BANKING REGULATION

-Siddhesh Joshi

AGENDA
Background Objectives of Banking Regulation Regulatory framework

Legal framework y RBI as key regulator of Banking activity y International norms

y

Basel Implementation in India

BACKGROUND

Banking Regulation
y

Bank regulations are a form of government regulation which subject banks to certain requirements, restrictions and guidelines Growing number and volume of activities being carried by commercial banks Globalization and financial innovation have increased the risks to which banks are exposed Sound regulatory policy can help avert banking failures and keep the financial system stable

Need for Banking Regulation

y y y

OBJECTIVES OF BANKING REGULATION

Protect bank depositors Reduce risk of disruption in banking industry Reduce the use of banks for criminal purposes Protect banking confidentiality Direct credit to favored sectors

LEGAL FRAMEWORK
provide the basic framework in which the institutions, instruments and the markets of a financial system operate Laws that are related to negotiable instruments, central banks of the country and regulation of banking industry provide the necessary framework
Laws

LEGAL FRAMEWORK
Negotiable Instruments Act, 1881 The Bankers Book Evidence Act, 1891 The RBI Act, 1934 The Banking Regulation Act, 1949
The

LAWS RELATED TO BANKING REGULATION

The
y

Negotiable Instruments Act, 1881

An Act to define the Law relating to Promissory Notes, Bills of Exchange and Cheques

LAWS RELATED TO BANKING REGULATION

The
y

Bankers Book Evidence act, 1891

An Act to amend Law of Evidence with respect to Bankers Books

LAWS RELATED TO BANKING REGULATION

The Reserve Bank of India Act, 1934

y

An Act to Constitute a Reserve Bank of India whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage

LAWS RELATED TO BANKING REGULATION

The Banking Regulation Act, 1949 y An Act to consolidate and amend the law relating to banking y RBI as the regulator of banking activity in India y Sections regarding appointment of Bank directors, capital requirements, cash reserves, power of RBI to control advances, etc.

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RBI : REGULATORY FUNCTIONS

Regulates Indian banking system, Development Financial Institutions (DFIs), Non-Banking Financial Companies (NBFCs), credit information companies, and some segments of financial markets Protects interests of depositors and maintains financial stability by regulating the Banking system Represents India in Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB)

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RBI: REGULATORY STRUCTURE

Board

for Financial Supervision (1994) Department of Banking Operations and Development (DBOD)
y

regulations for commercial banks

Department
y

of Banking Supervision (DBS)

supervision of commercial banks, local area banks and other financial institutions

Department
y

of Non-Banking Supervision
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regulates and supervises the Non-Banking Financial Companies (NBFCs)

RBI: REGULATORY STRUCTURE

Urban
y

Banks Department (UBD)

regulates and supervises the Urban Cooperative Banks (UCBs)

Rural
y

Planning and Credit Department (RPCD)

regulates the Regional Rural Banks (RRBs) and the Rural Cooperative Banks y supervision has been entrusted to NABARD

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REGULATORY MECHANISMS

Licensing
Commencing banking operations y Opening new branches and also change of location
y

Corporate Governance
Criteria for directors of banks y Directors need to have practical knowledge of banking areas y RBI can appoint additional directors
y

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REGULATORY MECHANISMS

Statutory Pre-emptions
Maintaining CRR and SLR y CRR (cash) and SLR ( approved securities)
y

Interest Rate
Interest rates on most categories of deposits and advances have been deregulated y Interest rates for NRIs is regulated y Small loans and export credits are regulated
y

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REGULATORY MECHANISMS

Prudential Norms y Capital Adequacy Ratio (CAR) as per Basel II norms y Loans and Advances : Classification of loan assets in performing and non performing assets y Exposure limits to prevent credit concentration risk and limit exposures to sensitive sectors, such as, capital markets and real estate y Investments and their reporting norms : HFT, AFS, HTM
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REGULATORY MECHANISMS

Other Regulatory Mechanisms

Disclosure norms y Know Your Customer norms (KYC) y Onsite inspection and offsite surveillance y Monitoring frauds
y

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FOREIGN BANKS IN INDIA

RBI created a roadmap for foreign banks in India Implemented in 2 phases

First phase: March 2005 March 2009 y Second phase: April 2009 onwards
y

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FIRST PHASE: MARCH 2005- MARCH 2009

New banks first time presence Existing banks branch expansion policy Conversion of existing branches to wholly owned subsidiaries (WOS) Shareholding in private sector banks

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SECOND PHASE: APRIL 2009 ONWARDS

Full national treatment to WOS of foreign banks Dilution of stake in WOS M&A with other private sector banks

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BASEL II NORMS
International standard to protect the international Basel II : 2nd Basel Accord, recommendation on financial systemand regulations issued by BCBS might Banking laws from the types of problems that arise should a major bank or a series of banks collapse Basel II in simple terms y Quantify risks to which banks are exposed y Maintain capital proportional to the risk which a bank faces y Role of credit rating agencies, information sharing

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BASEL II : 3 PILLARS

First Pillar
y

Maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk Regulatory response to the first pillar Stability in financial system through information sharing with investors, analysts, rating agencies

Second Pillar
y

Third Pillar
y

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CAPITAL ADEQUACY RATIO (CAR)

CAR = ( tier I + tier II ) capital / Risk weighted assets Tier I Capital = Ordinary Capital + Retained Earnings& Share Premium Tier II Capital = Undisclosed Reserves + General Bad Debt Provision+ Revaluation Reserve + Redeemable Preference shares Risk weighted assets: Quantification of credit, operations and market risks Minimum CAR under Basel II : 9 %

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BASEL II : IMPLEMENTATION IN INDIA

Aug 2004: RBI issues guidelines to banks to undertake a self assessment of risk management systems Capital Adequacy Assessment Procedure (CAAP) Nov 2005: RBI guideline on operational risk Borrowers have to get themselves rated from rating agencies Basel II implemented in India by March 2009

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SOME OBSERVATIONS
Dealing with bad debts of Indian banks Capital infusion by government in PS Banks Revaluation of assets to improve capital adequacy ratio

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THANK YOU

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