UGP,IIPM.UGP,IIPM.Banking and Banking and Insurance.Insurance.

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Malay K Ray, Course Faculty.Malay K Ray, Course Faculty.

Indian Banking Sector.Indian Banking Sector. Indian Banking Sector consists of Indian Banking Sector consists of

Commercial Banks, Indian and Foreign , Commercial Banks, Indian and Foreign , Cooperative Banks, Regional Rural Banks, Cooperative Banks, Regional Rural Banks, Local Area Banks.Local Area Banks.

Reserve Bank of India is the apex Bank and Reserve Bank of India is the apex Bank and the Central Bank of the country. the Central Bank of the country.

The Banks are owned by Government of The Banks are owned by Government of India, Private Investors, both domestic and India, Private Investors, both domestic and foreign, as well as Cooperative bodies.foreign, as well as Cooperative bodies.

The chart on the next slide gives a snapshot The chart on the next slide gives a snapshot view of the Indian Banking system.view of the Indian Banking system.

Indian Banking System.Indian Banking System.

Role of Central BankRole of Central Bank The Central Bank of a country can be stated to be The Central Bank of a country can be stated to be

an institution occupying the central position in the an institution occupying the central position in the monetary and banking setup of a countrymonetary and banking setup of a country

The objectives of a modern central bank are:The objectives of a modern central bank are: Achieving macroeconomic stability relating to Achieving macroeconomic stability relating to

domestic inflation and foreign exchange ratedomestic inflation and foreign exchange rate Arranging for strategic strengthening of the Arranging for strategic strengthening of the

country’s financial sector through creation of country’s financial sector through creation of appropriate financial infrastructureappropriate financial infrastructure

Ensuring sound financial health of the country’s Ensuring sound financial health of the country’s financial institutionsfinancial institutions

There is a trend in some countries to restrict the There is a trend in some countries to restrict the central bank functions to achieve the first two central bank functions to achieve the first two objectives, assigning the responsibility for the third objectives, assigning the responsibility for the third one to another institution.one to another institution.

Objectives of Reserve Bank Objectives of Reserve Bank of Indiaof India

In India, RBI’s objectives are:In India, RBI’s objectives are:i.i. Promotion of growth and price stabilityPromotion of growth and price stabilityii.ii. Maintaining monetary stability in the Maintaining monetary stability in the

countrycountryiii.iii. Creation and maintenance of stable Creation and maintenance of stable

payment systempayment systemiv.iv. Regulation of volume of money and creditRegulation of volume of money and creditv.v. Ensuing sound health of the financial Ensuing sound health of the financial

institutions and credit allocation as per institutions and credit allocation as per national prioritiesnational priorities

Functions of RBIFunctions of RBI

RBI’s functions are:RBI’s functions are:

1)1) Issuance of all currency notes and coins Issuance of all currency notes and coins except Re. 1 along with management of the except Re. 1 along with management of the currency through efficient supply, currency through efficient supply, withdrawal, destruction and exchange withdrawal, destruction and exchange mechanismsmechanisms

2)2) Working as banker to the government and Working as banker to the government and its agent and adviser on monetary, banking its agent and adviser on monetary, banking and financial mattersand financial matters

1)1) Also maintaining central and state government Also maintaining central and state government accounts and granting short duration loans.accounts and granting short duration loans.

Functions of RBI- contd.Functions of RBI- contd.

3) Forex manager:3) Forex manager:Managing the country’s foreign Managing the country’s foreign currency reserves, maintaining the currency reserves, maintaining the stability of the external value of stability of the external value of rupee, administering exchange rupee, administering exchange controls as necessary for the countrycontrols as necessary for the country

4) Banker to the banks:4) Banker to the banks: by providing them short term credit by providing them short term credit against securities at times of need against securities at times of need and working as lender of last resortand working as lender of last resort

Functions of RBI-contd.Functions of RBI-contd.

5) Controlling credit and money supply:5) Controlling credit and money supply: A very important function as the monetary A very important function as the monetary

authority for ensuing price stability and authority for ensuing price stability and achieving socioeconomic objective of growthachieving socioeconomic objective of growth

Requires provision of appropriate liquidity, Requires provision of appropriate liquidity, creation of suitable interest rate creation of suitable interest rate environment and guidance to banks from environment and guidance to banks from time to time regarding flow of credittime to time regarding flow of credit

Involves use of quantitative and qualitative Involves use of quantitative and qualitative methods viz. bank rate, repo rate, open methods viz. bank rate, repo rate, open market operations, changes in Reserve Ratio market operations, changes in Reserve Ratio (SLR, CRR), selective credit control, moral (SLR, CRR), selective credit control, moral suasionsuasion

Functions of RBI-contd.Functions of RBI-contd.

6. Collection and publication of 6. Collection and publication of economic and financial data at economic and financial data at various periodicity (weekly to annual)various periodicity (weekly to annual)

7. Regulating and supervising the 7. Regulating and supervising the commercial and cooperative banks commercial and cooperative banks through licensing policy, various through licensing policy, various policy guidance and directives from policy guidance and directives from time to time, inspection system, time to time, inspection system, monitoring health of the banks.monitoring health of the banks.

Banking Sector ReformsBanking Sector Reforms

Arising out of the recommendations and suggestions of Arising out of the recommendations and suggestions of NaraSimham Committee one and two, appointed in 1991 NaraSimham Committee one and two, appointed in 1991 and 1998 respectively, the following important reforms and 1998 respectively, the following important reforms have so far been introduced in the country’s banking have so far been introduced in the country’s banking sector.sector.

i)i) Reduction in SLR and CRR to reduce preemption first to Reduction in SLR and CRR to reduce preemption first to 25% and 10%, and subsequently to the present levels of 25% and 10%, and subsequently to the present levels of 24% and 6% respectively.24% and 6% respectively.

ii)ii) Deregulation of interest rates.Deregulation of interest rates.

iii)iii) Allowing Private Sector Banks to enter the Banking arena Allowing Private Sector Banks to enter the Banking arena to foster competition and for introduction of up to date to foster competition and for introduction of up to date technology and providing better customer service.technology and providing better customer service.

iv)iv) Direct access to capital markets for Public Sector Banks Direct access to capital markets for Public Sector Banks and reduction of government stake in these banks.and reduction of government stake in these banks.

Banking Sector Reforms- Banking Sector Reforms- contd.contd.

v)v) Liberalized branch licensing policy and operational Liberalized branch licensing policy and operational freedom to banks in terms of opening new branches.freedom to banks in terms of opening new branches.

vi)vi) Setting up of debt recovery tribunals to ensure quick Setting up of debt recovery tribunals to ensure quick recovery of bank debts.recovery of bank debts.

vii)vii) Introduction of prudential norms for income Introduction of prudential norms for income recognition, asset classification and provisioning for recognition, asset classification and provisioning for bad debts.bad debts.

viii)viii) Bringing down gradually the NPA norm to 90 Bringing down gradually the NPA norm to 90 days, as is prevailing now, to fall in line with days, as is prevailing now, to fall in line with international practice.international practice.

ix)ix) Creation of Asset Reconstruction Company to take Creation of Asset Reconstruction Company to take over doubtful and loss assets from the banks. over doubtful and loss assets from the banks.

x)x) Insistence on bringing down average level of net Insistence on bringing down average level of net NPAs for all banks to below 5%.NPAs for all banks to below 5%.

Banking Sector Reforms-Banking Sector Reforms-contd.contd.

xi)xi) Introduction of Asset Liability Management Introduction of Asset Liability Management practices at the banks to avoid mismatches of Asset and practices at the banks to avoid mismatches of Asset and Liability.Liability.

xii)xii) Adoption of advanced risk management techniques Adoption of advanced risk management techniques at the banks for proactive management of the risks in the at the banks for proactive management of the risks in the banks’ portfolios.banks’ portfolios.

xiii)xiii) Banks allowed entering new areas like Insurance, Banks allowed entering new areas like Insurance, Credit Cards, Investment banking, Infrastructure Credit Cards, Investment banking, Infrastructure financing and gold banking. financing and gold banking.

xiv)xiv) Banking ombudsman scheme introduced to look into Banking ombudsman scheme introduced to look into and resolve customers’ grievances.and resolve customers’ grievances.

xv)xv) Adoption of first Basle 1 norm for capital adequacy Adoption of first Basle 1 norm for capital adequacy and from March 31,2007, Basle II norms encompassing and from March 31,2007, Basle II norms encompassing credit, market and operational risks. The Basle norms credit, market and operational risks. The Basle norms created necessity for stronger risk management created necessity for stronger risk management architecture at the Banks.architecture at the Banks.

xvi)xvi) Permission for FDI in banks. Permission for FDI in banks.