Banking Sector Reforms.ppt

7/27/2019 Banking Sector Reforms.ppt

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The Road Ahead of Banking Reforms in India

Presented by :

Shagufta Khan

M1224



Introduction

• The Indian banking sector is an important constituent of the Indian

financial system

• Without a sound and effective banking system, India can not be

considered as a healthy economy

• Substantial role in the growth of the economy

• Need for banking reforms :

‒ Public had lesser confidence on banks

‒ Enough room for growth and healthy competition



Major Implications of Narsimham Committee I

(1991)

• Reduction in SLR and CRR :

- Reduction from 63.5 % to 31.5%

- This has left more funds with banks for allocation to agriculture, industry, trade,

etc.

• Prudential norms :

- Proper classification of assets and full disclosure of A/cs of banks & FI

• Deregulation of interest rates on loans from Rs. 20 lakhs to Rs. 2 lakhs

• Setting up of Asset Reconstruction Fund (ARF) :

- To take over a portion of loan portfolio of banks whose recovery has become

difficult

• Stopped Direct Credit Programme :- Reduced the profitability of banks

• Public sector banks allowed for direct access to capital markets :

- The Banking Companies (Acquisition and Transfer of Undertakings) Act

was amended to enable the banks to raise capital through public issues



Major Implications of Narsimham Committee II

(1998)• Autonomy in banking :

- To implement this, criteria for autonomous status was identified- 17 banks were considered eligible

• Increase in FDI Limit :

- In private banks the limit has been increased from 49% to 74%

• Stronger banking system :

- Use of mergers to build the size and strength of operations for each

bank

- There were a string of mergers in banks during the late 90s and early

2000s• Capital Adequacy Ratio :

- To improve inherent strength of banks & to improve their risk

absorption capacity (RBI norms : 9%)

•

Reduction in NPAs :- 14.4 % in 1998 to 7.2 % in 2004



Basel II Norms

• Pillar One :

- Minimum capital requirements similar to Basel I, i.e. 9 % – except thatcredit risk calculation is reformed and a new charge for operational risk

to be added

•

Pillar Two :- Banks have to establish Internal Capital Adequacy Assessment Process

which shall be subject to rigorous supervisory review process

• Pillar Three :

- Public disclosures to enhance market transparency

- Specific list includes capital structure, capital adequacy, composition of

loan / credit portfolios by risk rating and detailed risk parameters for

each risk-rating category



Basel III Norms• Pillar 1 :

- Minimum Regulatory Capital Requirements based on Risk Weighted

Assets (RWAs) :

Maintaining capital calculated through credit, market and operational

risk areas

Increased from 2.5% to 7%

• Pillar 2 :

- Supervisory Review Process :

Regulating tools and frameworks for dealing with peripheral risks that

banks face

• Pillar 3 :

- Market Discipline :

Increasing the disclosures that banks must provide to increase thetransparency of banks



Future Outlook of Banking

• E - banking :

‒ Branchless banking

‒ Providing customers with cost effective services

‒ Capability to cater to large customers

• Consolidation :

‒ It help save costs and improve operational efficiency

‒ Owing to the diversified operations and credit profiles of merging

banks, it is likely to serve as a risk-mitigation exercise

• Rural banking :

‒ Delivery of banking services at an affordable cost to vast sections

belonging to low income groups



Future Outlook of Banking• Stronger crisis management tools integrated with technology :

‒

It will ensure competitive advantage ‒ Upgradation in technology proportionately so that the MIS and the

analytical tools for risk management are available

• Enhanced use of technology :

‒ An integrator which holds the key to the future success of banks

‒ Foreign banks have raised the expectation of the customer

(Mobile banking and wireless tools)

‒ Speed, accuracy and quality in operations and delivery mechanism act as

cost efficiency

• Better financial system architecture :

‒ Better regulatory guardrails that stops the financial system from driving

off cliffs

Banking Sector Reforms.ppt

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