Professional Documents
Culture Documents
The Committee has elaborately framed timing and sequencing of current account
convertibility.
Impacts of Capital Account Convertibility on Banks
For the success of the current account convertibility a lot depends on the strength and
financial consolidation of the banking system. The impact of current account convertibility
would be the most on the financial system of the country. The impacts of the phased
changes in the policies regarding the banking system to bring about capital account
convertibility are discussed below :
Total Deregulating of Interest Rates
The Committee has recommended total deregulation of interest rates i.e. total transparency
to ensure non- existence to formal or informal interest rate control, in the current financial
year. The measure of withdrawing of interest cap is expected to trigger off deposit rates war
among public sector, foreign and private sector banks. Interest rate on savings bank
account is expected to be increased to 6.5% p.a. from 4.5% p.a. by private sector banks to
wean away deposits from public sector banks. The deposit rate war would also fuel cost of
funds.
Scheduled Plan to Bring Down NPAs
The Committee has suggested time-bound plan for reduction of NPAs of the banking system
to enable it face international competition. The targets for reduction of NPAs as percentage
of total advances are set at 12% in 1997-98, 9% in 1998-99 and 5% in 1999-2000. It has
also recommended a comprehensive banking legislation and an enforcement machinery to
reduce the quantum of NPAs and ensure this framework to prevent future defaulters. With
other costs and returns remaining unchanged the spreads available to the banking system is
estimated to increase by 1.8%.
Restricting Growth of Weak Banks
Strengthening of financial system being the most important precondition for capital account
convertibility, the Committee has suggested monitoring of the growth of weak banks so as
to temper the impact of its growth on the banking system. The Committee has suggested to
convert the weaker banks into `narrow banks' observing that the weaker banks are growing
at a faster rate than the banking system. These `narrow banks' observing that weaker
banks are growing at a faster rate than the banking system. These `narrow banks' are
advised to restrict their incremental resources only to investments in government securities,
restraining their liability growth.
Stringent Imposition of Capital Adequacy Norms
The Committee has recommended to consider the imposition of even more stringent capital
adequacy norms than the Basle norms as the risks faced by financial sector are much higher
in developing countries. It noted that prudential norms should emphasise necessary
safeguard to enable the banks in system to attain the international standards instead of
enabling the weakest segment of the financial system a cushion for survival. It has also
suggested that the supervisory system should be in a position to take quickie, strong and
deterrent actions in cases of inadequacies or deviations from norms.
Liberalisation of Gold Trade
The Committee has noted that the liberalisation of gold regime is necessary before moving
towards capital account convertibility. It has also suggested to allow Indian entities into the
international commodity markets. Banks and financial institutions fulfilling defined criteria
have been suggested to be permitted to operate freely in the domestic and international
markets. This would augment sale of gold to residents, gold denominated deposits and
loans, mobilisation of household gold and working capital gold loans to jewellery
manufacturers and deposits schemes like gold accumulation plans.
Cut in Cash Reserve Ratio
The Committee has recommended a progressive reduction of average effective cash reserve
ratio from the existing level of 9.3% to 8% in 1997-98, 6% in 1998-99 and finally to 3% in
1999-2000. This reduction in CRR by 6.3% is expected to release Rs.35,000 crores into the
banking system over a 3-year period. This would reduce the lending rates as the cost of
funds will be reduced to a great extent, with the huge increase in the lendable resources,
the banks would be able to finance infrastructure sector in a big way.
CONCLUSION
The greatest impact of the capital account convertibility would be felt in the banking sector.
Total deregulation of the interest rates would instil greater competition in the circle. The
weaker banks would further be cornered as `narrow banks`. NPAs reduction would be at
focus of attention of banks which would help regaining of its financial health. margin of
banks would be under pressure, infusing adequate asset liability management system in the
banks. However, banks will have much more liberal limits for borrowing and deploying funds
outside India. Indian banking system should surge ahead in this occasion and accept the
challenge by eradicating its weak points and consolidating its financial health.
Contributed by
U S Ghose
General Manager
Allahabad Bank
CAPITAL ACCOUNT CONVERTIBILITY