Yojana January 2018 Summary: Banking Reforms (Part -1 ) (Download PDF)


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Next Issue – Public Grievance Redressal. Collecting coins in pot – burying them. Money from home to banks – interest on deposits – Investment banking and corporate banking. RBI as regulator and banker to banks. Banking system in India initially started with small banks and deposits were siphoned off by bankers – nationalization of banks; later Narsimham Committee on Banking reforms.

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Yojana January 2018 Summary: Banking Reforms (In English)

Dr. Manishika Jain explains Yojana January 2018: Banking Reforms (Special Issue)

Obstacle to banking is NPA (non-performing assets); also cyber security (less cash economy and digitalization of banking transactions)

Banking Sector Reforms: Ensuring Regulation

  • For robust banking system – recapitalization, corporate governance reforms, low entry barrier, improved financial supervision, dynamic corporate debt market and efficient debt recovery mechanism
  • What’s important for functioning of financial markets? Size, resilience and level of capitalization
  • Challenges – NPA, high share of public sector banks and low financial depth
  • What’s required – improve governance of banks; enhance competition and develop corporate bond market to relieve pressure from banks
  • History – 1969 – Govt. nationalized banks with deposits more than Rs. 50 crore (controlling 80 % bank branches)
  • In 1980 – more banks were nationalized – totaling to more than Rs. 200 crore
  • From 1969 to 1991 – priority sector lending grew from 14 % to 41%
  • In 1991 – efficiency and productivity declined with poor customer quality. 👌 Narsimham committee recommended reducing SLR and CRR to free up bank resources, rely on market forces, make it easier for private banks to enter
  • Narsimham Committee again in 1998 on capital adequacy, bank merger, greater technology use and professional management of banks
  • Credit to GDP ratio was 53.4 % in 2000 in India; 133 % in China and 122 % Thailand
  • Committees after 2000 talked about macroeconomic and regulatory framework, financial inclusion and domestic financial development

👌 PJ Nayak Committee – enhance governance and management of public sector banks

  • Public Sector Banks (PSBs) – account for 70 % of overall assets & largest contributor of NPA (around 88%) – rose from Rs. 2.75 lakh crore in March 2015 to Rs. 7.33 lakh crore in June 2017
  • Stressed asset in PSB is 16 % and 3 times higher than private banks – leads to decline in Return on Asset and Return on Equity ratio (turned to be negative in 2016)
  • Banks profit after tax contracted during 2016 - 17
  • Bank stress led to slow down of industrial credit
  • 👌 Basel III requirements that would come in force in Jan 2019 – stand difficult for bank – room for growth capital for banks

👌 Indradhanush Plan 2015 - 16 – recapitalization (of Rs. 2.1 lakh crore) – high NPA ratio and its impact on low bank credit, low profitability and declining capital adequacy ratio – help bank clean up balance sheets and cover bad loans & strengthen governance

  • Insolvency and Bankruptcy Code to address NPAs
  • Creation of Central Repository of Information on Large Credits (CRILC) for stressed assets
  • Deposit Money Banks Asset to GDP ratio is 69 % for India; 153 % for China and 166 % for Japan
  • In India since 1991, only 14 licenses granted for universal banks while for USA around 130 new banks were chartered annually b/w 1976 and 2009. As of March 2016, only 6 % of total banking assets was accounted by foreign banks
  • China focused on recapitalization, strengthen financial regulation, corporate governance, transparency
  • South Korea created Financial Supervisory Service after East Asian Financial Crisis of 1990s

📝 Indradhanush Plan

  • Creation of independent Bank Board Bureau for employment of bank officials – greater accountability

  • Develop corporate bond markets – liquid and deep bond markets will enable firm to raise debt at low cost

  • Make banking more competitive – new on-tap policy for greater competition and innovation

Protagonist to Economic Transformation

  • For 1st time per capita dollar income of country will touch 2000 mark – multifold expansion in domestic consumption and improving affordability
  • Nationalization of banks – 1969/1980
  • Banking sector reforms in 1991 – deregulation of credit and interest rate, reduction in pre-emptions, migration to CBS, licensing of new age private banks
  • Deposit penetration increased to 60.8 % of GDP n FY07 from 35.6 % in FY97 & credit intensity doubled to 45 % of GDP during same period
  • Deposit and credit ratio w. r. t. GDP increased to 71.2 % and 51.9%
  • Share of outstanding credit of private sector banks rose from 20 % in FY07 to 29 % in FY17
  • Factors contributing to increase in market share for private sector banks in last 10 years are of following types
  1. Vintage – invest in technology intensive solutions, expansion of point of sale machines (private banks with 80 % share in 2012) – with diversification income contributes 20 % share of total income compared to 14 % for public sector banks
  2. Productivity – analyze cost to income ratio (employee expenditure + other operating expenditure) / (net interest income + other income)
  3. Agility – private banks are flexible in hiring right talent and make sure that compensation and retention are attractive

📝 Next Generation Banking

India’s economy is set to be 4th largest in 2025 with 4 Ds

  • Development – financial inclusion and sectoral reforms

  • Deregulation – improve financial intermediation and savings propensity

  • Demographics – youth and digitally equipped population

  • Disruption – digitization and integration of banking, telecom and financial space

📝 Transforming Banking

  • Cashless and branchless banking – internet market rose from $11 billion in 2013 to $137 billion in 2020; transform from 9 to 5 and move to 24 × 7 solutions

  • Innovation of ATM usage – only 11 ATM per 1 million people compared to 52 in Malaysia

  • Infrastructure financing – 5 % share in global infrastructure market and is expected to rise to 9 - 10 % by 2025 with 5: 25 PPP model

  • New Models to serve MSMEs – which contribute to 8 % of GDP with debt finance demand of MSME at $650 billion

  • JAM trinity – Jan Dhan – Aadhar – Mobile

  • Competition and Consolidation – account number portability; big data analytics and securitization of retail loans

Managing NPAs: A Paradigm Shift

  • Borrowing lead to creation of demand for productive resources and increases income level of those who supply good and services
  • Reason for credit growth is fast accretion of NPA on banks balance sheets - 72 % market share of outstanding credit of Scheduled Commercial Banks is of PSBs
  • Gross NPA are Rs. 8.40 lakh crore in Sept 2017
  • Bad loans for PSBs remained at Rs. 7.33 crore while that of 17 private sector banks increased by 10.5%
  • Stressed Advance ratio of industries constitute 23%
  • Increase in balance sheet size by lending to borrowers
  • Delay in project completion
  • Poor recovery of receivables
  • Business failures due to over optimistic projections
  • Borrowed funds were not used for which they were lent
  • Willful defaults – entrusted to Senior Fraud Investigation Office (SFIO) – imprisonment from 6 months to 10 years and fine; if fraud involves public interest imprisonment will not be less than 3 years
  • Lack of skill
  • Deficiency in credit appraisal
  • Enabling laws for bank to recover default amount from borrowers –
  • RDDBFI act

  • 👌 SARFAESI Act – allows bank to take possession of assets charged to bank and auction without intervention of court

    • Deepak Narang vs. State of Haryana 2006 case – rescue of harassed AGM of Allahabad Bank and castigate magistrate who admitted FIR and ordered prosecution based on concocted facts

    • Case where petitioners are protected under Code of Criminal Procedure under Section 32 of 2002 Act

    • 64,519 properties were seized in 2015 - 16

    • Govt. amended law to make it mandatory for district collector to hand over physical possession to bank when application is made under act by authorized officer

    • “Case study of industrialist of Ludhiana” – important for Ethics section page 17

  • Insolvency and Bankruptcy Code 2016 – depend on will power and intent of user to find equitable solution; banks to do forensic audit to ascertain end use of funds; use artificial intelligence to predict default one year in advance with 80 % confidence – software by D2K technology

Bank Recapitalization: Enhancing Capital Base

NPA of domestic sector banks have reached 10 % of loans and advances recently

Strengthening banks would create more jobs, growth and investments

Total Rs. 2.1 lakh crore

  • Rs. 18,000 crore from budgetary support

  • Rs, 58,000 crore from equity issuance

  • Rs. 1.35 lakh crore from issue of bank recapitalization bonds

Govt. will issue bonds and bank will subscribe directly

Of govt. allows banks to trade the money in secondary market it would enhance the capital base

12 are big ticket NPA accounts worth Rs. 2.25 lakh crore referred by RBI to National Company Law Tribunal in June 2017

Banks have to take haircut of 60 % worth Rs. 2.4 lakh crore to settle 50 large stressed assets with debt of Rs. 4 lakh crore

👌 Haircut (difference b/w loan amount and actual value of asset used as collateral – explains lenders perception of risk of fall in value of assets) classified as:

  • Deep: > 75%

  • Aggressive: 50 - 75% (metal and construction)

  • Moderate: 25 - 50% (power sector)

  • Marginal: less than 25%

Annual interest cost of bonds is likely to be Rs. 8,000 - 9,000 crore

Facilitating Financial Inclusion

  • Cooperative Credit Societies Act, 1904 – gave impetus to cooperative movement in India
  • Started with nationalization of SBI in 1955
  • 14 banks nationalized in 1969
  • 8 more nationalized in 1980
  • RBI & NABARD to extend banking across India under microfinance initiatives and business correspondents were launched
  • 2005 – KYC (Know your Customer) – simplification of norms by RBI
  • In 2011, only 58.7 % of total households in India and 54.4 % households in rural India had access to formal banking services
  • In 1969, one bank branch for 3 lakh population
  • PM Jan Dhan Yojana in 2014 – one basic banking account for every household. By 6 Dec, 2017 – 30.7 crore accounts opened of which 18.1 crore in rural areas and 12.7 crore in urban areas
  • RuPay cards increased to Rs. 231. Crore
  • In 2015, presence of nationalized bank SBI was highest in rural areas
  • Increase in credit to urban areas and NE region & extend credit to agricultural sector
  • Biometric enabled hand held device for rural masses
  • Integrated machines for cash withdrawals, voice command, narration for available facilities
  • Combating the challenge of financial literacy

👌 Bankers to Banks

  • RBI established on 1st April 1935 – initially at Calcutta and moved to Mumbai in 1937
  • After 1949, fully owned by GoI
  • RBI initially had offices in Kolkata, Chennai, Mumbai, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) – Later Burma was succeeded and Central Bank of Burma formed; similarly State Bank of Pakistan was formed
  • Aim to regulate and issue bank notes, secure monetary stability, operate currency and credit system and have monetary policy framework
  • RBI Monetary Policy – maintain price stability with objective of growth – in 2016 amended to provide basis for flexible inflation targeting framework – set inflation target once in every 5 years – aim to supply clean and genuine notes
  • RBI as regulator – protect depositor interests, develop and conduct banking operations, foster health of banking systems
  • Universal bank licensing policy - 2 new banks in 2014 as IDFC limited and Bandhan Financial services Private Ltd.
  1. Management of stressed assets
  2. Review governance of Board of Banks in India
  3. Regulate Cooperative Banks
  4. Regulate Non-Banking Financial Institutions
  5. Consumer protection and education – Consumer Redressal Cell in 2006
  • In 1995 – Banking Ombudsman scheme – alternate dispute redressal mechanism for resolution of disputes b/w bank and customers – it was revised in 2006 (under it BO and staff in offices of BO are drawn from serving employees of RBI)
  • 📝 Formulation of Charter of Customer Rights for banks based on global best practices in consumer protection with
  1. Right to fair treatment
  2. Right to transparency, fair and honest dealing
  3. Right to suitability
  4. Right to privacy
  5. Right to grievances redress and compensation
  • Role as banker and debt manager to govt.
  • Pays and receives money on behalf of various govt. departments
  • Float loans and manage them on behalf of govt.
  • Provides ways and means advance to the govt.
  • Create educative microsite for public awareness about bank notes in name of “paisa bolta hai”
  • Oversight of payment and settlement systems – Payment and settlement systems act, 2007 and Payments and settlements regulations, 2008
  • Management of public debt
  • Transfers are electronically routed through computerized system as e-kuber (facilitate bank monitoring of fund systems)
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Yojana January 2018 Summary: Banking Reforms (In Hindi)

Dr. Manishika Jain explains Yojana January 2018: Banking Reforms (Special Issue)

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- Published/Last Modified on: January 31, 2018


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