Indian Banking Sector Reforms – A Glimpse

By -

Prof. Mallikarjun Bali

BLDEA’s VP Dr. P G Halakatti College of Engg & Tech.,

Bijapur

Today, 60% of India’s population does not have a bank account

About 90% of small business houses have no link with formal lending institutions

Gross NPA’s of banking sector crossed 4% of total advances. If re-structured loan is considered, it may cross 10% of total advances. In absolute terms, it is around 10 lakhs crore

The country has 87 scheduled commercial banks as on 31st May 2013. Of this, 26 are PSB’s, 20 are Private banks and 41 are Foreign banks.

Only 41 banks are listed with stock exchanges

Share of PSB’s in deposit is around 78%, and in advances is about 76%.

None of the Indian banks figured in the top 50 Global banks

China has 4 banks in the top 10 banks of the world.

Country has 30 state & 370 District Co-Operative banks

PSB’s account for 82% of the total number of bank branches in the country.

State Bank Group(As at March 2013)

State Bank Group(As at March 2013)

Return on Assets of Bank for selected Countries

Source: Compiled from Financial Soundness Indicators. IMF

County had faced Macro - economic crisis in 1991.

Forex reserve touched very low level, not even sufficient to pay 1 week import bill.

Economy was growing at less than 2% Majority of banks were incurring losses The banks were no where near the

international norms regarding capital adequacy, prudential norms etc.

Bank Rates

These above factors led for the formation of high level committee headed by Mr. M Narasimham, a former Governor of RBI to address the problems & suggest the remedial measures.The committee submitted its report in the Month of Nov, 1991

The Govt should reduce its stake from existing 100% to 51%

Reduction of Statutory Liquidity Ratio (SLR) from 38.5% to 23% over a period of 5 years

Progressive reduction in Cash Reserve Ratio (CRR)

Phasing out of directed credit prorammes Deregulation of interest rate Prescribed minimum capital adequacy ratio

of 4% to Risk Weighted Assets (RWA) by March, 1993 and 8% by March, 1996.

Adoption of uniform accounting practices regarding income recognition, assets classification & provisions against bad & doubtful debt.

Setting up of special tribunal to speed up the process of recovery of loans.

Setting up of Asset Re-construction Companies (ARC’s)

Abolition of branch licensing Giving freedom to Individual bank to recruit

officers.

The Govt appointed a second high level committee on banking sector reforms under the chairmanship of Mr. Narasimham to review the progress of banking sector reforms to-date and suggest new measures to strengthen Indian financial system & make it internationally competitive one.

The committee submitted its report in the month of April 1998.

Recommendation of the Committee – II are broadly classified as below

I. Strengthening Banking SystemII.Asset QualityIII.Prudential Norms and Disclosure

RequirementsIV.Systems and Methods in BanksV. Structural Issues.

Minimum Capital to Risk Asset Ratio (CRAR) be increased from existing 8% to 10%, an intermediate minimum target of 9% be achieved by 2000 & the ratio of 10% by 2002.

The Govt should reduce its stake to 33% from the existing 51%.

Risk weight on Govt guaranteed advances should be the same as for other advances.

An asset be classified as doubtful if it is in the substandard category for 18 months in the first instance and eventually for 12 months, there after it will become loss.

For banks with high NPA, the committee advises to determine realisable value of bad loan & such asset could be transferred to ARC’s.

The interest subsidy element in credit for the priority sector should be totally eliminated and interest rate on loans under Rs. 2 lakhs should be deregulated for scheduled commercial banks as has been done in the case of Regional Rural Bans and Co-operative credit institutions.

Bank should stops recognizing income on assets (loans) where the interest & principle is not paid for 3 months.

Bank should make 1% provision on standard loans.

Provisioning made against bad loan should be tax deductible one.

There should be an independent loan review mechanism and a system to monitor the loan.

Banks should have a system of recruiting skilled man power.

Public sector bank should be given flexibility in determining managerial remuneration keeping in mind market trend

Mergers of public sector banks should emanate from the management of the banks with the Government as the common shareholders playing a supportive role. Merger should not be seen as a means of bailing out weak banks.

“Weak banks” may be nurtured into healthy units by slowing down on expansion, eschewing (refraining) high cost funds / borrowings etc

Why PSB’s have failed ? Comparative Performance of Public Sector & Private

Sector Banks

The banks have been asked to carry out independent & objective credit appraisal in all the cases. Further it says that banks should not depend on the credit appraisal report prepared by outside consultant.

They have been asked to make enquiry about the source & quality of the equity capital brought in by the promoter.

The banks required to see whether the names of any director is appeared in the list of defaulters.

The banks are also required to classify the borrowers as non co-operative borrowers.

The RBI has also brought advocates & assets valuers within its radar.

It also advises the banks to ensure a higher degree of monitoring in respect of advances already given.

Banks have now been mandated to create a new sub asset category called as “Special Mention Account” (SMA)SMA has been further categorised into SMA-NF, SMA-1, SMA-2

A loan can be potentially categorised as SMA-NF if any one of the following signals are noticed.

1.A delay of 90 days or more in the submission of stock statements.

2.Non co-operation for conduct of stock audit3.Return of 3 or more cheques in the last 30

days on account of non availability of funds.

SMA – I represents a category where the principal & interest payment is overdue between 31 & 60 days.SMA – II represents a category where the principal & interest payment is overdue between 61 & 90 days.

The RBI proposes to set-up a Central Repository of Information on Large Credit (CRILC) that will collects, store & disseminate credit data.

Other day, while addressing gathering at the Institute of International Finance in Washington DC, said that he has five plans to reform the Indian banking sector. They are;

1. Plan I Revising & Strengthening Monetary Policy framework.

2. Plan II Reform Indian’s Banking System.3. Plan III Financial Inclusion.4. Plan IV Liberalizing Indian Market.5. Plan V Dealing with Financial Distress.

A panel under Deputy Governor Sri Urjit Patel was constituted, to look into ways of revising & strengthening monetary policy framework & the committee submitted its report on 21-1-2014. Major recommendations of the committee are as follows;

The committee suggest that inflation shall be the target for the monetary policy framework.

The RBI should, while framing the monetary policy framework, focus on Consumer Price Index (CPI) & not on the Whole Sale Price Index (WPI).

The Govt bring down the rate of inflation to 6% in two years form the exiting 10%. The target for medium term would be an inflation rate 4% +/- 2%.

The Govt should reduce Fiscal Deficit to 3% of GDP by 2016-17.

The Govt should form a committee called as Monetary Policy Committee (MPC) comprising Governor, The Deputy Governor & Executive Director in charge of Monetary Policy & two external full-time member.

RBI Constituted a committee under the chairmanship of Dr Bhimal Jalan a former Governor of RBI to suggest on the issue of Banking Licenses. The committee has submitted the report on 25th Feb, 2014. And this committee has recommended for issue of licenses in a phased manner.

The RBI has received 25 applications seeking license for starting new banks.

A committee under the Chairmanship of Nachiket Mor was constituted to suggest ways and means to extend banking services to millions of unbanked people.

The following are the key recommendations; Govt should provide banking facility to every

resident Indian by 2016. The Govt should set up two banks one is

payment bank and other one is whole sale bank

The initial capital of the bank should be 50cr, which is one-tenth of capital required for a fully serviced commercial bank.

Payment bank will only accept deposit and will not do any lending business.

The maximum amount of deposit to be accepted is Rs. 50,000.

Whole Sale bank will do both lending and accepting deposit. It will accept deposit of not less then 5cr

Apex Bank wants to broaden and deepen the Indian capital market to enhance the liquidity and also risk sustaining capacity of market.

In this connection The Apex Bank suggests the following measures;

Setting up of more and more Corporate Debt Tribunals (CDT)

Setting up separate bench for speedy disposal of NPA related cases.

Appointment of Special Cadre of Officers.

Indian rupee is gained by 8.4% from the day he assumed his office.

New rules of limiting bad loan. Branch licensing has been liberalized. He allowed cash settlement of Interest Rate

Futures. He wants to create a central repository to collect,

store and disseminate information on large corporate borrowing.

Various committees to strengthen monetary policy, widen banking facilities etc., have been formed.