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Financial standards and codes,drafted by the Bank for International Settlements led (BIS) Basel Committee on Banking Supervision(BCBS),has evolved over time as one of the key responses to the challenges faced by the prevailing international financial architecture which has met with the recurrent financial crisis since the early 1980’s.In June 1974,a large number of banks in the OECD had released Deutsche Marks to Bank Herstart in Frankfurt against payments in the US dollars,to be delivered in New York.Because of a difference in the time zones,there was a delay (in dollar payments to counter-party banks in the US) over which the Bank Herstart was liquidated.This incident prompted the G10(G-13) countries to form the Basel Committee on Banking Supervision,under the auspices of the BIS.Formed in the end of 1974,the committee included experts from the Central bank of the BIS member-countries and other officials at the BIS. To address the above issues,the recently drafted Basel II Accord by the BCBS seems to address the following goals: • A comprehensive coverage of credit risks,market risks and operationals risks. • A Three-Pillar approach with due recognition of the role of supervisory review and market discipline.
• A menu of options,both for estimating regulatory capital and to bridge the gap between regulatory and economic capital.
Indian Approach to Basel Norms
The Indian approach to standards and codes is guided by the Standing Committee(on International Financial Standards and Codes) that was set up by the Reserve Bank of India (RBI) in consultation with the Government of India in December 1999.The Advisory Group on Banking Supervision has gone ahead with international standards in respect of Basel core principles,corporate governance,internal control,credit risk,loan accounting,financial conglomerates and cross border banking. Banking in Post Independence Years Following Independence ,the development of rural India was given a high priority.To cater to the needs of the rural areas,an official committee was created which recommended that the Imperial Bank which was the functioning bank in India,should be taken over by a state-partnered and state-sponsered bank.By an act of the parliament the State Bank Of India was constituted on July 19,1955.With its creation, more than a quarter of the resources of the Indian banking system thus,passed to the direct control of the state.Subsequently in 1959,the state bank of India(subsidiary Bank)Act was passed,enabling the SBI to take over eight former state-associate banks as its subsidiaries (later named
associates).This marked a significant step in the launch of a state-controlled banking system in India. Simultaneously as above,Agricultural Refinance Act of 1955 allowed the setting up of a specialized bank for agriculture,the National Bank for Agriculture and Rural Development(NABARD) which catered exclusively to agriculture.Subsequent to these developments,the state felt the need for a wider diffusion of banking facilities including bank lending.The problem was apparent with the proportion of credit for industry and trade moving up,from 83 percent to 90 percent between 1951 and 1968. The rise was clearly at expense of crucial segments of the economy like agriculture and smallscale industry.More critically,bank failures and mergers were rather rampant,with the number of banks dropping from 648 (including 97 scheduled commercial banks or SCB’s and 551 non SCB’s) in 1947 to 89 in 1969(comprising 73 SCB’s and 16 non SCB’s.
Bank Nationalisation-Accent on ‘Social Control of Credit’(1969-1991)
‘Social control’ of bank credit flows,with priority sector lending as a major aspect,was an important objective of bank nationalization .it introduced restrictions on advances by banking companies,in order to ensure that bank advances were confined not only to large scale industries and big business houses,but were also directed,not only to large-scale industries and big industries and big business houses,but were also directed,in due proportion to
important sectors such agriculture,small scale industries and exports.Since 1969, there has been a significant spread of the banking habit in the economy with banks able to mobilize a large amount of savings.However,by the 1980’s there was a general perception that the operational efficiency of banks in India was on the downturn with low profitability ,growing non-performing assets (NPAs) which were already high and a low capital base.Poor internal controls and the lack of proper disclosure norms led to many problems which were kept undercover.The quality of customer service did not keep pace with the increasing expectations.All these factors led to the next phase of nationalization in 1980 which raised the public sector banks’ share of deposit from 86 percent (1969() to 92 percent (1980).However, a reversal of the process of largescale banking de-regulation and reforms in the banking sector as part of the overall economic liberalization in India in 1991. Given the relatively underdeveloped capital market in India with little internal resources,firms and economic entities rely,to a large extent,on financial intermediaries to the meet their financial requirements.The major institutional intermediaries which supply credit in India include banks and nonbank financial institutions(that is,development finance institutions or DFIs),other Financial Institutions(FI’s) and Non Bank Finance Companies(NBFC’s).The non-institutional or unorganized sources of credit include indigenous bankers and moneylenders.Informations about the
unorganized sector is limited and not readily available. Banks in India can be broadly classified as regional rural banks or RRB’s,scheduled commercial banks or SCB’s ,and cooperative banks.The SCB’s for the purpose can be classified into the following three categories : 1.Public sector banks or PSB’s (SBI and its associations,and nationalized banks) which are the major banks ; 2.Private sector banks(old and new); and 3.Foreign banks. At the end of the Financial year 2004, these SCB’s had a network of 54,275 offices, and total assets worth Rs.19,750 billion,making them the most active and dominant financial intermediaries in the country. As for concentration in the Indian banking sector,it has declined gradually over the last few years.