SeptemberReserve Bank of India Bulletin2005848
structure of assets and liabilities, and various indicatorspertaining to major segments of financial markets suchas debt, forex, capital market segments, besidesmacroeconomic indicators such as growth, inflation,interest rate and exchange rate. The MPI review isaccompanied by a review of developments in the globalenvironment. As part of the efforts to disseminate theseFinancial Soundness Indicators (FSIs), the Reserve Bank has started publishing the core set of indicators in itsvarious publications.7. Financial sector reforms adopted in the 1990s haveenhanced the strength of banks and financial institutionsin India. A striking feature of these institutions has beentheir improved resilience to the domestic and the externalenvironment. The reform process has changed therelationship between the RBI and commercial banksfrom one of micro regulation to that of macromanagement. Aided by the robust macroeconomicenvironment, banks’ bottom lines have improvedsignificantly over the last two years. The aggregatecapital ratios of scheduled commercial banks at 12.83per cent as at end March 2005 have been well abovethe stipulated level of 9 per cent.8. The Reserve Bank, along with the Government, hasinitiated several institutional measures to contain thelevels of NPAs. Notable among these includeestablishment of Debt Recovery Tribunals, Lok Adalats(people’s courts), Asset Reconstruction Companies(ARCs) and Corporate Debt Restructuring (CDR)mechanism. Settlement Advisory Committees have beenformed at regional and head office level of commercialbanks. Enactment of the Securitisation andReconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 has helped inimproving the recovery climate in the country. TheGovernment amended the relevant provisions of the Actto address the concerns expressed by the Supreme Courtregarding a fair deal to borrowers through an ordinancedated November 11,2004. The declining trend in grossand net NPLs for scheduled commercial banks hascontinued despite the adoption of 90-day delinquencynorm and unprecedented surge in growth of advances.9. Legislation has since been enacted to facilitate thecompilation and dissemination of credit informationincluding data on defaults to the financial system by theCredit Information Bureau of India Ltd. (CIBIL). The legalprovisions and practice in bankruptcy of the real sectorare however still inadequate and need further reform.10. The Reserve Bank is also making efforts to formulatepolicies to deal with risks arising on account of operationsof large and complex financial institutions as these posea systemic risk. As a first step in this direction, an inter-agency Working Group on Financial Conglomerates (FC)comprising three supervisory bodies,
the ReserveBank, the Securities and Exchange Board of India andInsurance Regulatory and Development Authority, inJune 2004, identified 23 FCs and a pilot process forobtaining information from these conglomerates has beeninitiated.11. The year 2004-05 has witnessed a surge in creditoff-take leading to a sizeable decline in the liquid assetsof the bank. Consistent with the shift to functioning ina competitive economy and to the adoption of prudentialbest practices, the major challenges facing the bankingsector are the deployment of funds in quality assets andthe management of revenues and costs.
12. Unlike Basel I, which is simple, Basel II is complex.Therefore, the BCBS does not expect Basel II to beadopted widely or quickly. They believe that countriesshould adopt the options and approaches that are mostappropriate for the state of their markets, their bankingsystems, and their supervisory structures. Supervisors canadopt the framework on an evolutionary basis and useelements of national discretion to adapt it to their needs.
13. Under Basel II the capital requirements are more risk sensitive as these are directly related to the credit ratingof each counter-party instead of counter-party categoryas it is under Basel I. Further, it requires banks to holdcapital not only for credit and market risk but also foroperational risk (OR) and where warranted for interestrate risks, credit concentration risks, liquidity risks,
This makes Basel II more comprehensive than Basel I.Where banks were required to hold a uniform level of 8per cent as minimum capital under Basel I, supervisorshave the discretion to require banks to hold higher levelsof minimum capital under Basel II. Basel II has otheradvantages such as providing a range of options forcounter-party capital requirements and in the processreducing the gap between required capital and regulatorycapital. Basel II recognises a wider range of collaterals