Banking re

Private Sector Banks

Foreign Banks Competition and Financial Stability.
Reserve Bank to implement the recommendations of the Committee.

• Prudential Norms: RBI has laid down prudential norms in order to

bring professionalism in commercial banks. The purpose of prudential
norms include proper disclosure of income, classification of assets
and provision for bad debts so as to ensure that the books of
commercial banks reflect the accurate and correct picture of its
financial position.
• Banks are supposed to disclose non-performing assets (NPAs). With
effect from March 31, 2004, a NPA is an advance where, the loans and
advances are overdue in terms of interest and/or installment payment
for a period of more than 90 days, (earlier the norm was 180 days).
Recovery of Dues
• In early 1990s, the financial position of several public sector banks
appeared very weak due to high NPAs. The overall gross NPAs of the
scheduled commercial banks were over 10% of the total gross
advances. Some of the public sector banks made huge losses due to
high NPAs. In order to solve, this problem, the RBI set up a Special
Recovery Tribunal so as to provide legal assistance to the banking
sector to recover their dues at a quicker pace.
• In 2004-05, the gross NPAs of scheduled commercial banks as a
percentage to total gross advances have declined to 5.2% from nearly
13% in 1999-00. In 2008-09, the gross NPAs stood at 2.3% of all
scheduled commercial banks.
Reduction of SLR
• Under SLR, the government has imposed an obligation on the banks
to maintain a certain ratio to its total deposits with the RBI in form of
liquid assets like cash, gold, and other securities. The SLR has been
reduced from 38.5% in
• 1991 to 25% (present level). The reduction in CRR and SLR releases
more funds in the market by way of loans and advances.
Reduction of CRR
• The CRR is the cash ratio of a bank's total deposits to be maintained
with RBI. A high CRR reduces the cash for lending and a low CRR
increases the funds for lending.
• The CRR has been brought down from 15% in 1991 to 6% in
• April 2010.
Deregulation of Interest Rates
• The RBI has deregulated interest rates since 1989. At present, banks
are allowed to fix interest rates for all deposits except savings, and for
all advances except export credit.
• The deregulation of interest rates would bring transparency to the
banking transactions. It would also generate competition among the
banks, which in turn would improve efficiency of the bank personnel.
This in turn would bring better service to the bank's customers.
Minimum Lock-In Period
• RBI has reduced the minimum lockin period of term deposits from 15
days to 7 days in October 2004. This would be an advantage to the
term depositors. They would be encouraged to deposit money for 7
days rather than to keep idle with them. This would increase the short
term deposits, which can be effectively deployed by the banks in call
markets, repos, etc.
Capital Adequacy Ratio
• As per the recommendations of the Narsimham Committee, the
Capital adequacy ratio is the ratio of minimum capital to risk assets.
Increase in capital adequacy ratio improves confidence of the
depositors in the banking sector. At present, all banks have the CAR
above the minimum level of 9%. By 31st March, 2009 the CAR of as
many as 78 banks was above 10% and that of only one bank was in
the range of 9 to 10%. In fact, the overall CAR of all SCBs was 13.2%
by 31 March 2009.
Asset Liability Management
• To facilitate better asset liability management, banks are allowed
discretion to disallow premature withdrawal of large deposits except
in respect of individuals and Hindu Undivided Families, subject to
informing the depositors in advance.
Freedom of Operation
• Scheduled commercial banks are given freedom to open new
branches and upgrade extension counters, after attaining capital
adequacy ratio and prudential accounting norms. The banks are also
permitted to close nonviable branches other than in rural areas. Bank
lending norms have been liberalized.
Measures for Urban Cooperative Banks
(UCBs):
• To ensure greater security to depositors and members of urban
cooperative banks (UCBs), interim prudential measures have been
announced by RBI in 2001-02, such as
• Direct or indirect lending by UCBs to individuals against security of shares
stopped.
• Existing lending to brokers or direct investment in shares to be unwound.
• Borrowing from call money market limited to 2% of aggregate deposit at the
end of the previous financial year.
• Increase in SLR holdings of scheduled UCBs from 15% to 20% w.e.f. March,
2002.
FDI limit in Banking Sector
Govt. of India has increased the FDI limit in private sector banks from
49% to 74%. The increase in FDI enables Indian private banks to obtain
more foreign capital, but also expertise and technology from foreign
parties. This can have a direct effect on the efficiency of the private
sector banks.
Anti-Money Laundering Guidelines
• Prevention of money laundering has assumed greater importance
because of funding of terrorist and other illegal activities. Therefore,
in November 2004, RBI revised Know Your Customer (KYC) guidelines.
Banks have to frame policy guidelines regarding procedures relating
to:
• Customer acceptance
• Customer identification
• Risk management
• Monitoring transactions of suspicious nature, so as to report to Government.
Adoption of BASEL-II Norms
• The Basel Committee on Banking Supervision released the New
Capital Adequacy-Basel II Framework on June 26, 2004. Accordingly,
RBI has issued guidelines to banks for the implementation of Basel II
norms. Several measures have been taken by RBI to prepare the
banking system to move towards Basel II norms.
Managerial Autonomy for Public Sector
Banks
• Government of India has provided managerial autonomy to public
sector banks in February 2005, so as to enable them to compete with
private sector banks. PSBs are allowed to:
• Undertake new lines of business and Exit from a line of business.
• Make suitable acquisitions.
• Close or merge unviable branches.
• Open branches abroad.
• Set up subsidiaries.
• Decide on issues such as recruitment, place training, promotion, etc.
• Technology: Technology infrastructure for the payment and
settlement system has been strengthened with the introduction of:
• Electronic Fund Transfer
• Centralized Fund Transfer System
• Structured Financial Messaging Solution
• Negotiated Dealing System
• Real Time Gross Settlement (RTGS) System
New Areas for Bank-financing
• New areas have been opened up for bank financing such as Insurance,
Credit and Debit Cards, Investment Banking, Infrastructure Financing,
Housing Finance, Factoring, Venture Capital Funds and Mutual Funds
etc