA figures do not include advances covered by

Govt. guarantees which have turned sticky and which in the absence of such

guarantees would have been classified as NPAs. The committee is of the view

that for the purposes of evaluating the quality of asset portfolio such advances

should be treated as NPAs.

8. Banks and financial institutions should avoid the practice of “ever greening” by

making fresh advances to their troubled constituents only with a view to

settling interest dues and avoiding classification of the loans in question as

NPAs.

9. No further recapitalisation of banks should be from the Government budget.

10. The banks should reduce the average level of Net NPAs for all banks to below

5% by the year 2000 and 3% by 2002. For those banks with an international

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presence, the minimum objective should be to reduce gross NPAs to 5% and

3% by the year 2000 and 2002 respectively and net NPAs to 3% and 0% by

these dates.

11. The committee has stated that cleaning up the balance sheet of banks would

make sure, only if, simultaneously, steps were taken to prevent or limit the

reemergence of new NPAs which would only come about through a strict

application of prudential norms and managerial improvement.

12. Directed credit has a proportionately higher share in NPA portfolio of banks

and has been one of the factors in erosion in the quality of bank assets. There

is continuing need for banks to extend credit to agriculture and small scale

sector. In this process, there is scope for correcting the distortions arising out

of directed credit and its impact on banks’ asset quality.

13. Within the priority sector, 10% of net bank credit is earmarked for lending to

weaker sections. A major portion of this lending is on account of Government

sponsored poverty alleviation and employment generation schemes. Given the

special needs of this sector, the current practice may continue. The Committee

recommends that the interest rates on loans under Rs. 2 lakhs should be

deregulated for scheduled commercial banks as have been done in the case of

RRBs and co–operative credit institutions.

Prudential Norms and Disclosure Requirements

14. Indian Banks should move towards international practices in regard to income

recognition by introduction of norm of 90 days in a phased manner by the year

2002.

15. RBI should consider introduction of a general provision on standard assets, say

of 1%, in a phased manner.

16. In the case of all future loans, the income recognition and asset classification

and provisioning norms should apply even to government guaranteed advances

in the same manner as for any other advances.

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17. There is need for disclosure, in a phased manner, of the maturity pattern of

assets and liabilities, foreign currency assets and liabilities, movements in

provision account and non-performing assets.

18. Banks should also pay greater attention to asset liability management to avoid

mismatches and to cover, among others, liquidity and interest rate risks.

Structural Issues

A weak bank should be one whose accumulated losses and net NPAs

exceed its net worth or one whose operating profits less its income on

recapitalisation bonds is negative for three consecutive years. A case by case

examination of the weak banks should be undertaken to identify those which are

potentially revivable with a programme of financial and operational restructuring.

Such banks could be nurtured into healthy units by slowing down on expansion,

eschewing high cost funds/borrowings, judicious man power deployment, recovery

initiatives, containment of expenditure etc.

The policy of licensing new private banks may continue and foreign banks

may be allowed to set up subsidiaries or joint ventures in India with the same

capacity of other private banks and subject to the same conditions with regard to

branches and directed credit as in these banks.

Functional autonomy with accountability within the framework of

purposive, rule bound, non-discretionary prudential regulation and supervision, is a

prerequisite for operational flexibility and for critical decision making. Capital

enhancement also becomes a necessity for public sector banks. So public sector

banks should be encouraged to go to the capital market to raise capital.

Simultaneously, the minimum shareholding by Government/Reserve Bank in the

equity of the nationalised banks and the State Bank should be brought down to 33

percent. This will raise their functional autonomy and enhance the effectiveness

and efficiency of the system.

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Regulation and Supervision

To improve the soundness and stability of the Indian Banking system the

regulatory authorities should make it obligatory for banks to take into account risk

weights for market risks. The regulatory concerns should ensure transparency and

credibility particularly as we move into a more market driven system where the

market should be enabled to form its judgement about the soundness of an

institution.

An integrated system of regulation and supervision should be put in place to

regulate and supervise the activities of banks, financial institutions and non-bank

finance companies under Board for Financial Regulation and Supervision (BFRS)

to make this combination of functions explicit. The BFRS should be given

autonomy and statutory powers and it should be separated from RBI. However,

the Governor, RBI should be head of the BFRS.

IMPLICATIONS OF REFORMS (PROGRESS)

Reforms began with the implementation of many of the recommendations

made by the Narasimham Committee I and II. Some of them were implemented in

a phased manner.

Removal of Entry Barriers /Deregulation of Entry of New Banks

To promote competitiveness in the banking sector, the industry was opened

for private banks and foreign banks. Indian banks were allowed to enter into joint

ventures with foreign banks and foreign banks were also permitted to set up either

branches or subsidiaries in India. In January 1993, RBI had issued guidelines for

issuing licenses to new banks in the private sector. Private banks such as UTI

Bank, Global Trust Bank, ICICI Bank, IDBI Bank, HDFC Bank, Centurion Bank,

Times Bank and Indus Ind Bank came into operation with minimum equity capital

of Rs. 100 crores and also made public issues for raising additional capital .

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Based on the experience gained on the functioning of new private sector

banks, revised guidelines were issued in January 2000. Following are the major

revised provisions:

a. Initial minimum paid up capital shall be Rs.200 crores which will be raised to

Rs.300 crores within three years of commencement of business.

b. Contribution of promoters shall be a minimum of 40 percent of the paid up

capital of the banks at any point of time. This contribution of 40 percent shall

be locked in for five years from the date of licensing of the bank.

c. While augmenting capital to Rs.300 crores with in three years, promoters

shall bring in at least 40 percent of the fresh capital which will also be locked

in for five years.

d. NRI participation in the primary equity of a new bank shall be to the

maximum extent of 40 percent.10

Deregulation of Interest Rates

The interest rate regime prior to 1992 was closely administered by the

Reserve Bank. As against this, the banking sector now operates in a deregulated

environment. Now there is total deregulation of the rates on deposits and almost

total deregulation of the lending rates. With this deregulation of interest rates,

banks now have more freedom in their operations. The concessional rates of

interest on the priority sector lending have been allowed on loans upto Rs. 2 lakh

and export credit loans. The general rates of interest based on prime lending rates

will be applicable for higher credit amounts. Interest rate slabs have been reduced

from twenty to three. Prime Lending Rate (PLR)11 of banks for commercial credit

is now decided by the banks themselves and is not set by the Reserve Bank of

India. In order to keep transparency, banks are required to announce their prime

lending rates and also their range of effective lending rates. Selective Credit

Controls have also been abolished during this period. Now the country has a

liberalised credit allocation mechanism and reduced direct control over interest

rates by the monetary authorities.

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Through its monetary policy for the first half of 2001–2002, Reserve Bank

has allowed banks to lend below their PLRs to credit worthy borrowers, including

public enterprises, for loans above Rs. 2 lakhs. The Reserve Bank has also given

flexibility to banks to attract fixed deposit from senior citizens at higher rates. But

the Reserve Bank continues to fix interest on saving accounts (3% at present) and

issues guidelines on non-resident deposits from time to time.

Reduction in Pre-emptive Reserves

In the pre-reforms period banks were required to maintain high levels of

cash and liquid reserves. This helped the government in financing its fiscal

deficits. But banks had to maintain huge funds in the form of CRR and SLR. The

RBI reduced SLR and CRR substantially to increase the lendable resources at the

disposal of banks, thereby enhancing their profitability. SLR has been reduced to

the 25 percent statutory limit in October 1997. CRR is also being reduced in a

phased manner to finally reach its statutory limit of 3 percent. With reduced SLR

and CRR, banks got sizeable resources for more remunerative deployment.

Prudential Norms

A milestone measure in the financial sector reforms is the introduction of

prudential norms to strengthen the banks balance sheet and enhance transparency.

The prudential norms are in the areas of income recognition, asset classification,

provisioning for bad and doubtful debts and capital adequacy. The income

recognition norms are intended to depict a true picture of the income and

expenditure of the bank. The asset classification and provisioning norms are

intended to assess the quality of the asset portfolio of the banks. The capital

adequacy (which is based on the classification of assets) is intended to check

whether the banks are in a viable position to meet any contingencies due to a

decline in the quality of asset.

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According to new norms of income recognition, commercial banks could

take into account interest income only when it is actually received, and not when it

is accrued. Earlier banks had the freedom to account accrued interest as income in

the profit and loss account.

Likewise as per the new norms of provisioning, it is to be made on the basis

of classification of assets into four different categories, viz., standard assets, sub–

standard assets, doubtful assets and loss assets. The provisioning requirement

ranges from 10 percent to 100 per cent, depending on the category of the asset.

Banks have now been given a clear definition of what constitutes a non-

performing asset, and it is also tightened over time. Banks are classifying a loan as

NPA after 90 days of loan non-performance from fiscal 2004 – 2005 (for details

refer Chapter IV).

Capital Adequacy

Based on the risk weighted assets of the banks, the prudential norms

prescribe the minimum capital to be maintained. It is the ratio of capital to risk

weighted assets. In April 1992, The RBI introduced the Capital to Risk Assets

Ratio (CRAR) system for banks, including foreign banks, in India. Under the new

system, risk weights were assigned to balance sheet assets, non-funded items and

other off-balance sheet exposures according to the prescribed percentages.

Initially in April 1992, the BIS (Bank of International Settlements) standard of 8

percent capital adequacy laid by Basel Committee I was accepted. Later in tune

with recommendations of Narasimham Committee II the RBI has revised the

CRAR norm from 8 percent to 9 percent with effect from 31st March 2000 and

from 9 percent to 10 percent with effect form 31st March 2004. Achievement of

capital adequacy is expected to strengthen the financial soundness and stability of

banking system, while keeping them in line with International Standards.

By amending Banking Companies Act in 1994, permission has been given

to public sector banks to mobilise capital from the market up to 49 percent of their

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capital, a policy change of gradual privatisation of PSBs. Many public sector banks

have already accessed the capital market for their Tier I Capital. Though State

Bank of India went to public in 1993, Oriental Bank of Commerce was the first

nationalised bank to enter the capital market with this policy change. Private sector

banks also approached the capital market for their Tier I and Tier II Capital during

this period.

Phasing Out of Directed Credit Programme

Committee recommended that the priority sector should be redefined and

the target for this sector should be fixed at 10% of aggregate credit, subject to

taking a review after three years. The redefined priority sector comprises the small

and marginal farmer, the tiny sector of industry, small business and transport

operators, village and cottage industries, rural artisan and other weaker sections.

But the Government has decided not to reduce the level of priority sector lending

from 40%. But the priority sector definition has been enlarged to include certain

categories of advances which were hitherto not part of priority sector, such as

housing finance and tourism, software and venture capital. Moreover, banks which

are not able to attain the priority sector lending targets are allowed to place the

money under the Rural Infrastructure Development Fund (RIDF)

Transparency of Accounts

To provide a realistic picture of the financial position of the banks,

transparency of accounts is required. For that the committee recommended that the

format of bank balance sheet and profit and loss account should be modified in

such a manner that the bank balance sheets should disclose more information. RBI

and Government have modified the formats with effect from March 1992 and

banks are preparing their balance sheets as per the new formats. Later additions

such as break up of capital adequacy ratio, provisions made for the year, NPA

percentage etc were introduced. Now banks have to disclose 7 critical ratios

relating to productivity and profitability through annual reports.

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Relaxation in Branch Licensing Policies

Banks were given greater freedom to rationalise their existing branch

network by relocating branches and opening of new branches. Non-profitable

branches can be closed as per this rule. It is necessary to remain in a viable size as

in the post-reform era, banks are facing severe competition from other financial

institutions and non–banking finance companies. Banks are now expanding their

network into potential areas where low cost deposits are available. The potentiality

of other fee based services is also taken into consideration.

Recapitalisation

The experience of bank recapitalisation in several parts of the world has

demonstrated that the exercise of recapitalisation does not necessarily prevent

banks from getting into trouble again........ Recapitalisation of weak banks using

public money is also a costly and unsustainable option, in view of the increasing

strains on the government exchequer.12 Even then the government has

recapitalised nationalised banks using public money.

Up to 1992–93 an amount of Rs.4000 was utilised for recapitalising 19

nationalised banks. The budget for 1993–94 made a provision of Rs.5700 crores

for recapitalisation of nationalised banks, subjecting the banks to ‘time–bound’

performance obligations. The government contribution was intended to be invested

in special 10 percent Recapitalisation Bonds, 2006. In 1994–95 the budget

provision towards recapitalisation of nationalised banks was Rs.5287.12 crores.

Out of this a sum of Rs. 4362.54 crores was allocated to 13 nationalised banks as

Tier I capital and Rs. 924.58 crores as Tier II capital to 6 nationalised banks.

In 1995–96 the Government provided a sum of Rs.850 crores and in

1996–97 Rs.1509 crores towards recapitalisation of nationalised banks. In

1997–98 a sum of Rs.2700.00 crores and in 1998–99 a sum of Rs. 400.00 crores

were released by the government with this purpose. Thus the total contribution of

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Government of India towards recapitalisation of public sector banks in the six

years, 1993–94 to 1998–99, amounted to Rs. 20446.2 crores.

In addition to recapitalisation of weak banks, the government has provided

an amount of Rs. 6334.44 crores towards writing down the capital base of eleven

banks for adjustment of their losses. Even after this many banks remained under-

capitalised. In this context, Government has allowed PSBs to raise fresh capital

from the market by amending Banking Companies Act to reduce the minimum

shareholding of Government to 51 percent.

OTHER DEVELOPMENTS: AN OVERVIEW

Technology in Banks

Technology has become the rule of the day the world over. Across the

world, sophisticated software applications and advances in telecommunications

have interacted with rapidly improving hardware technology to profoundly alter

management process and the manner in which products and services are

manufactured and distributed. This process has also resulted in a dramatic increase

in productivity, which is necessary to achieve a sustained increase in real income

and standard of living .13 Indian Banking Sector has also been one sector which

has undergone fundamental changes due to the application of information

technology. The new technology has rapidly altered the traditional ways of doing

banking business.14

Information and Communication Technology has become integral part of

banking in India. By taking advantage of technology, banks are able to develop

required management information systems (MIS) that would help in taking

scientific decisions. In banking, where customer service is most important, the

quickest way of servicing them is through computers and technology. Banking

technology is evolving rapidly in five key areas of convenience – in product

delivery and access, managing productivity and performance, product design,

adapting to market and customer needs, and reducing throughput time.15

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Quick investment decisions are possible speedily and accurately by

collecting and transmitting meaningful information. This will result in more

spreads to the banks. For this, on line inter-connectivity is necessary. According to

bankers, technology can substantially bring down the menace of non-performing

assets plaguing the banking system.

The availability of information and communication technology has

radically altered the traditional way of banking. IT is used now, not only to

automate back-offices and handle voluminous work, but it is also used for fast

delivery of services as per a customer’s convenience.16 Banking has now shaped

into electronic banking or virtual banking or E-banking. E-banking means delivery

of banking services through electronically equipped channels. It is the use of

electronic channels to communicate and do business transactions with both domestic

and international customers primarily using the Internet and the World Wide Web.

Technology savy banks, private and public, are one step forward in

introducing different technology based products to sustain existing customers and

attracting new customers. It enables bankers’ cross-selling of products like

insurance, money market and other financial products. Decision support systems

like data warehousing, MIS and business intelligence and online trading and

settlement are common features of this upgradation. Moreover, this enables Indian

banker to go beyond boundaries – across the globe – with confidence.

The beneficial impact of modern day technology in services to customers is

manifold. Possibility of transacting from any branch (anywhere banking), easy

collection, remittances and fund transfers, 24 hours/7 days banking through ATMs

and Internet banking, automated standing instructions, browsing of bank web sites

for different information, fund transfer to other banks through EFT and RTGS

facility, submission of different statements to and from banks, utility bill payments

etc. are some of the benefits available to customers now. Biometric ATMs and

mobile ATMs are new developments in this area. Biometric ATMs will do away

with the need for PIN number by using thumb impression for identification and are

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particularly easy to use for the rural and uneducated masses. These technology

intensive delivery channels have improved the quality of service to customers.

Now there is ‘convenient banking’ with speed and perfection.

Centralised Online Real-time Electronic Banking (CORE Banking)

Under the computerised branch system the database of the branch remains

with the branch itself. Processing of transactions and generation of reports are also

done at the branch level. There is no centralized database linkage between

branches. This stand-alone-architecture hinders offering of advanced tech-based

banking services to customers. This drawback can be overcome by a new

centralized system called “CORE Banking Solution” (CBS), in which the database

of all branches are centralised at one place. Processing of transactions and report

preparation are centralised at one place.

The introduction of CBS in many banks has enhanced banking services in a

visible manner. The customers of a bank branch now become the customers of the

whole bank and avail the facility of “anywhere, anytime” banking. With the speed

and accuracy of the transaction processing, money transfers, remittances, and local

and national clearing, banks are able to do more transactions with reduced costs.

Thus, CBS coupled with ATM network and Internet Banking and RTGS gives the

customer the facility of doing business with the bank round the clock without

visiting the bank’s branch.17 The CBS, which is operating on a centralised data

and information reservoir, has the ability to convert a branch customer into a bank

customer and thereby make it possible to process many hitherto distributed

banking activity into centralized activity. Banks are coming up with outlet,

Centralised Processing Centres, where all loan processing, renewal and

documentation for all branches are done, leaving branches free for marketing and

business of cross-selling.18 Now cheque clearing becomes easy as in all service

branches information regarding an account like balance, copy of signature etc., are

available on the screen itself, and cheques need not travel to the branches for

payment.

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Cheque Truncation System

Banks worldwide spend millions of dollars each year for processing and

clearing cheques. Cheque truncation system and the use of E-cheques are the easy

solution to this high-cost cheque processing. Cheque truncation system is an online

image-based cheque clearing system where the cheque images and the Magnetic

Ink Character Recognition (MICR) data are captured at the collecting/presenting

bank and transmitted to a central server/service bureau. Electronic image, as

inward data, available from service bureau, will be used for payment processing by

the paying banks instead of having to collect the physical cheques from the

clearing house. This inward data can then be used for verification of information

including signature. The payment is also done through online.

Real Time Gross Settlement System (RTGS)

A payment system which operates a gross settlement system in which both

processing and final settlement of fund-transfer instructions can take place

continuously (i.e., in real time) is known as Real Time Gross Settlement System.19

It is

a systematically arranged centralised system in which inter-bank payment instructions

are settled instantly. This system facilitates finance settlement of inter bank fund

transfers on a continuous, transaction-by-transaction basis throughout the processing

day. The Reserve Bank of India introduced this system in India during the year 2004.

It has been intended to provide instant payment to the customers wishing to pay in

different centres. As a result of operation of the RTGS, clearing of funds of different

transactions are cleared and settled on a minute-to-minute basis, unlike at the end of

the day or next day. With the extension of RTGS throughout the banking system,

Reserve Bank intends to put in place an integrated payment system for the Indian

financial system. Eventually, it will serve as an effective risk control strategy. The

long term objective of RTGS is to dispense with instruments like demand drafts and

pay orders and make available the system for retail fund transfers between individuals

and banks.20

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Kerala based Federal Bank is the first bank in the country to implement

RTGS facility in its all branches. But, according to a report in March 2007, the real

situation in Indian banks is not up to the level of expectation. While the RTGS

platform created by RBI has enough capacity to handle upto one lakh transactions

daily, the actual use is 15,000. Of this 13,000 related to inter-bank deals. It is only

the foreign and private banks which account for bulk of the 2000 non-bank

transactions. PSU banks have simply not created awareness about this platform

despite the fact that the RTGS brings not just a technologically advanced product,

but is available across 28,000 branches covering as many as 3,200 Indian cities and

towns.21

Bancassurance in India

Bancassurance, a French term, in its simplest form means the distribution of

insurance products through a bank’s established branch network. In concrete terms

bancassurance describes package of financial services that can fulfill both banking

and insurance needs at the same time.22 The convergence of banking and insurance

is occurred in Bancassurance i.e., it is an arrangement where banks and insurance

companies combine together for mutual benefit. Commercial banks can use their

wide branch network to sell all types of insurance products and services to their

traditional customers, whose database is available with the bank. Insurance

companies, on the other hand, design complex financial products which are

attractive to customers such as retirement funds or single premium insurance

policies. Bancassurance, also known as 'Allfinanz' or 'one-stop financial shop’,

takes different forms in various countries depending upon the demography and

economic and legislative climate of the concerned country.

The motives behind bancassurance vary. For banks it is a means of product

diversification and a source of additional fee income. Insurance companies see

bancassurance as a tool for increasing their market penetration and premium

turnover. The customer sees bancassurance as a bonanza in terms of reduced price,

high quality product and delivery at doorsteps.

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In India, banks have been permitted to enter into insurance business after

the enactment of the Insurance Regulatory and Development Authority (IRDA)

Act in 1999. This Act opened up the Insurance Sector for private participation

with foreign insurance companies with a maximum of 26% capital investment.

Simultaneously, Reserve Bank of India prescribed certain norms for entry of banks

in to the insurance business, including obtaining its prior approval. Certain

modifications were made in these norms through the Monetary and Credit Policy

for the year 2000-2001. The norms prescribe banks having minimum net worth of

Rs.50 crores and satisfying capital adequacy, profitability, NPA level and the track

record of the performance of the subsidiaries can undertake insurance business

through joint venture with risk participation. Others which are not eligible can

participate up to 10% of their net worth or Rs. 50 crores in an insurance company.

But insurance products can be distributed as authorised agents by any scheduled

commercial bank or its subsidiary by a simple marketing tie up with Insurance

Company.

Initially, many banks entered it as a defensive strategy assuming that entry

of insurance companies would erode their market share. However, later they

realised that they can increase their non-interest income by allowing insurance

companies to use their resources as customer databases, retail network, etc.23 The

major bancassurance partnerships in India are shown in Table 2.1

Table 2.1

Bancassurance Partnerships

Insurance Company Banks

New India State Bank of India, United Western Bank, Corporation

Bank.

United India Punjab National Bank, Andhra Bank, Indian Bank, State

Bank of Patiala, Federal Bank, South Indian Bank,

Dhanalaxmi Bank, State of Indore State Bank of

Travancore, State of Hyderabad, Syndicate Bank.

Royal Sun Alliance Citibank, ABN Amro, Standard Charted.

Bajaj Allianz American Express, Repco Bank, Karur Vysya Bank

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National Insurance J & K Bank, Bank of Rajasthan, Bank of Punjab etc.

TATA AIG HSBC, IDBI, Development Credit Bank, Orissa State Co-

operative Bank

ICICI Lombard ICICI Bank, Federal Bank

HDFC Standard Union Bank of India, Indian Bank, HDFC Bank

ICICI Prudential Federal Bank, ICICI Bank, Bank of India, Punjab and

Maharashtra Cooperative Bank, Allahabad Bank, South

Indian Bank, Citibank.

Birla SunLife Citibank, Deutsche Bank, IDBI Bank, Development Credit

Bank, Bank of Rajasthan, HSBC.

Tata AIG HSBC, Citibank, IDBI bank

SBI Life SBI, BNP Paribas

ING Vysya Vysya Bank

Allianz Bajaj Slandered Chartered Bank, Syndicate Bank, Centurion

Bank.

MetLife Dhanalakshmi Bank, J & K Bank, Karnataka Bank.

Aviva ABN Amro, American Express, Canara Bank, Lakshmi

Vilas Bank

LIC Corporation bank, Oriental Bank of Commerce, Nedungadi

Bank, Central Bank of India, Indian Overseas Bank and

Bank of Punjab.

Oriental Insurance Oriental Bank Of Commerce, Dena Bank

Kotak Mahindra Ins.co. Dena Bank.

Source: Different sources

Consolidation in the Banking Sector

Consolidation means “unite” or “combine” to strengthen the business. It is

a form of business organisation established by the outright purchase of the

properties of all the constituent or member organisations and the merging or

amalgamating of such properties into a single business unit.24 The New single

business unit is surely more powerful than the members organisations in every

respect. This is a globally accepted concept, and banking industry is not an

exception to this.

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The first Narasimham Committee Report, in view of the global trend for

consolidation, recommended mergers and acquisitions to create a four tier banking

structure in India, subject to synergies and locational business complementarities.

(3–4 large banks with global presence, 8–10 national banks and finally local banks

and rural banks). Khan Committee in 1997 recommended mergers of banks and

DFIs, subject to voluntary decisions of management and shareholders. The second

Narasimham Committee reiterated its earlier recommendation. The consolidation

among strong banks will raise their strength and improve the value to the

stakeholders including shareholders, employees, depositors and borrowers.

Although, the merger of two banking cultures involves time and patience, the

benefits of greater reach, economies of scale and lower intermediation costs are

competitive advantages worth pursuing.25

Table 2.2

Bank Mergers since Reforms in 1992

Banks Merged Merged/Amalgamated with Year

New Bank of India Punjab National Bank 1993

Bank of Karad Ltd. Bank of India 1994

KashiNath seth Bank Ltd. State Bank of India 1996

Bari Daob Bank Ltd. Oriental Bank of Commerce 1997

Punjab Co–op. Bank Ltd. Oriental Bank of Commerce 1997

20th century Finance Ltd. Centurion Bank Ltd. 1998

Barcilly Corporation Bank Ltd. Bank of Baroda 1999

Sikkim Bank Ltd. Union Bank of India 1999

Times Bank Ltd. HDFC Bank Ltd. 2000

Bank of Madura Ltd. ICICI Bank Ltd. 2001

Banaras State Bank Ltd. Bank of Baroda 2002

Nedungadi Bank Ltd. Punjab National Bank 2003

South Gujarat Local Area Bank Ltd. Bank of Baroda 2004

Global Trust Bank Ltd. Oriental Bank of Commerce 2004

IDBI Bank Ltd. IDBI Ltd. 2005

Bank of Punjab Ltd. Centurion Bank of Punjab Ltd. 2005

Lord Krishna Bank Ltd. Centurion Bank of Punjab Ltd. 2007

Centurion Bank of Punjab Ltd. HDFC Bank 2008

Source: Different Sources

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The Securitisation and Reconstruction of Financial Assets and Enforce-

ment of Security Interest Act, 2002 (SARFAESI Act, 2002)

Filing cases against the borrower in the Civil Courts or in the Debt

Recovery Tribunals (DRTs) which were set up under the Recovery of Debts Due to

Banks and Financial Institution Act, 1993, was the only step followed by banks

and financial institutions to recover their dues or non-performing assets. But, as

the judicial process was a lengthy one, DRTs were not in a position to dispose of

most NPA cases. For helping banks and financial institutions in the speedy

recovery of NPAs, the Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002, came into existence. This Act has

gone a step in the direction of enforcing lender rights.26

As per the Act banks and financial institutions have the power to directly

enforce the security interest on pledged assets without going through the judicial

process of the Civil Courts or the DRTs. Along with that they have the option to

approach the DRT simultaneously for the recovery of the NPAs. But the Act is not

applicable against agriculture land as security or where dues are less than 20% of

principal amount and interest thereon.

If the banks apply the Act they have the right either sell off/ auction off the

financial assets or directly sell the financial assets usually at discounted prices, to

Securitisation Companies or Asset Reconstruction Companies (ARCs) in exchange

of bonds or debentures as payment. Now it is the turn of the ARCs to recover the

assets from the borrower and dispose it off. In India, banks are very enthusiastic in

enforcing this Act for the recovery of bad loans. It will lead to the reconstruction

of hitherto decaying financial assets, a large number of which are sick industrial

units, which will give a great boost to the overall health of the economy.27

Corporate Governance in Banks

In the context of liberalisation and globalisation financial stability can be

assured only through a strong regulation and supervision mechanism, competent

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leadership and market discipline. In this background, Basel Committee and

Narasimham Committee mentioned that it is the responsibility of the banking

supervisors to ensure effective corporate governance in the banking industry.

Corporate governance brings in accountability in terms of performance,

transparency in operations and aims at retaining the confidence of share holders,

customers, employees and other stakeholders. By definition, corporate governance

is a “system by which companies are directed and controlled”, thus placing the

Board of Directors of a company in the centre of the governance system.28 The

basic elements of corporate governance comprise capable and experienced

directors, efficient management, clear corporate objectives, business plan and

clearly defined responsibility and accountability.

From the perspective of banking industry, corporate governance also

includes in its ambit the manner in which their boards of directors govern the

business and affairs of individual institutions and their functional relationship with

senior management.29 In the Indian context the Board of directors is expected to

initiate efficient working by following sound practices, taking strategic decisions

and avoiding conflicts among different stake holders. The objective of good

corporate governance in Indian banking is to make them socially and economically

responsible for the health of the nation.30 So, Corporate Social Responsibility

(CSR) also come as part of this aspect.

SEBI has instructed the companies listed in the stock exchanges to practice

certain corporate governance principles. As per SEBI guidelines, companies should

publish mandatory information regarding composition of board of directors, Audit

committees, annual/half yearly/ quarterly results etc. Reserve Bank of India on its part

directed the banks to appoint experts and independent directors in the Board, bring

about more transparency in balance sheets, appoint more meaningful and constructive

audit committees, and introduced a self-evaluation system for the Board. In the case

of public sector banks, higher operational flexibility has been given to Board of

Directors. Empirical research studies found improvement in the efficiency of Indian

Banks due to this.31

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Banking Ombudsman Scheme

Deficiency in banking services has been a major complaint against commercial

banks in India. For the redressal of grievances of customers, a system known as

Banking Ombudsman scheme was notified by the Reserve Bank of India in 1995. The

scheme has been initiated to establish a system of expeditious and inexpensive redress

of customer complaints. Under the scheme, an ombudsman, appointed by Reserve

Bank, takes steps to solve the complaints of a customer according to the provisions in

the scheme. The scheme covers all commercial banks and scheduled primary co-

operative banks. The scheme was revised later, first in 2002 and then in 2006. At

present there are 15 Banking Ombudsmen at 15 centres covering the entire country.

The latest amendment of the scheme has widened the scope of authority and functions

to cover various banking services like loans and advances, credit cards, delays in

issuing cheques and DDs, and also ATM operations. The Banking Ombudsman

would act as the arbitrator for all disputes not exceeding Rs.10 lakh.32

Financial Inclusion

There are complaints against commercial banks that they exclude rather

than attract vast sections of population, in particular low income people. Such

excluded groups include women, small and marginal farmers, artisans and small

entrepreneurs, those employed in the unorganised sector, the self-employed and the

pensioners. As privileged organisations commercial banks have the duty to provide

banking services to all segments of the population on equitable basis. Considering

this view, the Governor, Reserve Bank of India in the Annual Policy statement

2005–06 announced initiatives to encourage greater degree of financial inclusion in

the country. 33 Financial Inclusion means extending the reach of the financial

sector to sections of the society as well as to geographical regions that were

neglected in the past.34 With this purpose, since November 2005 all banks need to

make available no-frills account either with ‘zero’ balance or very low minimum

balance to vast sections of population. The charges also would be very low or nil

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in those accounts. The future would focus on financial inclusion of all sections of

the society into banking stream through no-frills banking or mass banking.

On an all India basis almost all banks have come out with no-frills accounts

for financial inclusion of the masses. In this connection many relaxations are

allowed in know your customer (KYC) norms. All individuals who are eligible to

open normal savings accounts can now open no-frills accounts with a minimum

balance of Rs.5. Pass book and cheque book will be provided to account holders.

In Kerala, Palakkad District became the first district in the country to achieve

cent percent financial inclusion in September 2006. Every household in Palakkad

district has a savings account and access to credit through General purpose Credit

Cards (GCCs).35

In continuation of this, in September 2007 Kerala attained the first

‘Total Banking State’ status with the attainment of at least one bank account in every

household. This coveted goal was achieved through a massive campaign by all the

banks – including those in the co-operative sector – with the total involvement of

people’s representatives and other agencies.

The Result: 36

Total No. of SB Accounts opened : 12,70,331

Of which ‘No frills’ accounts opened : 8,70,463

No. of GCCs issued during the campaign : 48,885

No. of households covered under the campaign: 11,82,476

Coverage of households : 100%

Committee on Financial Sector Reforms headed by Dr. Raghuram Rajan

The Planning Commission has set up a Committee on Financial Sector

Reforms, chaired by Dr. Raghuram Rajan, Professor, University of Chicago

(former IMF Chief Economist). The Committee in its draft committee report

published on 7th April 2008 suggested a set of measures to improve financing to

poorer sections of the population and to big business, to strengthen financial

stability and foster growth. It suggested a number of steps to reform public sector

banks also. It proposed creation of stronger boards for public sector banks. It

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recommended performance bonuses and greater pay for directors, and delinking of

banks from government.

Another proposal of the committee was that large PSBs should create

financial holding companies with the bank and other financial firms as subsidiaries

to realise economies of scope from providing multiple financial services. The

holding company should sell more shares to the public to raise capital for growth.

For that, the committee recommended government holding below 50 percent.

The committee recommended abolition of branch and ATM licensing

policy immediately so as to give complete freedom to banks regarding the decision

as to where to open branches and how many. Encouragement of consolidation

among banks and entry of new banks also came as recommendations of the

committee. The committee observed that creation of small finance banks would

increase financial inclusion by reaching out to poorer households and local, small

and medium enterprises. In a pragmatic way, it quips that “instead of forcing credit

to household that could thereby become heavily indebted, the focus should be on

making them creditworthy so that when opportunities arise, they have access”. 37

Conclusion

The reforms in the banking sector have opened the window of opportunities

for the Indian banks. In the post-reform period banks have greater autonomy in

delivering their services. However, in the era of competition there are three crucial

driving forces which will determine banks’ profitability and viability. These are –

a) Product differentiation;

b) Deregulated interest rates and

c) Internationalisation of banking services.38

In the micro level for their profitability and long run sustainability the aspects to be

considered are quality of assets, effective asset/liability management and quality of

service to their customers. Taking into account these factors, most of the Indian banks

have adopted suitable organization structures, increased the role of information

technology and redesigned their product portfolios.

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REFERENCES

1. Nair, Manju S., Changing Role of Services Sector: A Study on Policy Impact

on Banking Sector, unpublished Ph.D. Thesis, Kerala University, 2001

2. In India as well as in other emerging economies the banking system is better

equipped to protect the saving class because of its superior database about the

borrowers. Perhaps the most important reason for its dominance is that the

household sector which contributes the most to gross domestic savings has

been showing a marked preference for bank deposits. According to the RBI,

between 2001 and 2006, out of every Rs.100 saved by this sector, bank

deposits accounted for almost Rs.41. while barely Rs.3.2 went into shares,

debentures and mutual fund instruments – The Hindu, Editorial, Monday,

June25, 2007.

3. Patil, R.H., “Contemporary Banking: Competition and Markets”, in Jadhav

Narendar, (ed), Challenges to Indian Banking: Competition, Globalisation

and Financial Markets, Delhi, Mac Millan (I) Ltd, 1996, P.103.

4. Nandi, Sukumar, Growth, Financial Cycles and Bank Efficiency – A Study of

the Indian Money Market, Mumbai, Business Publications Inc. 1998, P.35

5. Ibid

6. Statistical Tables Relating to Banks in India, RBI, Bombay.

7. Ravikumar, T., (Ed.) Indian Banking – An overview: Indian Banking in

Transition – Issues and Challenges, New Delhi, Vision Books, 2000.

8. Ibid.

9. The Bank of International Settlements (BIS) which was setup in 1930 and

located in Basel, Switzerland was the principal centre for international

cooperation among the Central Banks in Europe. Later it became the secretariat

for the BASEL Committee on Banking Supervision (BCBS), which came into

operation in 1974. The committee has recommended many minimum standards

for banking regulation and supervision. These standards as best International

Practices have been accepted by member countries and more than 120 other

countries.

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10. Sury, M M, INDIA: A Decade of Economic Reforms, 1991–2001, Delhi,

New Century Publications, 2001, P. 138.

11. Prime Lending Rate (PLR) means the rate of interest which a bank charges on

advances given to its prime/best borrowers. Other borrowers depending on

their creditworthiness or the purpose of advance are charged prime lending

rates plus a certain percentage of interest.

12. Report on Trend and Progress of Banking in India, 2000–01, RBI.

13. Kumar, Narendar and Kumar, Mohan, “Bank Computerisation in India – A

Backdrop”, Banking Finance, Vol. XVIII No. 2, Feb. 2005, P. 5.

14. Kapila, Raj and Kapila, Uma, “Ongoing Developments in Banking and

Financial Sector”, Banking Finance, Vol.4, March 2000, P.8.

15. Kumar, R. Deepak, Technological Developments in Banking – in Ravi

Kumar T.(ed), Indian Banking in Transition –Issues and Challenges, Vision

Books, New Delhi, 2000.

16. Rawani, A.M. and Gupta, M.P., “Information Technology Initiatives in

Indian Banking Sector”, Paradigm, Vol. 4 No.1, Jan-June 2000, P. 129.

17. Bhattacharya, Ashok, “Technology in Banks: A Strategic Resource”,

Chartered Financial Analyst, October 2006. p. 42.

18. Ibid.

19. Shetty, K. Shanker, Indian Banks Towards 2020, Bangalore, K. Shanker Shetty,

2006, P. 46.

20. Ibid.

21. Leeladhar, V., quoted in “Dull RTGS Irks RBI”, The Economic Times,

Thursday 22nd March, 2007

22. Kulshrestha, Laxmi Rani and Kulshrestha, Anuja, Reformation of Marketing

Strategy :Insurance Sector, SAJOSPS, Vol.4 No.1, July-Dec.2003, P.61.

23. Jutur, Sharath, “Bancassurance: Indian Scenario”, Chartered Financial Analyst,

August 2004, p.42.

24. Sivaloganathan, K., “New Dimensions of Indian Banking Industry, Banking

Finance”, March 2005, Vol XVII No.3, p.17.

25. Ibid.

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26. Singh, TMN, “Efficiency of the Securitisation Act in NPA Management”,

Urban Credit, September 2003, Vol.XXV, No.3, p. 29.

27. Kumar, Narendra, “The Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002”, IBA Bulletin, May 2003,

Vol.XXV, No.5, p.10

28. Subramanian, N., Corporate Governance Imperatives in Banks, IBA Bulletin,

Sept. 2004, vol.XXVI, No.9, p.31

29. Lakshminarayanan, P., Corporate Governance in Banks, IBA Bulletin, July

2004, Vol.XXVI No.7, p. 16.

30. Rao, Prabhakara, Indian Banking in 2010, IBA Bulletin Special Issue, Vol.

XXVI No.1, January, 2004, p.172.

31. Lakshminarayanan, P., loc. Cit.

32. Satish, D., “Indian Banking: Towards Fair Practices”, Professional Banker,

August 2006, vol. VI, No.8, p. 60.

33. As per RBI statistics, on an all India basis, only 59 per cent of adult

population has bank accounts. Only 39 per cent of rural adults have access to

accounts while it is 60 per cent in urban areas. Further, only 14 per cent have

loan accounts on an all India basis while it is just 9.5 per cent in rural areas.

34. Challenges of Financial Inclusion, The Hindu, Monday, July 2, 2007

35. The Economic Times, Wednesday, 17 June, 2007.

36. Report of SLBC, Trivandrum, 24th December, 2007.

37. Srinivasan, G., “Taking ‘a hundred small steps’ to ensure financial

inclusion”, The Hindu-Business Line, Thursday, April 20, 2008.

38. Indian Banking – an Overview: Ravikumar,T. (Ed.) Indian Banking in

Transition: Issues and Challenges, New Delhi, Vision Books, 2000.