PRESENTED BY Naman Kohli A29 Neha Sopori A31 Pravesh Phogat A Rahul Gaddh A Saurabh Rai A Sirin Sam

A57

Functions as intermediary between savers and investors Channelization of Savings and Investments into right opportunities for investment Helping economic development Imparting liquidity to non liquid assets like different securities Mobilization of Capital Influence on Rates of Interest

Modern banking can be traced as far back as 1786 Establishment of GENERAL BANK OF INDIA as first joint stock Bank 1806-Bank of Kolkata established and renamed Bank of Bengal in 1809 In 1921, three presidency banks (at Madras, Bombay, Bengal) were merged to form the IMPERIAL BANK OF INDIA IN 1955 after its nationalisation Imperial Bank of India was converted into THE STATE BANK OF INDIA

To increase control over the banking sector, in 1969, GOI nationalized 14 major private sector banks Done primarily because priority sector lending was being ignored Lending largely to industries Small industries and units were ignored Agriculture an small and marginal farmers were totally ignored In 1980, GOI further nationalized 6 commercial banks

Public sector management led to poor performance of banks Significant increase in Non-Performing Assets (NPAs) of banks As a result, Banking sector reforms were made integral part of the Liberalization process Was necessary for overall stability of the financial system Post 1991 (L.P.G), 2 major committees were set up to recommend reforms

Narasimhan Committee I 1991 (Operational Flexibility & Functional Autonomy) Narasimhan Committee II 1998 (Structural Changes - To strengthen system)

Gradually reduce SLR from 38.5% to 25% over a 5 year period Resulting in more funds (banks were lending to agriculture) Government borrowing rates be determined by market forces- deregulation RBI should reduce dependence on CRR Should progressively reduce CRR from 15% to 3% 5%

Pay interest to banks for their deposits above the basic minimum equal to one year deposit rate This would reduce the idle cash balances with RBI which banks could use for lending Also incase idle balances are kept, banks would earn a good rate of return

Gradually phase out Directed Credit Programmes Should be a measure adopted only in extreme cases Agriculture and small industries had already grown to a mature stage and no special support was required

Redefine the priority sector Include weakest sections of the rural community such as

Marginal farmers Rural artisans Village and cottage industries

Directed Credit Programme for the redefined priority sector should be 10% of total bank credit Social purpose of banks should be enhance small industries

 Interest

rates should be widely determined by market forces of demand and supply All controls and regulations regarding interest rates of banks lending and deposits activities should be removed Concessional rates of interest for priority sector lending to be phased out Subsidies in IRDP loans should be withdrawn

Reduction in no. of public sector banks by M&A It suggested

3 to 4 large banks to become international in nature (with SBI at the top of the pyramid) 8 to 10 national banks Local banks - operations confined to a local region Rural banks(including RRBs) to finance agriculture

Banks should have the freedom to open branches only as per profitability considerations Stop nationalization of banks Allow setting up of new private sector banks Encourage foreign banks to set up shop in India Allow Indian & foreign banks to set up JVs

Setting up of ARF Asset Reconstruction Fund

To tackle growing problems of NPAs Take over NPAs at a discount from the banks Resulting in removal of NPAs from Balance sheet of banks and use funds earned at discount for lending

Make RBI the primary and only governing body for banks

Public sector banks to be free and autonomous

SLR

Reduced from 38.5% TO 25% and further to 24%

CRR
From 15% to current levels of 4% 7% Banks could lend more to credit starved sectors

INTEREST RATES
Deregulated Main purpose to increase operational efficiency of banks by increasing the competition

PRUDENTIAL NORMS
100% provisions for all NPAs Provisioning of bad debts would help in books of accounts to be of international standards

CAPITAL ADEQUECY NORMS

ACCESS TO CAPITAL MARKET

Permitted Public sector banks to access Capital markets by way of fresh issue Government share not to fall below 51%

FREEDOM OF OPERATION

Freedom to open more branches Close operations for branches where business hasnt reached desired levels

NEW PRIVATE SECTOR BANKS

Many new players Budget of 1996-97 To mobilize rural savings and channelize them into investment into local areas

LOCAL AREA BANKS

RECOVERY OF DEBTS

Merger of strong public sector banks and closure of some weaker banks Corrective measures like recapitalization undertaken for weak banks and if required such banks were closed down Setting up of Asset reconstructing fund for tackling NPAs of public sector banks Healthy competition between public sector banks and private sector banks was essential

Enhancement of capital adequacy norms from the present level of 8 percent but did not specify the amount to which it should be raised The report saw a future possibility of flow of capital to meet higher and unspecified levels of capital adequacy and reduction of targeted credit

Competition Enhancing Measures

Allowing operational autonomy and reduction of public ownership in public sector banks by raising capital from equity market up to 49 percent of paid up capital. Transparent norms for entry of Indian private sector banks, foreign banks and joint venture banks. Permission for foreign investment in the financial sector through foreign direct investment (FDI) as well as portfolio investment.

Competition Enhancing Measures The banks are allowed to diversify product portfolio and business activities. Roadmap for foreign banks and guidelines for mergers and amalgamation of private sector banks with other banks and NBFCs. Instructions and guidelines on ownership and governance in private sector banks.

Measures enhancing role of market forces

Reduction in pre-emption through reserve requirement Market determined pricing for govt. Securities Disbanding of administered interest rates and enhanced transparency and disclosure norms to facilitate market discipline Introduction of auction-based repos and reverse repos for short term liquidity management Facilitation of improved payments and settlement mechanism

Prudential measures

Introduction of international best practices norms on capital to risk asset ratio (CRAR) requirement, accounting, income recognition, provisioning and exposure. Measures to strengthen risk management though recognition of different component of risk, assignment of risk weights to various asset classes, norms of connected lending, risk concentration, application of market to market principle for investment portfolio limits on deployment of fund in sensitive activities.

Prudential measures

Introduction of capital charge for market risk, higher graded provisioning for NPAs Guidelines for ownership and governance, securitization and debt restructuring mechanism norms, etc. Introduction and roadmap for implementation of Basel II by 31 March 2007

Institutional and legal measures

Setting up of debt recovery tribunals, asset reconstruction companies, settlement advisory committees, corporate debt reconstructing mechanism, Lok-Adalat (peoples court), etc. for quick recovery of debts Promulgation of Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 and its subsequent amendment to ensure creditor rights

Institutional and legal measures

Setting up of Clearing Corporation of India Limited (CCIL) to act as a counter party for facilitating payment and settlement system relating to fixed income securities and money market instruments. Setting up of Credit Information Bureau of India Limited (CIBIL) for information sharing on defaulters as also other borrowers

Supervisory measures

Establishment of Board of Financial Supervision as the apex supervisory authority for commercial banks, financial institutions and non-banking financial companies Move towards risk based supervision, consolidated supervision of conglomerates, strengthening of off-site surveillance through control returns

Supervisory measures

Recasting of the role of statutory auditors, increased internal control through strengthening of internal audit. Strengthening corporate governance, enhance due diligence on important shareholders, fit and proper test for directors

Technology related measures

Setting up of INFINET as the communication backbone for the financial sector Introduction of Negotiated Dealing System (NDS) for screen based trading in govt. securities Real Time Gross Settlement System (RTGS).

SHARE OF TOTAL CREDIT AND DEPOSIT ACROSS VARIOUS BANKS (in %) CREDIT Nationalised banks SBI group Other SCBs Foreign banks RRBs Mar 08 48.3 22.8 19.7 6.8 2.4 Mar 08 25.0 20.7 18.8 27.8 21.6 June 08 47.6 23.1 19.9 7.1 2.4 June 08 28.2 26.1 22.0 34.4 19.7 Sept 08 47.9 23.4 19.3 7.2 2.2 Sept 08 28.0 28.0 17.7 32.4 10.0 Dec 08 49.0 23.4 18.7 6.6 2.3 Dec 08 29.0 24.0 12.3 18.1 13.6 Mar 09 50.5 DEPOSIT Mar 08 June Sept 08 08 48.6 22.6 20.1 5.8 3.0 48.6 23.2 19.4 5.8 3.0 Dec 08 48.3 24.4 18.6 5.7 2.9 Dec 08 22.5 28.9 11.1 12.0 19.8 Mar 09 49.5 24.1 18.2 5.2 3.0 Mar 09 24.5 30.5 8.9 12.7 21.9

Nationalised 48.5 banks 22.6 20.3 5.6 3.0 Mar 08

23.1 SBI group 18.2 Other SCBs 5.9 2.3 Mar 09 24.7 Foreign banks RRBs

GROWTH TATE (in %) CREDIT Nationalised banks SBI group Other SCBs Foreign banks RRBs DEPOSIT June Sept 08 08 24.2 24.1 15.7 19.3 21.7 21.8 23.0 14.3 14.5 19.0

Nationalised 24.4 banks 25.9 22.9 24.4 18.6

21.0 SBI group 10.2 Other SCBs 3.5 Foreign banks

14.6 RRBs

All SCBs

22.8

26.6

25.7

23.3

19.3 All SCBs

24.2

22.0

20.0

21.0

21.9
RRBS:

SCBs: Scheduled commercial banks; Regional rural banks

SBI group: State Bank of India and associate banks;

RBI Website www.rbi.org Banking in India- Pandikar and Mithani Indian Banking System-Mukund Mahajan www.goi.org Banking System in India- Jyoti Chindaramani http://www.businessstandard.com/general/pdf/072109_01.htm