Escolar Documentos
Profissional Documentos
Cultura Documentos
G. H. Deolalkar
Overview of Banking and tries, exports, and banking activities in the developed
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commercial centers (i.e., metro, urban, and a limited
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Financial Institutions
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number of semi-urban centers).
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The banking system’s international isolation was
The Banking Sector
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also due to strict branch licensing controls on foreign
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The banking system in India is significantly different banks already operating in the country as well as
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from that of other Asian nations because of the entry restrictions facing new foreign banks. A crite-
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country’s unique geographic, social, and economic rion of reciprocity is required for any Indian bank to
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characteristics. India has a large population and land open an office abroad.
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size, a diverse culture, and extreme disparities in in- These features have left the Indian banking sec-
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come, which are marked among its regions. There are tor with weaknesses and strengths. A big challenge
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high levels of illiteracy among a large percentage of facing Indian banks is how, under the current own-
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its population but, at the same time, the country has a ership structure, to attain operational efficiency suit-
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large reservoir of managerial and technologically ad- able for modern financial intermediation. On the other
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vanced talents. Between about 30 and 35 percent of hand, it has been relatively easy for the public sector
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the population resides in metro and urban cities and the banks to recapitalize, given the increases in
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rest is spread in several semi-urban and rural centers. nonperforming assets (NPAs), as their Government-
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The country’s economic policy framework combines dominated ownership structure has reduced the con-
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socialistic and capitalistic features with a heavy bias flicts of interest that private banks would face.
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the path of growth-led exports rather than the “export- Financial Structure
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led growth” of other Asian economies, with emphasis The Indian financial system comprises the following
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sector. The banking system has had to serve the goals b. Private sector
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nomic growth, and the reduction and elimination of (ii) State cooperative banks
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private sector monopolies in trade and industry. In (iii) Central cooperative banks
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ment of state policy, it was subjected to various na- a. All-India financial institutions (AIFIs)
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tionalization schemes in different phases (1955, 1969, b. State financial corporations (SFCs)
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and 1980). As a result, banking remained interna- c. State industrial development corporations
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massive branch expansion and attracting more people About 92 percent of the country’s banking segment
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to the system. Moreover, the sector has been as- is under State control while the balance comprises
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signed the role of providing support to other eco- private sector and foreign banks. The public sector
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nomic sectors such as agriculture, small-scale indus- commercial banks are divided into three categories.
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THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 61
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Others
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33.52
31.67
41.27
24.00
33.66
25.00
29.00
23.00
33.12
the State Bank of India (SBI) and Associate Banks
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Percent Share
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of SBI. The Reserve Bank of India (RBI) owns the
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Governmenta
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majority share of SBI and some Associate Banks of
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66.48
68.33
59.73
76.00
75.00
66.34
71.00
66.88
77.00
1
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SBI. SBI has 13 head offices governed each by a
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board of directors under the supervision of a central
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board. The boards of directors and their committees
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1.93
0.50
5.26
1.20
0.50
4.74
2.96
2.07
6.39
Total
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hold monthly meetings while the executive commit-
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Equity After Public Issue
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tee of each central board meets every week.
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Others
0.65
0.12
2.12
0.38
0.13
1.60
1.00
0.60
1.50
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Nationalized banks (19 banks): In 1969, the Gov-
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ernment arranged the nationalization of 14 sched-
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Governmenta
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uled commercial banks in order to expand the branch
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1.28
0.38
3.14
0.38
0.82
3.14
1.96
1.47
4.89
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network, followed by six more in 1980. A merger
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reduced the number from 20 to 19. Nationalized banks
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are wholly owned by the Government, although some
3.60
0.90
12.70
0.73
3.04
22.12
8.50
1.80
6.75
60.15
Total
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12.18
3.00
0.75
0.60
2.66
19.38
7.50
1.20
5.25
52.52
Premium
0.65
2.74
0.14
0.15
0.38
1.00
0.60
1.50
7.68
Equity
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4.74
1.28
0.36
0.35
2.00
0.82
1.96
1.47
4.89
December 1996
December 1996
February 1997
October 1994
January 1998
October 1997
Date of Issue
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Oriental Bank of Commerce
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GDR = global depository receipt.
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State Bank of India
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Corporation Bank
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Name of Bank
Bank of India
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Total
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Table 3: Structure of the Banking Industry in
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Terms of Total Assets, March 1997 clude the name of any bank from the Second Sched-
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ule if the bank, having been given suitable opportu-
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Total Assets
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Bank Number (Rs billion) nity to increase the value of paid-up capital and im-
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State Bank of India and associates 8 2,043.56 prove deficiencies, goes into liquidation or ceases to
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Nationalized banks 19 3,519.05
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carry on banking activities.
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Old private sector banks 25 444.54
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A system of local area banks announced by the
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New private sector banks 9 161.13
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Foreign banks 39 559.11 Government in power until 1997 has not yet taken
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190.51a
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Regional rural banks 196
root. RBI has given in principle clearance to five
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applicants.
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aAs of March 1996.
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Source: Reserve Bank of India.
Specialized development financial institutions
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(DFIs) were established to resolve market failures
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More than 40,000 NBFCs exist, 10,000 of which in developing economies and shortage of long-term
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had deposits totaling Rs1,539 billion as of March 1996. investments. The first DFI to be established was the
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After public frauds and failure of some NBFCs, Industrial Finance Corporation of India (IFCI) in 1948,
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RBI’s supervisory power over these high-growth and and was followed by SFCs at state level set up un-
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high-risk companies was vastly strengthened in Janu- der a special statute. In 1955, Industrial Credit and
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ary 1997. RBI has imposed compulsory registration Investment Corporation of India (ICICI) was set up
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and maintenance of a specified percentage of liquid in the private sector with foreign equity participa-
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reserves on all NBFCs. tion. This was followed in 1964 by Industrial Devel-
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Reserve Bank of India and Banking of RBI. The same year saw the founding of the first
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and Financial Institutions mutual fund in the country, the Unit Trust of India
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cooperative, or rural. The relationship is established A wide variety of financial institutions (FIs) has
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once the name of a bank is included in the Second been established. Examples include the National
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Schedule to the Reserve Bank of India Act, 1934. Bank for Agriculture and Rural Development
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Such bank, called a scheduled bank, is entitled to (NABARD), Export Import Bank of India (Exim
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of the following conditions laid down in Section 42 Industries Development Bank of India (SIDBI),
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(6) of the Act, as follows: which serve as apex banks in their specified areas
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• it must have paid-up capital and reserves of an of responsibility and concern. The three institutions
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aggregate value of not less than an amount speci- that dominate the term-lending market in providing
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fied from time to time; and financial assistance to the corporate sector are
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• it must satisfy RBI that its affairs are not being IDBI, IFCI, and ICICI. The Government owns in-
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conducted in a manner detrimental to the inter- surance companies, including Life Insurance Cor-
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ests of its depositors. poration of India (LIC) and General Insurance Cor-
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The classification of commercial banks into sched- poration (GIC). Subsidiaries of GIC also provide
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uled and nonscheduled categories that was introduced substantial equity and loan assistance to the indus-
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at the time of establishment of RBI in 1935 has been trial sector, while UTI, though a mutual fund, con-
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extended during the last two or three decades to in- ducts similar operations. RBI also set up in April
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clude state cooperative banks, primary urban coop- 1988 the Discount and Finance House of India Ltd.
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THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 63
(DFHI) in partnership with SBI and other banks to Magnitude and Complexity
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deal with money market instruments and to provide of the Banking Sector
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liquidity to money markets by creating a secondary The magnitude and complexity of the Indian banking
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market for each instrument. Major shares of DFHI sector can be understood better by looking at some
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are held by SBI. basic banking data. Table 4 shows classification of
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Liberalization of economic policy since 1991 has banks based on working funds.
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highlighted the urgent need to improve infrastruc-
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Table 4: Classification of Banks Based on Working
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ture in order to provide services of international stan- Funds, as of 31 March 1997
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dards. Infrastructure is woefully inadequate for the
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Classification Working Funds (Rs billion)
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efficient handling of the foreign trade sector, power
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Small Up to 50
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generation, communication, etc. For meeting spe- Medium 50–100
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cialized financing needs, the Infrastructure Devel- Large 100–250
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Very Large 250–500
opment Finance Company Ltd. (IDFC) was set up
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Exceptionally Large Above 500
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in 1997. To nurture growth of private capital flows,
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Source: Reserve Bank of India.
IDFC will seek to unbundle and mitigate the risks ○
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an efficient financial structure at institutional and In terms of growth, the number of commercial
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project levels. IDFC will work on commercial ori- bank branches rose eightfold from 8,262 in June 1969
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entation, innovations in financial products, rational- (at the time of nationalization of 14 banks) to 64,239
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izing the legal and regular framework, creation of a in June 1998. The average population per bank
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long-term debt market, and best global practices on branch dropped from 64,000 in June 1969 to 15,000
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governance and risk management in infrastructure in June 1997, although in many of the rural centers
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NBFCs undertake a wide spectrum of activities only 6,000 people per branch. This was achieved
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ranging from hire purchase and leasing to pure in- through the establishment of 46,675 branches in ru-
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vestments. More than 10,000 reporting NBFCs (out ral and semi-urban areas, accounting for 73.5 per-
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of more than 40,000 NBFCs operating) had depos- cent of the network of branches. As of March 1998,
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its of Rs1,539 billion in 1995/96. RBI initially limited deposits of the banking system stood at Rs6,013.48
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their powers, aiming to moderate deposit mobiliza- billion and net bank credit at Rs3,218.13 billion.
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tion in order to provide depositors with indirect pro- The number of deposit accounts stood at 380 mil-
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tection. It regulated the NBFCs under the provi- lion and the number of borrowing accounts at 58.10
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sions of Chapter IIIB of the RBI Act of 1963, which million. Tables 5, 6, and 7 reflect the diversification
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were confined solely to deposit acceptance activi- of branch network attained by commercial banks,
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ties of NBFCs and did not cover their functional the regional balance observed since nationalization,
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diversity and expanding intermediation. This ren- and stagnation in branch expansion in the post-re-
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dered the regulatory framework inadequate to con- form period. There has been a net decline in the num-
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trol NBFCs. The RBI Working Group on Financial ber of rural branches and a marginal rise in the num-
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powers for more effective regulation of NBFCs. A The outreach of cooperative banks and RSBs is
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for NBFCs with net owned funds (NOF) of In an effort to increase the flow of funds through
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stantially through deposits under the Rural Infrastruc-
100.0
31,806
100.0
100.0
4,716
100.0
100.0
14,420
100.0
100.0
4,261
100.0
8,839
64,239
9
188
Total
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ture Development Fund placed by commercial banks,
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as well as through the improvement of NABARD’s
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Metropolitan
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capital base and increase in the general line of credit
14.6
18.2
16.3
89.4
0.0
33.3
10.7
5,176
860
12.1
5
623
947
3
168
7,782
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Number of branches
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Percent distribution
by RBI. The functioning of cooperative banking in-
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As of 30 June 1998
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stitutions did not show much improvement during
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1996/97 and 1997/98. With deposits and credit indi-
17.5
23.4
9.0
19.2
11.1
6,100
1,102
15.4
2.0
1,358
15.0
744
17
282
1
9,604
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Urban
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cating general deceleration, the overdue position of
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these institutions remained more or less stagnant.
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Semi-urban
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34.1
35.3
1,609
6,616
27.3
20.8
1.6
2,414
22.3
12.6
1,505
1,822
21.7
13,971
2
3
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structure and practices of the commercial banking
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sector in revamping their internal systems, ensuring
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in the process timely completion of audit and upgrad-
1,145
24.3
13,914
32.6
12,311
4,120
Rural
1,389
46.6
43.7
0.0
85.4
33.3
51.2
32,882
3
0
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ing of their financial architecture. In various regions,
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there is a differing pattern of cooperative banking,
Bank Group and Population Groupwise Distribution of Commercial Bank Branches in India
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100.0
100.0
8,821
4,200
31,469
100.0
100.0
100.0
100.0
100.0
14,439
100.0
63,653
8
181
Total
10.6
0.0
5,083
88.9
605
25.0
936
11.9
7,573
2
161
16.2
Percent distribution
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1,049
23.1
17.1
5,971
15.3
1,346
9.4
12.5
1.9
718
277
14.7
17
9,379
1
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19.0
34.6
35.5
6,518
2,412
27.3
1,490
20.6
1.7
25.0
12.4
1,791
13,783
21.7
2
3
25.0
4,127
13,897
33.0
1,387
46.8
44.2
37.5
85.7
0.0
12,368
Rural
32,918
51.7
3
0
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PSBs.
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Associate Banks of SBI
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Foreign banks in India
Nonscheduled banks
Nonscheduled banks
Regional rural banks
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State Bank of India
Nationalized banks
Nationalized banks
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Total
Total
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Table 6: Credit-Deposit Ratio and Investment-and-Credit-Deposit Ratio of Scheduled Commercial Banks,
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By Region (percent)
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Credit-Deposit Ratio Investment-and-Credit-Deposit Ratio
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Region 1995 1996 1997 1998 1995 1996
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Northern Region 48.6 60.8 51.0 54.5 53.4 66.5
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Northeastern Region 35.6 34.5 29.9 58.5 68.8 56.9
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Eastern Region 47.1 47.7 39.8 63.2 62.7 63.4
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Central Region 39.0 40.5 35.1 55.1 57.3 55.7
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Western Region 63.2 69.4 65.5 68.0 67.2 73.9
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Southern Region 69.4 76.6 72.3 80.5 80.9 87.1
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Sources: Indian Bank’s Association, Reserve Bank of India.
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Table 7: Distribution of Commercial Bank Branches, By Regiona
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Number of Branches Average Population per Bank Branch (thousand)
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Region 1969 1997 ○
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1998 1969 1997 1998
Table 8: Outreach of Cooperative Banks and Regional Rural Banks, as of March 1997
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Name Number of Banks Number of Branches Deposits (Rs billion) Loans and Advances (Rs billion)
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DCCB = district credit cooperative bank, PCARDB = primary cooperative agriculture and rural development bank, RRB = regional rural bank, SCB = scheduled commercial
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Sources: Reserve Bank of India, National Bank for Agriculture and Rural Development.
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Table 9: Primary (Urban) Cooperative Bank Table 10: Gross Nonperforming Asset Ratio of
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Deposits and Other Funds (Rs billion) Primary (Urban) Cooperative Banks
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Number of NPA/Total
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a As of 31 March.
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Cooperative banks were established under the NPAs in Indian banks as a percentage of total
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Cooperative Societies Acts of different states; assets is quite low. The NPA problem of banking
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• cooperative banks have a three-tier setup, with institutions in India is exaggerated by deriving NPA
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state cooperative bank at the apex, central/dis- figures based on percentage against risk assets in-
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trict cooperative banks at district level, and pri- stead of total earning assets. The Indian banking sys-
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mary cooperative societies at rural level; tem also makes full provisions and not net of
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• only some of the sections of the Banking Regu- collaterals as practiced in other countries.
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lation Act of 1949 (fully applicable to commer- Narasimham Committee (II) noted the danger of
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cial banks), are applicable to cooperative banks, opaque balance sheets and inefficient auditing sys-
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resulting in only partial control by RBI of coop- tems resulting in an underrating of NPAs. Neverthe-
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erative banks; and less, there is a general feeling that the NPA problem
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• cooperative banks function on the principle of is manageable. Considerable attention is being de-
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cooperation and not entirely on commercial pa- voted to this problem by RBI, individual banks, and
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rameters. shareholders (Government and private).
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With the increasing focus internationally on NPAs
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Policy Issues in the ○
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during the 1990s affecting the risk-taking behavior of
Banking Sector banks, governments and central banks have typically
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The Nonperforming Asset Problem politico-economic system under which the banks op-
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OPTIMISM WITH RESPECT TO THE erate. In some countries such as Japan, banks have
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NONPERFORMING ASSET PROBLEM been encouraged to write off bad loans with retained
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The NPAs of public sector banks were recorded at earnings or new capital or both. This ensures that the
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about Rs457 billion in 1998 (Table 11). By 1997/98 cost of resolving the NPA problem is borne by the
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banks had managed to recover Rs250 billion and pro- banks themselves. However, this policy is not suitable
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visioned for Rs181.39 billion. But since new sets of for countries such as India where the banks neither
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loans go bad every year, the absolute figures could have adequate reserves nor the ability to raise new
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be increasing. About 70 percent of gross NPAs are capital. In some countries, the banks are State owned
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locked up in “hard-core” doubtful, and loss assets, so the final responsibility of resolving the problem lies
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by securities, and, therefore, recoverable. But these the governments concerned have been forced to
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are pending either in courts or with the Board for securitize the debt through debt underwriting and re-
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Industrial and Financial Reconstruction (BIFR). capitalization of the banks. For instance, in Hungary,
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of Public Sector Banks loans with the banking system, while in Poland, loans
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NPA/Gross NPA/ have been consolidated with the help of long-term re-
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1993 392.53 23.2 11.8 Most of these countries have emphasized efforts
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1996 416.61 18.0 8.2 in conjunction with one or both the measures men-
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Source: Reserve Bank of India. to coerce these firms to restructure. The former
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THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 67
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Table 12: Outstanding Advances to Priority Sectors by Public Sector Banks
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June March March March March March
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Type 1969 1994 1995 1996 1997 1998
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Amount (Rs billion)
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Agriculture 162.00 212.04 235.13 263.51 310.12 343.05
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Small-scale industries 257.00 215.61 258.43 294.82 315.42 381.09
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Others a 22.00 104.32 124.38 137.51 165.48 188.81
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Total 441.00 531.97 617.94 696.09 791.31 913.19
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Percent of Net Bank Credit
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Agriculture 5.4 15.0 13.9 14.3 16.4 15.7
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Small-scale industries 8.5 15.3 15.3 16.0 16.6 17.5
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Others a 0.7 7.4 7.4 7.5 8.7 8.7
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Total 14.6 37.8 36.6 37.8 41.7 41.8
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○
a Include small transport operations, self-employed persons, rural artisans, etc.
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Source: Reserve Bank of India, Report on Trend and Progress of Banking in India 1997/98, July 1997–June 1998.
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Czechoslovakia and Poland, for example, consolidated MAIN CAUSES OF NONPERFORMING ASSETS
○
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all NPAs into one or more “hospital” banks, which One of the main causes of NPAs in the banking sec-
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were then vested with the responsibility to recover tor is the directed loans system under which com-
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○
the bad loans. In Poland, this centralization of the re- mercial banks are required to supply a prescribed
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○
covery process was supplemented by regulations that percentage of their credit (40 percent) to priority
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○
authorized the loan recovery agency to force the de- sectors. Table 12 shows that credit supply of PSBs
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○
faulting industrial units to either restructure or face to the priority sectors has increased gradually to a
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○
liquidation. Other countries such as Bulgaria created little more than 40 percent of total advances as of
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“hospital” banks and legalized swap of debt for equity March 1998. Loans to weaker sections of society
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that gave banks stakes in the defaulting firms, and under state subsidy schemes have led borrowers to
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hence provided them with the incentive and the power expect that like a nonrefundable state subsidy, bank
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In India, conversion of loans into equity is an op- Directed loans supplied to the “micro sector” are
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tion that should be seriously considered instead of problematic of recoveries especially when some of
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attempting recovery solely through either or both le- its units become sick or weak. Table 13 shows PSB
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gal means and an asset reconstruction company loans to sick/weak industrial units. Nearly 7 percent
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(ARC). Unlike NPAs, the substitute asset of equity of PSB’s net advances was directed to these units.
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will be an intangible investment ready for sale to po- Clearly, these units are one of the most significant
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tential buyers. The DFIs have a formal conversion sources of NPAs, rather than bank mismanagement
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clause for debt to be exchanged for equity that ought on the scale that has been seen in Japan and some
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to be exercised not only if it is an NPA but also if the Southeast Asian countries. The weakness of the
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equity is appreciating. This clause has not been so banking sector revealed by the accumulated NPAs
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far much exercised. stems more from the fact that Indian banks have to
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Table 13: Public Sector Banks’ Loans to Sick/Weak Industrial Units (Rs billion)
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SSI Sick Units Non-SSI Sick Units Non-SSI Weak Units Total
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Potentially viable units 6.36 4.79 33.66 31.07 5.12 5.57 45.14 41.43
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Nonviable units 29.44 30.32 26.24 25.27 3.31 2.96 58.99 58.55
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Viability not decided 1.42 0.98 28.33 29.60 3.61 7.11 33.36 37.89
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Source: Reserve Bank of India, Report on Trend and Progress of Banking in India 1997/98, November 1997.
68 A STUDY OF FINANCIAL MARKETS
serve social functions of supporting economically Operational restructuring of banks should ensure
○
○
weak sectors with loans at subsidized rates. that NPAs in the priority sectors are reduced, but
○
○
The Narasimham Report (II) recommended that not priority sector lending. This will remain a priority
○
○
the directed credit component should be reduced from for the survival of banks. Any decisions about insu-
○
○
40 to 10 percent. As the directed credit component lating Indian banks from priority sector financing
○
○
of the priority sectors arises from loan schemes re- should not be reached until full-scale research is un-
○
○
quiring Government approval of beneficiaries, banks’ dertaken, taking into account several sources includ-
○
○
selection standards with regard to eligible borrowers ing records of credit guarantee schemes.
○
○
are being interfered with. The nexus of subsidies
○
○
should be eliminated from bank loan schemes. Tar- SMALL-SCALE INDUSTRIES: DECLINE IN SICK
○
○
gets or prescribed percentages of credit allocation UNITS AND NONPERFORMING ASSETS
○
○
toward the priority sectors should not be confused In 1996-1997, banks conducted a viability study
○
○
with directed credit. across the country of 229,234 SSI units and identi-
○
○
Government subsidy schemes were intended origi- fied 16,220 units as being potentially viable. In its
○
○
nally to prompt bankers to lend to weaker sectors. report on Currency and Finance, RBI said that the
○
○
But as the directed credit component became partly number of sick units fell from 262,376 in March 1996
○
○
politicized and bureaucratized, the realization has to 235,032 in March 1997. Of the viable units, 10,539
○
○
grown that priority sector bank credit should operate units had outstanding credit of Rs32.22 billion under
○
○
with the required degree of risk management. a nursing program for turnaround or rehabilitation.
○
○
However, the dangers of the priority credit system The RBI has called for half-yearly reports from banks
○
○
to sound banking should not be exaggerated. The to monitor progress in industrial rehabilitation. In ad-
○
○
shackles of “directed lending” have been removed and dition, it has also issued guidelines to banks on the
○
○
replaced by tests of commercial viability. Economic need for proper coordination between them and term-
○
○
activities classified under priority sector have under- lending institutions in the formulation and implemen-
○
○
gone a metamorphosis and upgrade since 1969 when tation of a rehabilitation program.
○
○
banks were first nationalized and assigned the role of The main causes of industrial sickness in non-SSI
○
○
financing the sector. The expansion of the definition units were internal factors such as deficiencies in
○
○
of the priority sector, upgrade in the value limit to de- project management (44.8 percent of the cases) and
○
○
sion for indirect lending through placement of funds well as external factors such as nonavailability of
○
○
with NABARD and SIDBI have lightened the per- raw materials, power shortages, transport and finan-
○
○
formance load of banks. Thus, priority sector financ- cial bottlenecks, increases in overheads, changes in
○
○
ing is no longer a drag on banks. But in the long term, Government policy, and demand shortfalls. The re-
○
○
Indian banks should be freed from subsidized lending. port notes that the number of sick/weak units, both
○
○
The scope in India for branch expansion in rural SSIs and non-SSIs, decreased by 27,350 (10.3 per-
○
○
and semi-urban areas is vast and also necessary. cent) from 264,750 in March 1996 to 237,400 at end-
○
○
Increasingly, NBFCs operating at such places are March 1997. However, the amount of outstanding
○
○
coming under regulatory pressure and are likely to bank credit in this regard increased by Rs3.88 billion
○
○
abandon their intermediation role. Banks will have to (3 percent) during 1996/97 to Rs137.87 billion.
○
○
move in to fill the void and these branches will find The SSI sector accounted for about 99 percent of
○
○
priority sector financing as the main business avail- the total sick units, but the share in total bank credit
○
○
able especially in rural/semi-urban centers. outstanding to such units was only 26.2 percent. The
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 69
○
○
2,374 in March 1996 to 2,368 in March 1997. Out- RBI guidelines stipulate that interest on all NPAs
○
○
standing bank credit to these units also showed a should not be charged and considered in the income
○
○
decline of 2.4 percent from Rs88.23 billion at end- account. The guidelines create some complications
○
○
March 1996 to Rs86.14 billion in March 1997. The in the accounting system. For instance, if a loan has
○
○
priority sector to which SSI belongs is not such a turned into an NPA shortly before the end of a fi-
○
○
burden on banks. On the contrary, it offers a good nancial year, the interest payments during the cur-
○
○
spread of risks and business opportunities for all types rent and previous financial years are considered not
○
○
of branches—metro, urban, semi-urban, and rural. yet earned and the corresponding book entries rec-
○
○
On the other hand, in the case of non-SSI industrial ognizing interest income should be reversed. The
○
○
units, banks are not the only source of institutional definition of income recognition has become a criti-
○
○
finance, a major part of which comes from AIFIs at cal issue in presenting a clear picture on the profit/
○
○
the project formulation stage. There will be a need loss account of banks. A review and, if necessary,
○
○
to separately study NPAs in which banks and AIFIs change in the guidelines and accounting system should
○
○
have common exposure. ○
○
○
○
immediately be undertaken.
NPA figures may be high in Indian banks, but cer- One of the important amendments introduced by the
○
2
○
tain factors need to be noted before comparing the Companies (Amendment) Ordinance in 1998 re-
○
○
country’s system with that of other Asian nations. quires that companies comply with accounting stan-
○
○
For instance, only 48 percent of banking institutions’ dards. As a step towards good corporate governance
○
○
assets are in corporate loans. The high level of pre- and better disclosure and presentation of accounts, it
○
○
emption of bank funds by the Government in the form is a milestone. However, it was introduced and imple-
○
○
of cash reserve requirement (CRR) and statutory mented in a halfhearted way. While the auditor was
○
○
liquidity requirement (SLR) is one of the reasons for required to check on compliance with accounting
○
○
low profitability of banks and poor returns on assets. standards, there was no statutory requirement for
○
○
However, in times of stress, such as the recent eco- the company to make such compliance. Now the
○
○
nomic crisis, these same assets provide balance sheet ordinance says that companies shall comply with
○
○
countries is clear from Table 14. Bank recapitaliza- The requirement covers all companies, public
○
○
tion needs in India are the lowest as a percentage of or private, listed or unlisted. That accounting stan-
○
○
gross domestic product (GDP) while their contribu- dards are now compulsory is contradicted by the
○
○
tion to developmental banking is high. This empha- requirement that if the accounting standards are
○
○
sizes the need for the Government to back the PSBs not complied with, the fact of such noncompliance,
○
○
even in the weak category. and the reasons and the financial effect of such
○
○
○
noncompliance shall be disclosed. It is possible that tors’ role in this direction are likely to outweigh costs.
○
○
a company can get away with noncompliance Auditors are also required under the new statement
○
○
merely by making the required disclosures. to add a paragraph in their audit report that highlights
○
○
The “going concern” is a fundamental accounting the going concern problem by drawing attention to
○
○
concept that allows financial statements to be pre- the relevant note in the financial statement. They
○
○
pared on the assumption that the enterprises will con- must qualify their report, however, if the manage-
○
○
tinue in operational existence in the foreseeable fu- ment does not make adequate disclosure in the fi-
○
○
ture. The Institute of Chartered Accounts of India in nancial statements.
○
○
1998 issued a Statement on Standard Auditing Prac- Clients are unlikely to welcome the going concern
○
○
tices (SAP 16) that aims to establish auditors’ re- qualification and their apprehension may well be re-
○
○
sponsibilities regarding the appropriateness of the inforced if it restricts their freedom of action, by forc-
○
○
going concern assumption as a basis for preparing ing covenants in loan agreements to be activated or
○
○
financial statements. It also elaborates the need for by restricting the freedom to pay dividends. More-
○
○
planning and conducting audits, gathering sufficient over, because of the lack of any form of quantifica-
○
○
evidence, and exercising judgment whether the go- tion, qualified reports are likely to be fuzzy and may
○
○
ing concern assumption made by directors is appro- differ significantly depending on the interpretation of
○
○
priate. The practice was to be followed for account- each audit firm. Following well-settled international
○
○
ing periods commencing on or after April 1999. The practice, it should be made mandatory for directors
○
○
conclusion that a financial statement has been pre- to confirm that the financial statements have been
○
○
pared for a going concern depends on a few funda- prepared on the basis of the going concern assump-
○
○
Prominent among these is availability of future nancial and other information and, if they are not
○
○
funding, which may affect future results as well as satisfied, comment appropriately in their audit report.
○
○
In addition, auditors will have to look at cash gener- PROBLEM OF THE REAL SECTOR VS.
○
○
ated from operations and other cash inflows, capital BANKING SECTOR REFORMS
○
○
funding and Treasury policies, inherent strengths and Changes in M3 and its select components—net bank
○
○
resources of the business, and availability of liquidity credit to Government (NBCG) and net bank credit
○
○
of the audit. Even if one accepts that auditors are offtake has slowed down and even declined in
○
○
capable of providing information about business risks 1998/99 for NBCCS (see Tables 15 and 16). Gov-
○
○
that is useful to investors and other parties, it is ques- ernment funding from banks has been rising in the
○
○
tionable whether the benefits of expanding the audi- last three years. An increase in new bank credit to
○
○
○
na = not available.
○
NBCG = net bank credit to Government, NBCCS = net bank credit to commercial sector.
○
○
Table 16: Monthly Changes in M3, March–July 1998/99 (Rs billion)
○
○
Month M3 Variation NBCG Variation in NBCG NBCCS Variation in NBCCS
○
March 8,253.89 na 3,306.19 na 4,321.90 na
○
○
April 8,376.64 122.75 3,360.85 64.76 4,316.36 (5.54)
○
May 8,460.14 83.50 3,497.40 136.55 4,298.30 (18.06)
○
June 8,554.03 93.89 3,601.38 203.98 4,286.27 (12.03)
○
July 8,616.23 62.20 3,666.97 65.59 4,329.23 42.96
○
○
na = not available, ( ) = negative values are enclosed in parentheses.
○
NBCG = net bank credit to Government, NBCCS = net bank credit to commercial sector.
○
Source: Reserve Bank of India.
○
○
○
the commercial sector in 1997/98 is partly due three problems are interrelated and suggest the need
○
○
to liquidation of high cost external commercial bor- for short- and long-term measures.
○
○
rowings. The real differences are more evident in The basic maladies affecting the financial sector
○
○
1998/99 (Table 16). in India are as follows:
○
○
There is a close connection between the relatively • structural weakness of the real sector and lack
○
○
small flow of finance to enterprises, the downward of competitiveness in international markets, and
○
○
trend in the real sector, and the depressed stock ○
○
• underdeveloped credit delivery systems that fail
market. The economy’s downward trend has per- to respond to fast changing situations.
○
○
sisted despite several initiatives taken by the mon- Strengthening the viability of the real sector has
○
○
There has been a large-scale extension of bank financial system. The Committee on Capital Account
○
○
credit to the Government at the expense of the com- Convertibility has not dwelt on the impact of expected
○
○
mercial sectors. This suggests that the principal rea- inflows of capital in relation to efficiency and ab-
○
○
son for the poor growth of bank loans is “inadequate” sorptive capacity of the real sector on the one hand,
○
○
demand, which can be traced to developments in the while emphasizing the needed strength of the finan-
○
○
real sector. The troubles faced by the real sector cial sector on the other.
○
○
also seem to originate from a fall in market demand It is mainly the second malady that has to be over-
○
○
for goods. In many industries, output expansion has come by banks and financial institutions. Future re-
○
○
been nil to modest, often with inventory pileups. Ad- forms will have to focus on how the real and the
○
○
verse market conditions facing consumer goods in- banking sectors can strengthen each other.
○
○
A cut in the bank rate by itself will have a limited The private sector’s (gross) investment in plant and
○
○
impact on the economy for the following reasons. First, machinery rose from Rs120 billion per year (3 per-
○
○
even if producers expect to make profits on their in- cent of GDP) in 1986-1990 to Rs730 billion per year
○
○
vestment and banks are willing to lend, investment (7 percent of GDP) in 1995-1997. A sixfold increase
○
○
may not materialize because of the difficulty of secur- in investment in such a short span is a structural
○
○
ing complementary finance from a depressed stock change brought about by strong macroeconomic fun-
○
○
market. Second, banks may be too wary of lending or, damentals and corporate management. There were,
○
○
more likely, may not have developed an efficient credit however, deficiencies in the management of struc-
○
○
delivery system to the major part of the economy. Third, tural reforms.
○
○
and most important, the large majority of producers The sequencing of the 1991 reforms seemed inap-
○
○
would take a dim view of future profitability of invest- propriate. Securing quick gains in the form of foreign
○
○
ment in the context of infrastructural bottlenecks. The institutional investor (FII) inflows into the capital
○
72 A STUDY OF FINANCIAL MARKETS
○
○
failed to improve the real sector and fueled stock NONPERFORMING ASSETS
○
○
price rises (the Government also did not take advan- Banks, FIs, and the market by themselves cannot
○
○
tage of disinvestment in public sector holdings). Capi- exercise control over companies. The reaction of in-
○
○
tal market liberalization and opening up avenues of vestors to falls in bond and stock prices ensures that
○
○
foreign funds raised through global depository receipt any damage is limited once there is a perception that
○
○
(GDR) issues, and other sources were not matched something is wrong. Bank financing provides a shield
○
○
by a full upgrade and modernization of the industries to companies from such short-term market whims if
○
○
to increase their competitiveness. the bank is satisfied the unit will pull through. In In-
○
○
A persistent trade deficit is indicative of an incor- dia, the process of disintermediation is of recent ori-
○
○
rect sequencing of reforms (in contrast with the gin and DFIs have, in fact, a lot of hold on compa-
○
○
People’s Republic of China [PRC], which from 1990 nies through their equity stakes and loan stakes in
○
○
onwards boosted foreign reserves through trade sur- the units financed. Even as the role of the stock mar-
○
○
pluses from manufactured goods exports). Not many ket expands, banks and DFIs still have a significant
○
○
Indian listed companies have foreign trading expo- role as finance providers and some complementarity
○
○
sure in the form of exports or imports. The concern of controls (in terms of rigors of financial discipline)
○
○
for Indian banks and FIs naturally is the risk of can be evolved to ensure corporate efficiency.
○
○
underperformance of the real sector and lack of ad- Banks are highly deficient on the stock market
○
○
equate cushion. Many companies have faced diffi- side (a position well established by the dismal record
○
○
culties in coping with adverse foreign exchange fluc- of mutual funds and merchant banking subsidiaries
○
○
tuation because of declines in the value of the rupee. floated by most of the public sector banks). Their
○
○
NPAs of banks with respect to corporate sector portfolios of investments in bonds and equities (which
○
○
lending have been caused by the following: are 100 percent risk assets) need to be screened
○
○
• neglect of core competencies; market prices alone. Banks also must adopt meth-
○
○
• diversion of new equity raised into nontradable ods of converting debt into equities in NPA accounts
○
○
• rapid growth after liberalization of merchant route. The case for corporate control is presented in
○
○
banks, which hastily vetted projects and initial Table 17, which highlights the extent of cost con-
○
○
public offerings (IPOs) in the rush to beat com- sciousness in the corporate sector.
○
○
petition, neglected to develop a debt market, Despite competition and falling profits, there has
○
○
and gave extraordinary support to raising of been no significant improvement in cost structure.
○
○
equity issues by the companies. Also, the slowdown has not made cost conscious-
○
○
The depressed stock market has caused compa- ness a top concern. This is exactly what banks and
○
○
nies to turn back to banks for finance. The loss of FIs have to be worried about. Equity holders, banks,
○
○
investor confidence happened even after several and FIs can position themselves as drivers of share-
○
○
reforms in the capital markets (some under the holder value. Credit risk analysis needs to be comple-
○
○
United States Agency for International Develop- mented by cost structure analysis and output effi-
○
○
ment’s [USAID’s] Financial Institutions Reform Ex- ciency with reference to the companies’ capital and
○
○
pansion [FIRE]) program. stock of borrowed funds. This is one reason why
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 73
○
Table 17: Cost Curve—Composition and Structure
○
(as percent of sales) outstanding receivables, although the earlier RBI
○
○
Item 1989/90 1993/94 1994/95 1997/98 stipulations of industry-wise norms have been abol-
○
○
Raw materials, stores 49.2 48.5 49.0 49.4 ished. Banks are now free to decide but buildup of
○
Raw materials 38.3 36.2 37.0 37.4
○
Stores and spares 3.6 3.4 3.1 3.2 current assets in borrowing units pushes up interest
○
○
Packaging expenses 0.5 1.2 1.2 1.1 costs of borrowing for existing borrowers and re-
○
Purchase of finished goods 6.9 7.7 7.7 7.7
○
Wages and salaries 8.5 7.5 7.1 7.2 sults in nonavailability of resources to new borrow-
○
○
Energy (power and fuel) 5.9 6.1 5.8 5.9 ers. Surplus liquidity in banks today is not an indica-
○
Other manufacturing expenses 2.3 2.6 2.7 2.5
○
Direct taxes 13.5 12.5 12.9 11.6 tor of efficient allocation of credit resources.
○
○
Repair and maintenance 1.7 1.6 1.5 1.5
Other issues concerning corporate control emerge
○
Selling and distribution expenses 4.6 5.1 5.1 5.8
○
Advertising 0.6 0.8 0.9 1.1 from closer analysis of how cash credits extended
○
○
Marketing 1.4 1.6 1.5 1.6
by banks became NPAs of defaulting borrowers while
○
Distribution 2.5 2.6 2.6 2.9
○
Amortization 0.0 0.1 0.1 0.1 they floated new industries with the help of DFIs, as
○
Miscellaneous expenses 3.8 3.6 3.6 3.9
○
well as how BIFR cases have dragged on. There
○
Nonrecurring expenses 0.5 0.3 0.2 0.3
○
Less: Expenses capitalized 0.3 0.4 0.2 0.4 ○
are 60 public sector units under BIFR review. Banks
Interest capitalized 0.0 0.2 0.3 0.3
○
interest, and tax 14.0 15.7 17.2 16.1 past became sick units later. Lack of transparency
○
or other tradable instruments of each issuer. In the DEBT RECOVERY TRIBUNAL REVAMP
○
○
US, the Federal Reserve and Federal Deposit Insur- The final report of the working committee on Debt
○
3
○
ance Corporation (FDIC) guidelines emphasize this Recovery Tribunals (DRTs) has recommended the
○
○
type of credit control. While analyzing credit offtake revamp of the tribunals to ensure that they are not
○
○
volumes, RBI equates such portfolio holdings of banks burdened with more than a specified number of cases.
○
○
to loans and advances. Qualitatively, the risk-control It has also called for the exclusion of cases under
○
○
mechanism for the two categories of assets has to the Sick Industrial Companies Act (SICA) if these
○
○
be on absolute par level. cases are filed with DRTs. In short, this will mean
○
○
Table 17 also reflects how interest from borrow- that DRTs could be given powers to override those
○
○
ing from banks and FIs remains high among total of BIFR, and this is the greatest stumbling block to
○
○
business costs of borrowers, while banks and FIs the recovery of bad debts.
○
○
have high liquidity. This problem can be combated According to the working group, not only should
○
○
by macroeconomic intervention to reduce interest there be a tribunal in every state but there should
○
○
rates to enable the economy to expand and the banks also be more than one DRT in the same state if it is
○
○
to outgrow their problems, and by banks and FIs en- justified by the workload of the tribunals. The DRTs’
○
○
suring efficient use of capital by borrowers to im- prosecuting officers should not face more than 30
○
○
prove allocative efficiency of resources. cases on any given date and there should not be more
○
○
The culture of just in time (JIT) inventories and than 800 cases in the pipeline at any given point. If
○
○
quick response (QR) to maintain an efficient supply the number of cases exceeds 800, the Government
○
○
chain is still not evident in Indian business manage- should consider appointing more tribunals to deal with
○
4
○
ment. The credit delivery system is anchored around such cases. While the working committee has
○
74 A STUDY OF FINANCIAL MARKETS
○
○
pointed to ensure speedy recovery of bank dues, it ALL-INDIA FINANCIAL INSTITUTIONS
○
○
has also stated that recovery officers may be given The net NPAs-total loans ratio at IDBI stood at
○
○
the assistance of police and professional debt recov- 10.1 percent, ICICI at 7.7 percent, and IFCI at
○
○
ery agencies. 13.6 percent as of 31 March 1998. However, loans
○
○
from other AIFIs such as LIC, GIC, UTI, and their sub-
○
○
INADEQUACIES OF THE BOARD sidiaries, Risk Capital and Technology Corporation
○
○
FOR INDUSTRIAL AND FINANCIAL (RCTC), Technology Development and Information
○
○
RECONSTRUCTION Company of India (TDICI), and Tourism Finance
○
○
A total of 320 cases were registered with BIFR in Corporation of India (TFCI), to the industrial sector
○
○
1998. This exceeded the 230 cases registered in have been substantial, but the data on their NPAs are
○
○
1997 and was a far cry from the 97 cases recorded not readily available. For state-level institutions such
○
○
in 1996. According to Board officials, a more than as SFCs and SIDCs, which lend to medium-size indus-
○
○
threefold rise in the number of cases registered try and SSI sectors, the NPA data are also not readily
○
○
since 1996 could be due to the competition that available. State-level institutions benefit from a spe-
○
○
companies are facing because of economic liber- cial recovery procedure allowed under their separate
○
○
On the other hand, the board seems to be unable IFCI, the other AIFIs are not under RBI’s regulatory
○
○
to cope with the deluge of cases. It is working with discipline. There is a need to study features of their
○
○
only one bench and eight members. SICA provides loan operations, credit control, and NPAs.
○
○
posed only 127 cases compared to 220 cases in Greater transparency in banks’ balance sheets and
○
○
1997. With the disposal of another five to ten cases penal action by RBI, including against bank auditors,
○
○
in 1998, this adds up to a dismal record of about require highly focused action. Internal audits in banks,
○
○
135 cases—only almost half of the number of cases now supervised by audit committees of respective
○
○
PUBLIC SECTOR BANKS’ BAD DEBTS: holders of the banks. High standards of preventive
○
○
Government ownership in banks attracts parliamen- management with respect to “off-balance sheet
○
○
tary review. The Estimates Committee of Parliament items” requires considerable attention as evidenced
○
○
takes a serious view of adverse comments made by instances of losses on letters of credits and guar-
○
○
against top managements of PSBs and NPAs on antees business. This applies also to auditing off-bal-
○
○
account of transgression of powers. The committee ance sheet items. At the macro level, the size of
○
○
called for a total revamp of the training system for NPAs as a percentage of GDP provides a good
○
○
bank officers. The committee also noted that public measure to assess the soundness of the system.
○
○
sector undertaking (PSU) banks have to be able to The issue needs to be tackled in terms of market
○
○
contain NPAs at a par with international standards segments from which NPAs have emerged: not put-
○
○
where the tolerable levels of NPAs are “around 3 to ting them simply under the umbrella of “priority sec-
○
○
wider market segments (for example, agriculture as restructured troubled loan would not automatically
○
○
a market segment has itself many subsegments). be classified as an impaired loan. In India, however,
○
○
any restructuring automatically classifies the assets
○
○
PRUDENTIAL NORMS as impaired. Banks and institutions are required to
○
○
RBI is considering changes in asset classification, classify the restructured loans as substandard for two
○
○
income recognition, and provisioning norms in line years and are prohibited from booking interest dur-
○
○
with recommendations of the Basle Committee on ing this period. The “relaxation” in asset classifica-
○
○
Banking Supervision that were made public in Octo- tion norms will mean little in the Indian context.
○
○
ber 1998. It remains to be seen if RBI will give banks In developed financial systems, it is beneficial to
○
○
and FIs discretion in the classifications of assets, have flexibility in determining weights for NPAs.
○
○
partially replacing the prevailing rigid norms and re- However, liberal measures should be introduced only
○
○
defining provisioning norms taking into account col- when all local players employ greater transparency
○
○
lateral. According to current practice, banks and FIs in the asset classification process. It is necessary to
○
○
are required to make 10 percent provisioning on sub- first ensure that companies and borrowers follow
○
○
standard assets and 20 percent on doubtful assets, ○
○
norms of disclosure and transparency. Much needs
even if the assets are backed by collateral. to be done in this respect by the Institute of Char-
○
○
culated a consultative paper entitled “Sound Prac- The condition of Indian banks under the present
○
○
tices for Loan Accounting, Credit Risk Disclosure, norms has improved, contributing to a better culture
○
○
and Related Matters,” complementing the Basle core of recovery. The borrowers must respond with bet-
○
○
RBI has already taken steps to implement the Basle SEPARATING SUPERVISION
○
○
core principles, which broadly deal with risk manage- The Narasimham Committee (II), while recommend-
○
○
ment, prudential regulations relating to capital adequacy, ing separation of supervision, admits that conflicting
○
○
and various internal control requirements. international experience has left no overwhelming
○
○
Banks and FIs have been insisting that existing case for either separation or combining of the cen-
○
○
asset classification rules are rigid leaving no scope tral bank’s supervisory powers. The likely conflict
○
○
for discretion, while the Basle Committee has said between monetary policy and supervisory concerns
○
○
that recognition and measurement of impairment of justifies the need to combine the two functions. Sepa-
○
○
a loan cannot be based only on specific rules. The rate authority structures for the two functions have
○
○
committee has also indicated that banks should iden- more likelihood of coming into conflict with each other.
○
○
tify and recognize impairment in a loan when the Economic downturns tend to highlight supervisory
○
○
chances of recovery are dim. It also stated that the concerns, and can put the banking system at risk and
○
○
focus of assessment of each loan asset should be subject the monetary authority to face the counter-
○
○
based on the ability of the borrower to repay the pressure of reflecting economic circumstances. The
○
○
loan. The value of any underlying collateral factors choice then becomes one of fine balance. Combining
○
○
also plays a major role in this assessment. supervisory functions with monetary policy can pro-
○
○
Another major difference between the Basle Com- vide a synergy that will get lost by separation. In fact,
○
○
mittee recommendations and the existing asset clas- central banks take on the supervisory function in more
○
○
sification norms in India relates to “restructured” than 60 percent of IMF member countries. In the case
○
○
loans. According to the Basle Committee norms, a of African and Asian countries alone, the figure is
○
76 A STUDY OF FINANCIAL MARKETS
more than 80 percent. In other countries, supervision reforms were first introduced under recommenda-
○
○
involves varying degrees of central bank involvement. tion of the Narasimham committee (I), the 27 (then
○
○
The regulatory and supervisory systems have to 28) PSBs were placed under A, B, and C catego-
○
○
take into account peculiarities of the banking and fi- ries; i.e., sound banks, banks with potential weak-
○
○
nancial structures as well as historical and cultural ness, and sick banks, respectively. Accordingly, re-
○
○
factors. For example, in India, the rural banking sec- capitalization and restructuring were carried out for
○
○
tor is large and the cooperative movement strong but B and C categories.
○
○
the banks in this sector have remained generally fi- For individual ratings by international rating agen-
○
○
nancially weak. No amount of sophisticated mon- cies, a bank is assessed as if it were entirely inde-
○
○
etary policy management is likely to provide props to pendent and could not rely on external support. The
○
○
this sector. What it needs is financial strengthening, ratings are designed to assess a bank’s exposure to
○
○
management upgrades, and different norms of finan- risks, appetite for risks, and management of risks.
○
○
cial supervision with reference to culture and the eco- Any adverse or inferior rating is an indication that it
○
○
nomic activity of the clients. Rural and semi-urban may run into difficulties such that it would require
○
○
populaces need dependable banks and rarely get al- support. Such credit rating announcements ignore the
○
○
ternatives in the form of banking competition. public sensitivity to which the banking system is con-
○
○
The importance of rural banking sector has been stantly exposed. The individual and support ratings
○
○
overlooked in the various deliberations of banking and are further explained in Table 18.
○
○
financial reforms in India. Several issues need to be The public expects banks to try to anticipate
○
○
raised in this regard. For instance, the separation of changes, recognize opportunities, deal with and
○
○
supervisory functions and monetary policy formula- manage risks to limit losses, and create wealth
○
○
tion would only harm the interests of the rural banking through lending. While the best banks may always
○
○
sector, which RBI and NABARD look after. Then, play a super-safe role by confining operations to
○
○
there is also the question of the large number of urban choice centers and business segments, banks in
○
○
cooperative banks, which serve communities in dif- India are expected to operate on a high-risk plane.
○
○
ferent cities and adjoining areas. How can a separate As such, the Government should support banks
○
○
supervisory body develop methods and resources to even during stages when they are nudged to offer
○
○
Regulatory Issues
○
gaze, there will be vacuum in places where there is The Indian Banks’ Association (IBA) should evolve
○
○
no bank and the NBFC is required to fold. Regula- into a self-regulatory organization (SRO) that would
○
○
tors have to ensure that banking expansion is pro- work toward strengthening India’s fairly weak bank-
○
○
moted in these places. ing sector and the sector’s moral regulator. Its broad
○
○
RBI has subjected banks to ratings under capital completing an organizational restructuring after which
○
○
adequacy, asset quality, compliance, and system it will examine its role as an SRO. It is now an advi-
○
○
(CACS); and capital adequacy, asset quality, man- sory organization of banks in India and its members
○
○
agement, earnings, liquidity, and systems (CAMELS) include most of the PSBs, private banks, and foreign
○
○
models for differentiating supervisory priorities. When banks. Its main activities involve generation and ex-
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 77
○
Table 18: Ratings of Banks
○
○
Individual Rating Support Rating
○
○
Very Strong. Characteristics may include A bank for which there is a clear legal guarantee on the part of
○
outstanding profitability and balance sheet integrity, the state, or a bank of such importance both internationally and
○
○
franchise, management, operating environment, or domestically that support from the state would be forthcoming,
○
prospects. if necessary. The state in question must clearly be prepared
○
and able to support its principal banks.
○
○
Strong. Characteristics may include strong A bank for which state support would be forthcoming, even in
○
the absence of a legal guarantee. This could be, for example,
○
profitablity and balance sheet integrity, franchise,
○
management, operating environment or prospects. because of the bank’s importance to the economy or its historic
○
relationship with the authorities.
○
○
Adequate. Possesses one or more troublesome A bank or bank holding company that has institutional owners of
○
aspects on profitability and balance sheet integrity, sufficient reputation and possessing such resources that
○
○
franchise, and management, operating environment support would be forthcoming, if necessary.
○
or prospects.
○
○
Weak. Weaknesses of internal and/or external A bank for which support is likely but not certain.
○
origin. There are concerns regarding profitability
○
○
and balance sheet integrity, franchise,
○
management, operating environment or prospects. ○
○
Problematic. Has serious problems that either A bank or bank holding company, for which support, although
○
require or are likely to require external support. possible, cannot be relied upon.
○
○
○
change of ideas on banking issues, policies; and prac- practices. This can, however, be all very well in theory
○
○
tices; collection and analysis of sectoral data; per- but difficult to practice because an SRO is more of a
○
○
sonnel administration; and wage negotiations between culture than an institution. It takes a long time to breed
○
○
labor unions and bank managements. But in its new a culture of self-regulation. The respect for a super-
○
○
role, it would reportedly expand its functions to supple- visor has to be earned and does not happen over-
○
○
strengthening the sector. IBA has to transform itself into a “real” industry
○
○
While the sector’s risk profile improved consider- body once the IBA management committee acts on
○
○
ably after prudential norms were introduced in 1994, the blueprint for change proposed by a consulting
○
○
by international standards, India’s banking sector is firm. The proposal is to overhaul the structure of the
○
○
perceived as fairly weak with poor asset quality by organization to increase efficiency. The new focus
○
○
leading agencies such as Standard & Poor’s. The is on networking as IBA was, for a long time, work-
○
○
SRO would examine and recommend the implemen- ing in isolation. Now the objective is to emerge as a
○
○
tation of more stringent prudential norms as laid out representative body for the banking industry. IBA has
○
○
in the recommendations of the Narasimham Com- already started interacting with different industries and
○
○
mittee (II). It would encourage practices to strength- looking into various aspects of financing software com-
○
○
en the sector. Its expanded role could incorporate panies, the film industry, construction companies, and
○
○
IBA as an SRO would have to ensure that banks Deregulation has helped promote competition and
○
○
follow at least a certain minimum level of prudential efficiency in the banking system in India and will
○
78 A STUDY OF FINANCIAL MARKETS
have a positive impact on systemic risk in the long partite Group agreed that the term “financial con-
○
○
run. Initially, however, deregulation has affected the glomerate” would be used to refer to “any group of
○
○
stability of the banking sector. Substantial progress companies under common control whose exclusive
○
○
has been made toward stronger regulatory frame- or predominant activities consist of providing signifi-
○
○
works. Changes in banks’ reporting requirements, cant services in at least two different financial sec-
○
○
improvement in the quality of on-site supervision, and tors (banking, securities, insurance).” Many of the
○
○
the establishment of credit information and loan-grad- problems encountered in the supervision of financial
○
○
ing and provisioning requirements have all helped. conglomerates would also arise in the case of mixed
○
○
More important, a focus on evaluating bank solvency, conglomerates offering not only financial services,
○
○
more than enforcing a set of detailed regulations, has but also nonfinancial services and products. Coordi-
○
○
resulted in lower systemic risk across the board. But nation between RBI, Insurance Regulatory Author-
○
○
there are still many instances in which neither inves- ity, and Securities and Exchange Board of India
○
○
tors nor bank supervisors are able to properly moni- (SEBI) is becoming increasingly urgent.
○
○
tor an institution’s creditworthiness.
○
Asset Liability Management
○
Asset quality is still the main source of risk for a
○
○
financial institution and must be carefully assessed. MATURITY MISMATCH
○
○
There are loan classification systems in which bad Interest rates have changed several times over the
○
○
loans can be converted into good ones through re- past seven years causing maturity transformations
○
○
structuring and are never reported as bad by rolling in assets and liabilities and their frequent repricing.
○
○
over the debt (“evergreening”). In some instances A clear and continuous statement of rate sensitive
○
○
the main factor for loan classification is performance assets and rate sensitive liabilities has to form the
○
○
of payment instead of the financial position of bor- basis of interest rate risk management. RBI is ex-
○
○
rower, which also creates difficulties in assessing pected to issue guidelines that show that manage-
○
○
credit risk. Previously, DFIs in India supported new ment-driven asset liability management (ALM) ini-
○
○
industries through equity and loan participation, and tiatives in banks are absent. This is also the reason
○
○
they usually insisted on payment of dues on existing why India’s money market has remained mostly as a
○
○
loans. But these payments may be diverted from call money market that is meant for clearing day to
○
○
working capital sourced from cash credit facilities day temporary surpluses and deficits among banks.
○
○
defaulters could promote new industries. What is have used “call” money as a regular funding source.
○
○
important, therefore, is not merely payment record PSBs are notably absent players in the market for
○
○
but actual surplus generation by the borrowers to term funds since they lack data on maturity gaps and
○
○
qualify for investment in new ventures. Consolidated interest rate gaps to be complied under ALM disci-
○
○
supervision of banks and their subsidiaries is another pline. The common complaints about difficulties in
○
○
important area that needs to be addressed in future collection of data from hundreds of rural and semi-
○
○
regulatory framework improvements. urban branches will not be combated unless there is
○
○
In 1993, the Bank for International Settlements (BIS) According to RBI and many PSBs, about 80 per-
○
○
set up a Tripartite Group of banking, securities, and cent of deposits are term deposits (one to three
○
○
insurance regulators to consider ways of improving years). Long-term lending (three to five years) com-
○
○
the supervision of financial conglomerates. The Tri- prises about 30 percent of total loans and thus, matu-
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 79
rity mismatch is not a serious issue. However, this An example of such organizational structure re-
○
○
claim may not be valid as maturity of deposits and view is strengthening the authority of a financial
○
○
term loans are not disclosed. Moreover, banks have institution’s ALM committee, or by establishing an
○
○
invested a large portion of funds in Government se- ALM expert section or a middle office. Risk man-
○
○
curities and debentures (long-term assets). RBI agement can shift from the worst method of con-
○
○
should highlight and address the real maturity mis- trolling the market risks related to assets and liabili-
○
○
match issue. Call money market is an age-old termi- ties to an integrated risk management measure in-
○
○
nology that RBI itself has to stop referring to in its corporating the credit risks in the banking and trad-
○
○
publication. The “call” segment of the market is dif- ing accounts. This shift would enable objective as-
○
○
ferent from the “term” segment in all sophisticated sessments of profitability and, based on these as-
○
○
market centers in the world. sessments, a strategic allocation of resources could
○
○
be carried out.
○
○
ASSET LIABILITY MANAGEMENT In general, the development of ALM operations
○
○
SOPHISTICATION has to be in the direction of an objective and com-
○
○
The importance of more sophisticated ALM has in- ○
○
prehensive measurement of various risks, a pursuit
creased for Indian banks in view of liberalization of of returns commensurate with the size of the risk,
○
○
interest rates and business activities, limits to the and a strategic allocation of capital and human re-
○
○
expansion of lending volume, introduction of deriva- sources based on the risk. This can be said to be the
○
○
tives, prevailing international discussions concerning key to successful ALM in an era of financial liberal-
○
○
risk management, innovation of computer technol- ization. Unless Indian banks and FIs adopt these prin-
○
○
ogy, and globalization. In ALM, risks in the banking ciples, there can be little progress in the following
○
○
products including deposits and loans and the trading • upgrading of trading techniques;
○
○
account, which mainly comprises short-term trading • implementation of flexible ALM operations in the
○
○
products such as foreign exchange and investments) banking account, such as strategic risk-taking op-
○
○
are managed separately. The primary focus is on erations that use interest rate swaps and invest-
○
○
how to hedge the passively arising interest rate risk ment securities and strategic pricing of medium-
○
○
However, given the changes in the business envi- tion of interest rate risk at the head office through
○
○
ronment, Indian banks and financial institutions have a review of the interoffice rate; and
○
○
to move forward to maximize profits through com- • with regard to customer business, the provision
○
○
prehensive measurement and management of mar- of various financial services based on improved
○
○
ket risks, particularly interest rate risk, by market risk management ability—for example,
○
○
• upgrading the risk management measures for the development of new types of deposit and
○
○
banking and trading accounts, thus integrating the loan products involving the use of derivatives and
○
○
risk measurement for the institution as a whole; the provision of ALM services—and the search
○
○
• shifting the focus of ALM in the banking ac- for new clients among small- and medium-size
○
○
count from simply hedging risks to actively tak- firms through sophisticated credit risk manage-
○
○
• reviewing organizational structure to make risk The evolution in financial management in terms
○
○
management more sophisticated and provide for of sophistication in ALM operations has to be an
○
○
more flexible ALM operations. autonomous response and not driven by regulators.
○
80 A STUDY OF FINANCIAL MARKETS
SINGLE CUSTOMER LIMIT efforts to curb the fiscal deficit caused monetary
○
○
Single customer limits are set at less than 25 percent policy to be tight and interest rates to remain high.
○
○
of net worth of the bank for a single customer, and Now that an industrial slowdown has set in, RBI has
○
○
less than 50 percent of net worth of the bank for a concluded that nothing should be done to dampen
○
○
group. By definition, a loan includes debentures is- the emerging signs of incipient recovery and focus
○
○
sued by the customer. As loans of PSBs are limited, should be largely on strengthening balance sheets of
○
○
they would be able to comply with these ceilings. banks and financial institutions.
○
○
However, small private banks may exceed these Excess investments made by banks in Govern-
○
○
ceilings if proper supervisory measures are not un- ment securities point to the fact that investable sur-
○
○
dertaken. pluses have not been adequately deployed to finance
○
○
industry and trade. Clearly, banks have been un-
○
○
RISK ASSESSMENT OF INVESTMENT able to predict interest rate changes, the root cause
○
○
Banks are required to comply with the SLR by in- being that ALM has been neglected. Through
○
○
vesting in approved securities, e.g., central Govern- 1993/94 to 1997/98, PSBs invested in Government
○
○
ment bonds, Treasury bills (T-bills), and state gov- securities in excess of SLR requirements by an av-
○
○
ernment bonds. Moreover, banks invest in PSU erage of 6 to 7 percent. The trend continued even
○
○
bonds, corporate debentures, and equities (limit is through periods of high growth in the economy when
○
○
5 percent of the increase in the previous year’s de- the overall GDP grew at more than 7 percent. The
○
○
posits). Investments are assessed at market prices. growth in SLR securities with the banks in excess
○
○
As for approved securities, only 60 percent of out- of the requirement has been high. PSBs had
○
○
standing are assessed at mark-to-market. It is diffi- excess Government securities to the tune of
○
○
cult to identify the actual asset position of banks if Rs160.68 billion in March 1994. This grew to
○
○
approved securities are not assessed at market price. Rs227.15 billion by March 1995, Rs316.77 billion
○
○
For this reason, RBI is planning to require banks to by March 1997, and Rs408.74 billion by March 1998.
○
○
assess 100 percent of the approved securities at mark- Investments in Government securities are totally
○
○
to-market in a few years. risk free over a certain period. Banks can end up
○
○
These regulations are based on the Government’s making large provisions if interest rates rise consis-
○
○
objective of bringing down fiscal deficit. It recog- tently over several years. This would depreciate the
○
○
and FIs to increase the share of Government securi- and 1996 when Government securities depreciated
○
○
ties in their portfolio without affecting their own vi- as interest rates perked up. Based on their experi-
○
○
ability and indeed the viability of the productive sec- ence, RBI has begun to assign some risk weight to
○
○
Despite the progressive reduction in the SLR over buying heavily into them.
○
○
the past five years in the wake of implementation of Assigning risk weight to Government securities,
○
○
Narasimham Committee (I) recommendations, banks however, contradicts the statutory requirement of
○
○
voluntarily directed high deposits growth into risk- maintaining minimum liquidity in Government securi-
○
○
free assets of Government securities. This trend co- ties investments. Also, balance sheets would not be
○
○
incided with companies raising external commercial strengthened significantly nor would the attraction
○
○
borrowings and issuing GDRs in international mar- of investing excess funds in Government securities
○
○
kets in preference to borrowings from banks. Back- be removed. Instead, banks should have strong ALM
○
○
tracking during previous changes in government on practices and risk management system in the com-
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 81
mercial lending area. RBI and Government should ments but the regulatory and risk management ap-
○
○
improve bank balance sheets by removing contami- paratus is not fully ready.
○
○
nation effect of NPAs in the form of Government-
○
○
guaranteed loans; i.e., by issuance of special Gov- DEPOSIT INSURANCE PREMIUMS
○
○
ernment bonds in favor of banks for converting such The banking crisis that plagued the US during the
○
○
NPAs into Government debt. 1980s was instrumental in drawing the attention of
○
○
The conflicting considerations—the need to re- policy makers to the fact that the system of deposit
○
○
duce monetary expansion while at the same time insurance has to be reformed. In the absence of
○
○
nurturing real growth—starkly illustrate the mon- deposit insurance, banks are vulnerable to a run that
○
○
etary policy dilemma that RBI faces. It has not pro- will precipitate a liquidity crisis in the financial sys-
○
○
posed to change the CRR or interest rates, and will tem. As a consequence, most Governments implic-
○
○
continue to manage liquidity through open market itly or directly guarantee the deposits in their re-
○
○
operations and repo operations. RBI will not hesi- spective banking systems. However, deposit insur-
○
○
tate to resort to further monetary tightening if infla- ance can lead to problems in the form of an in-
○
○
tionary pressures increase or if external develop- ○
○
crease in the proportion of credit disbursed to risky
ments warrant. Going a step beyond the recom- borrowers.
○
○
mendations of the Narasimham Committee (II) on This realization led to a reform of the deposit
○
○
introduction of market risk to Government and ap- insurance regime in the US with the enactment of
○
○
proved securities, an additional risk weight of the Federal Deposit Insurance Corporation Improve-
○
○
20 percent on investments in Government-guaran- ment Act, which imparts greater autonomy on the
○
○
teed securities of Government undertaking that do banks. The Act provides that “as long as it appears
○
○
not form part of a market borrowing program is that a bank will be playing with its own money (capi-
○
○
also being introduced. tal), almost any activity that can be adequately
○
○
TRADING RISK MANAGEMENT the structured early resolution fails, early resolution
○
○
Banks in India need a new attitude toward the scope is required through recapitalization by current share-
○
○
and extent of different types of risks. These risks holders, sale, merger or liquidation before the
○
○
are made up of the dynamics between many con- institution’s capital turns negative.” Clearly, the Act
○
○
flicting parameters—for example, balancing the aims to eliminate agency problems by ensuring that
○
○
needs of market constraints, industries, and geo- the losses are restricted to the shareholders, and do
○
○
graphic concentrations with the individual require- not spill over to affect the depositors or the Govern-
○
○
Information to support such understanding has not In India, however, the Narasimham Committee
○
○
historically been defined nor kept within banks’ sys- (II) has recommended differentiated premium rates,
○
○
tems. Trading portfolios of banks in India are be- which would amount to broadcasting to the public
○
○
coming diverse with the range of bonds, equities, and the status of banks. An alternative would be for the
○
○
derivative instruments, and allowance made by RBI deposit insurance system to extend rebates to banks
○
○
permitting investments in overseas markets. Debt showing improvements and deduct the rebate amount
○
○
swaps and interest rate swaps as well as currency from the next year’s premium. Rebates would be on
○
○
swaps are entered into with foreign banks and such the basis of annual performance whereas penal pre-
○
○
exposures need special monitoring. There is an ea- mium rates would operate only after deterioration is
○
○
Function of Bank Capital investor confidence low, and bank issues unpopular
○
○
CAPITAL ADEQUACY with investors. The need for general provisioning on
○
○
Capital adequacy is a self-regulatory discipline and standard assets increases the pressure on profitabil-
○
○
cannot save banks that are distressed. As such, the ity of banks as Government-guaranteed securities
○
○
time required for meeting bank capital adequacy must are prone to default.
○
○
be shortened to a minimum. The CAMEL rating sys- RBI has decided to implement certain recommen-
○
○
tem clearly recognizes the strength of bank capital dations of Narasimham Committee (II).
○
○
as just one requirement and also an end product of • Banks are to achieve a minimum of 9 percent
○
○
other processes, mostly management driven. It is CAR by 31 March 2000. Decisions on further
○
○
essential to amplify the quality of earnings as it is the enhancement will be made thereafter.
○
○
first thing that catches shareholders’ attention. His- • An asset will be treated as doubtful if it has re-
○
○
tory shows that banking problems germinate during mained substandard for 18 months instead of 24
○
○
years of economic boom. When the earnings com- months. Banks may make provisions in two
○
○
ponent becomes volatile and susceptible to sharp phases. On 31 March 2001 provisioning will be at
○
○
growth that is not sustainable, the quality of loan/risk not less than 50 percent on the assets that have
○
○
assets can become suspect. become doubtful on account of the new norms.
○
○
PSBs are owned by the Government, therefore, • On 31 March 2002, a balance of 50 percent of
○
○
they have implicit guarantees from the Government, the provisions should be made in addition to the
○
○
resulting in the lack of capital adequacy ratio provisions needed by 31 March 2001. A pro-
○
○
(CAR) norm. Given the recommendation of the posal to introduce a norm of 12 months will be
○
○
dard of capital adequacy, a CAR of 8 percent was • Government-guaranteed advances that have
○
○
to be achieved by March 1996. Twenty-six out of turned sticky are to be classified as NPAs as
○
○
27 PSBs had complied with this requirement as of per the existing prudential norms effective 1 April
○
○
Narasimham Committee (II) recommended CAR made over a period of four years such that ex-
○
○
targets of 9 percent by 2000 and 10 percent by 2002. isting/old Government-guaranteed advances that
○
○
As many PSBs have already high CARs (some indi- would become NPAs on account of new asset
○
○
March 1998), such targets could be attained. More- during the next four years from the year ending
○
○
over, as 35 percent of deposits are allocated to CRR March 1999 to March 2002 with a minimum of
○
○
and SLR, coupled with investment in Government 25 percent each year. To start with, banks should
○
○
guaranteed bonds, risk assets are not preferred. make a general provision of a minimum of
○
○
However, RBI has introduced a calculation method 0.25 percent for the year ending 31 March 2000.
○
○
that 60 percent of approved securities should be mark- The decision to raise further the provisioning re-
○
○
to-market, and the ratio will be raised to 100 percent quirement on standard assets shall be announced
○
○
ratio, many banks increased investments in approved • Banks and financial institutions should adhere
○
○
The banks will have difficulties raising more capi- provisioning, etc., and avoid the practice of
○
○
• Banks are advised to take effective steps for lenges to bank management. The time frame allowed
○
○
reduction of NPAs and also put in place risk man- for adjustments seem to be insufficient since profit-
○
○
agement systems and practices to prevent re- ability cannot be raised rapidly enough to accommo-
○
○
emergence of fresh NPAs. date additional provisioning and still be considered
○
○
• PSBs shall be encouraged to raise their tier-2 attractive by investors. This raises a question on how
○
○
capital, but Government guarantee to bond is- far banks will actively support growth through new
○
○
sues for such purpose is deemed inappropriate. financing initiatives. Clearly, additional returns to in-
○
○
• Banks are advised to establish a formal ALM ject better profitability in the short run have to come
○
○
system beginning 1 April 1999. Instructions on from (already shrunk) avenues of short-term financ-
○
○
further disclosures such as maturity pattern of ing and not from new industrial and infrastructure
○
○
assets and liabilities, foreign currency assets and projects, which entail long gestation periods.
○
○
liabilities, movements in provision account, and
○
○
NPAs, will be issued in due course. TIER-2 CAPITAL FOR BANKS
○
○
• Arrangements should be put in place for regular To meet CAR requirements, seven banks—Canara
○
○
updating of instruction manuals. Compliance has ○
○
Bank, Punjab National Bank, Central Bank of India,
to be reported to RBI by 30 April 1999. Indian Overseas Bank, United Bank of India, Fed-
○
○
• Banks are to ensure a loan review mechanism eral Bank (private sector), and Vijaya Bank—are
○
○
for large advances soon after their sanction and finalizing plans to raise about Rs20 billion worth of
○
○
continuously monitor the weaknesses develop- subordinated debt, which qualifies as tier-2 capital.
○
○
ing in the accounts in order to initiate corrective The funds will be raised in the form of bonds from
○
○
• A 2.5 percent risk weight is to be assigned to With this, the total amount of tier-2 borrowing (pri-
○
○
Government/approved securities by March 2000. marily debentures and bonds as against equity shares,
○
○
• Risk weights to be assigned for Government- which are considered tier-1 capital) planned in
○
○
guaranteed advances sanctioned effective 1 April November 1998 to February 1999 might have ex-
○
○
– central Government: 0 percent; While RBI regulations have capped the coupon
○
○
– state government: 0 percent; rate on bank offerings to 200 basis points (bp) above
○
○
– governments that remained defaulters as of the coupon rate on similar Government securities,
○
○
31 March 2000: 20 percent; and none of these banks can hope to find market interest
○
○
– governments that continue to be defaulters af- at such fine rates. A five- to six-year bank borrow-
○
○
ter 31 March 2001: 100 percent. ing will have to be capped at about 14 percent as
○
○
The latest figures (as of 1997/98) for banks’ and similar Government borrowing was effected at a
○
○
selected financial institutions’ capital adequacy are coupon of 11.78-11.98 percent in 1998-1999. How-
○
○
shown in Tables 19 and 20. Table 19 indicates that ever, with the top of the line FIs raising five-year
○
○
most PSBs have comfortable CARs but once the funds at 14 percent, these banks will have to offer
○
○
accounts are recast in conformity with the forthcom- more incentives to investors. Public issue timing and
○
○
ing provisioning norms, banks will have to start plan- pricing is a new challenge for PSBs. There are re-
○
○
ning for capital issues. The size of bank issues, se- ports that some banks have invested in tier-2 capital
○
○
quencing, and readiness of the capital market to ab- issues of other banks and it remains to be seen how
○
○
sorb all public offerings will pose tremendous chal- it will affect their CAR.
○
○
○
84 A STUDY OF FINANCIAL MARKETS
○
Table 19: Capital Adequacy Ratio of Public Sector Banks, 1995/96–1997/98 (percent)
○
○
Name of Bank 1995/96 1996/97 1997/98
○
○
State Bank of India 11.60 12.17 14.58
○
State Bank of Bikaner & Jaipur 9.33 8.82 10.65
○
○
State Bank of Hyderabad 9.90 10.84 10.83
○
State Bank of Indore 8.80 9.31 9.83
○
State Bank of Mysore 8.81 10.80 11.61
○
○
State Bank of Patiala 9.51 11.25 13.24
○
State Bank of Saurashtra 12.38 12.14 18.14
○
○
State Bank of Travancore 9.40 8.17 11.48
○
Allahabad Bank 9.68 11.00 11.64
○
Andhra Bank 5.07 12.05 12.37
○
○
Bank of Baroda 11.19 11.80 12.05
○
Bank of India 8.44 10.26 9.11
○
○
Bank of Maharashtra 8.49 9.07 10.90
○
Canara Bank 10.38 10.17 9.54
○
Central Bank of India 2.63 9.41 10.40
○
○
Corporation Bank 11.30 11.30 16.90
○
Dena Bank 8.27 10.81 11.88
○
Indian Bank neg. neg. 1.41
○
○
Indian Overseas Bank 5.95 10.07 9.34
○
Oriental Bank of Commerce ○
○
16.99 17.53 15.28
Punjab & Sind Bank 3.31 9.23 11.39
○
neg. = negative.
○
Financial Institutions, 1997 and 1998 (%) to broader customer bases. Such global trends are
○
○
IDBI 14.7 13.7 The Indian banking system is still in the growth
○
○
Exim Bank 31.5 30.5 policies originate from the Government. Even the
○
○
Industrial Investment Bank of India, NABARD = National Bank for Agriculture and
forms benefited neither bank.
○
Mergers and Recapitalization DFIs, and NBFCs raise the issue of merging banks,
○
○
○
Global trends in the banking industry in recent years ers would be determined by the size of the balance
○
○
have focused on cost management, which drove sheet, or by efficiency, competitiveness and strate-
○
○
banks to venture into nontraditional functions, stan- gic repositioning to reduce intermediation costs, ex-
○
○
dardize products, centralize activities, and form merg- pand delivery platforms, and to operate on econo-
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 85
mies of scale. The Government is disinclined to urge associate banks to expand in their respective regions.
○
○
mergers whereas RBI wants market forces to de- Such a policy may accelerate improvement in the
○
○
cide. population per branch ratio and also productivity.
○
○
In the corporate world, 50 percent of mergers fail
○
○
due to cultural incompatibility of the two organiza- RECAPITALIZATION
○
○
tions coming together. The Government in 1996/97 The Government owns the core of the Indian bank-
○
○
favored merging banks to create megabanks of in- ing sector, a factor that has contributed to its quick
○
○
ternational size and competitiveness. The only merger recovery from capital shortage. It did not need to
○
○
that materialized was five years ago between ICICI adopt the complicated procedures observed in the
○
○
(a DFI) and the financially ailing Imperial Tobacco rehabilitation processes of Japan and Korea to inject
○
○
Company (an NBFC of the multinational: ITC). ICICI public funds into major banks. The Government even
○
○
had the incentive of a tax shield advantage in addi- helped the nationalized banks increase their CARs
○
○
tion to expansion into retail business and a network (Table 21).
○
○
advantage. But the resulting merger was widely re-
○
Table 21: Capital Contributions by Government
○
garded as unsuccessful for both parties. ○
○
to Nationalized Banksa (Rs billion)
Mergers of international banks are being evolved Item Amount
○
○
1993/94 57.00c
○
1994/95 52.87b
○
interested in the global market, for they lack the re- 1995/96 8.50c
○
○
Total 200.46
○
market base. The danger is that of becoming too Capital Returned to Government 6.43
○
○
specialized, because when business drops, the diffi- Net Contribution 194.03
○
○
b Capital contribution.
place and with the right focus, there is room for big
○
c Capital allocation.
○
the eight state banks because of their 50 years of Recapitalization has been going on since 1991 in
○
○
staffing and management homogeneity, while small line with the implementation of the recommendations
○
○
private banks may be forced to merge to remove of Narasimham Committee (I). The total amount of
○
○
Consolidation will remain a matter of theoretical ized banks up to February 1998 was Rs194.03 bil-
○
○
discussion at least until after the merger of New Bank lion, which was 5.5 percent of total assets as of March
○
○
of India with Punjab National Bank has been stud- 1997. Needless to say, this recapitalization of the
○
○
ied. The problem of weak PSBs is a separate one. nationalized banks has been supported by India’s tax-
○
○
branch network and influence before nationalization. Additionally, some PSBs issued equity or subordi-
○
○
Instead of mergers, they should be given freedom to nated debt to increase CARs. Three nationalized
○
○
expand their branch network in regions of their choice banks (Dena Bank, Bank of Baroda, and Bank of
○
○
to facilitate relocation of staff that were rendered India) raised capital of Rs17.05 billion through public
○
○
surplus due to computerization. SBI has allowed its issues. In contrast, four PSBs obtained capital by
○
86 A STUDY OF FINANCIAL MARKETS
issuing subordinated debt. However, the precise fig- (public sector) banks are old banks and they should
○
○
ure of the amount of capital derived from the subor- be dealt with according to causes of deterioration
○
○
dinated debt is not available. such as mismanagement, lack of supervision, and
○
○
This process of bank recapitalization was guided political interference.
○
○
by the Indian authorities because the Government The Government and RBI instituted restructuring
○
○
and RBI are major holders of PSBs. Thus, in theory, exercises for weak banks detected based on the
○
○
there should exist no conflict between shareholders implementation of recommendations of the Narasim-
○
○
and the regulatory authorities that monitor the pro- ham Committee (I) in 1992/93. There are only three
○
○
cess on behalf of depositors and other debt holders. PSBs (India Bank, United Commercial Bank, and
○
○
This conflict sometimes complicates and hinders the United Bank of India) that still require treatment.
○
○
process of disposing of distressed banks in a fully What has gone wrong with these banks is well known
○
○
privatized banking industry, such as that in countries and remedial measures should lie with individual banks
○
○
like Japan. according to the nature of their respective sickness.
○
○
The public issues by PSBs suggest that the Indian Since investment in Government securities now car-
○
○
Government believes that bailout of such banks ries risk weight, narrow banking may not be the cor-
○
○
through capital injection is costly. However, accord- rect solution.
○
○
ing to the recapitalization figures of nationalized banks, The weak banks must improve the bottom line of
○
○
the Government has not yet abandoned the policy of each branch by adding earning assets. In the ab-
○
○
restricting interface of PSBs with the capital mar- sence of these, they may end up with “one-legged
○
○
ket. It will take a long time for the capital market to managers,” i.e., who know only how to raise depos-
○
○
play a pivotal role in monitoring and disciplining bank its (liabilities) but are averse to risk management (of
○
○
managements in India. assets). These banks are too big and rationalization
○
○
Meanwhile, the shortage of capital seems to be or closure of branches is not going to mitigate their
○
○
getting worse in the cooperative bank sector although major weaknesses. A long-term solution will lie only
○
○
the expert committee organized by NABARD rec- in financial strengthening and efficiency. Since merg-
○
○
ommends that the stringent capital adequacy norm ers with the strong banks have been ruled out, the
○
○
should be extended to cooperative banks and RRBs. Government as the owner must stand by these banks
○
○
The committee recommends that the Government while firmly rooting out bad managers and deficien-
○
○
assist cooperative banks to achieve 4 percent capital to be bank specific, depending on several factors, as
○
○
nomy,
○
Weak Banks
○
to run weak banks to restore them to operational branches will go against India’s development objec-
○
○
health over a period of three to five years. Also, such tive of reducing the population-branch ratio. The much
○
○
banks should operate as “narrow banks,” i.e., deploy neglected cooperative banking sector cannot fill the
○
○
only deposits for investment in Government securi- increasing service delivery gap for a population that
○
○
○
○
Developmental banking remains the need of the coun- The Union Finance Ministry is considering asking
○
○
try and the Government should concretely demon- the strong PSBs to set up an ARC for the weak
○
○
strate the will to back the risk-taking ventures of banks who have problems in recovering their bad
○
○
banks. The ability of public sector banks to raise eq- loans.
○
○
uity from the markets will depend upon how Gov- It is proposed that the debt funding of ARC be
○
○
ernment chooses to back the banks. An asset recon- through the issuance of Government-guaranteed
○
○
struction fund (ARF) is a solution that will favor bad bonds. Although the Finance Ministry has not yet
○
○
banks while penalizing good ones. taken a final decision on the modalities of an ARC,
○
○
The current thinking is that an ARF would be an internal study on establishing an ARC is being
○
○
formed for weak banks with equity contribution from worked out.
○
○
PSBs. This would amount to withdrawing equity from
○
Operational Efficiency
○
such banks in times when they have to meet strin-
○
○
gent CAR deadlines. It is the weak banks and their The most important problem facing Indian banks is
○
○
borrowers who must struggle to reform the balance ○
○
how to improve their operational efficiency.
sheet. Debt recovery processes in India are tortu- Overall efficiency of the banking sector may be
○
○
ously lengthy and ARF will not deliver goods better measured by an index of financial deepening defined
○
○
than the banks and their particular branches out of by the ratio of total bank deposits to GDP. This index
○
○
which funds have been lent. increased substantially between the 1970s and the
○
○
Unlike the banking crises in Asia, Latin America, mid-1980s (see Table 22). The improvement can be
○
○
or the savings and loans problem in the US (in 1989), partly explained by the expansion of the branch net-
○
○
Indian banks’ NPA problem was not caused by ex- work in India.
○
○
1970 13.4
○
1975 18.0
○
1990 35.7
○
1991 36.9
○
do in this respect, ARF will not be able to do. In- 1992 38.4
○
○
1994 39.6
○
1995 36.2
○
for transfer to ARF. The need is to reform the real 1996 38.3
○
○
sector and also to develop preventive controls in GDP = gross domestic product.
○
banks.
○
○
of the “too big to fail type” and have been in exist- However, in spite of the branch network expan-
○
○
ence for nearly a century. The critical policy initia- sion, financial deepening still remains at a low level
○
○
tive should be to reform and recapitalize them in- (less than 40 percent) by global standards. The In-
○
○
stead of relieving them of bad debts through an ARF dian financial deepening index is slightly higher than
○
○
their respective market reforms. This suggests that Increasing public ownership of banks will require
○
○
there is plenty of room for the Indian banking sector management to prudently handle shareholder con-
○
○
to increase its presence in the financial system. stituencies since takeovers by speculators wanting
○
○
Commercial banks in India will also have to ser- to make easy money or ensure financing for their
○
○
vice the demands of the different economic segments. own businesses are among the potential risks. This
○
○
They must not ignore nor prefer to serve only one of task lies squarely in the domain of the regulator and
○
○
these at the expense of the others. Banking services corporate offices of banks. Banks as business orga-
○
○
have to be designed and delivered in response to the nizations have to match up to both social expecta-
○
○
wide disparity in standards and ways of living of ru- tions and stakeholder aspirations. The board of a bank
○
○
ral, semi-urban, urban, and metropolitan populaces. bears a principal responsibility for fashioning a gov-
○
○
For example, the banking needs of a vast majority of ernance code appropriate to its structure. It is also to
○
○
the Indian population residing in the rural and semi- be charged with the responsibility of subjecting the
○
○
urban areas are relatively simple. In these markets, code to a periodic review to make it contemporary in
○
○
availability of services, timely credit, and low cost of a multibusiness banking organization.
○
○
their delivery are needed. The fundamental factor that has brought boards
○
○
of directors into the spotlight is a lack of confidence
○
DFIs. Autonomy as a concept can be summarized is the emergence of the global market. In the search
○
○
• it calls for separation of ownership and manage- stitutional investors have moved beyond their domes-
○
○
ment; tic markets and are looking to spread their risks geo-
○
○
• it requires distinction between bureaucracy and graphically. As they do so, they demand high and
○
○
business management. In terms of accountabil- consistent standards in terms of both financial re-
○
○
ity, this means distinguishing between perfor- porting and the treatment of shareholders’ interest,
○
○
mance accountability and accountability for mis- making boardroom accountability and standards of
○
○
• it necessitates change in the mindset of bankers There are, however, no uniform global standards
○
○
as well as regulators;.
○
• banks have to ready themselves to exercise au- dards are moving forward and this is gradually lead-
○
○
tonomy. This requires creation of knowledgeable ing to a greater degree of convergence between
○
○
workers who can bring to bear upon the func- markets. No company can afford to ignore these
○
○
tioning of the bank at all its establishments the developments, which are underpinned by advances
○
○
collective wisdom of the management; in information technology (IT) that make informa-
○
○
• autonomy is an inevitable fallout of deregulation; tion about companies more widely and immediately
○
○
• government or regulatory scrutiny does not accessible, thus contributing to the unification of fi-
○
○
amount to “back seat driving” and does not de- nancial markets. This also very much applies to the
○
○
prive a good management of its autonomy; and players in banking and other financial sectors.
○
○
Bank Computerization
○
tiny through results, then banks may suffer the Entry of new private sector banks, PCBs, and for-
○
○
phenomenon of “back seat driving.” eign banks offering most modern technology bank-
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 89
ing has forced PSBs to address computerization prob- will have to factor in returns on IT assets, and growth
○
○
lems more seriously in recent years. The pace of and productivity improvements.
○
○
computerization has remained slow even though op- Newly opened private sector banks, foreign banks,
○
○
position from staff unions has softened. The Central and a few other Indian banks have started Electronic
○
○
Vigilance Commission wants 100 percent computer- Money activities, which open up business opportuni-
○
○
ization in Indian banks to check frauds, delays, etc. ties but carry risks that need to be recognized and
○
○
The general perception is that in recent years, the managed prudently. The Basle Committee on Bank-
○
○
prime focus of bank computerization has been less ing Supervision has raised issues of critical impor-
○
○
on the number of branches computerized but more tance to banking authorities in this regard. There is
○
○
on better connectivity, say, between the head office no evidence that these aspects are being looked into
○
○
and regional offices of a bank with select branches. in India, yet there is a need for auditing firms to be
○
○
These are usually banks that handle large corporate aware of this issue.
○
○
borrowing accounts on one side, and those that are Despite recapitalization, the overall performance
○
○
in high deposit zones, on the other. of PSBs continues to lag behind those of private sec-
○
○
While the private sector banks have been upgrad- ○
○
tor and foreign banks. Questions of ownership, man-
ing technology simultaneously with branch expan- agement, and governance are central to this issue.
○
○
sion, many of the top PSBs have completed auto- Under public ownership, it is almost impossible to
○
○
mating their branches in the urban areas. The next draw a distinction between ownership responsibility
○
○
step to total branch automation is networking these and managerial duty. For this reason, Government-
○
○
branches. PSBs need to frame a strategy to choose owned banks cannot insulate themselves from inter-
○
○
the branches that have to be included in their net- ference. Inevitably, some PSBs are overregulated
○
○
for them to connect all the 64,000 branches spread A central concern is that banking operation flex-
○
○
across the country, as a first step, they are following ibility, which is essential for responding to changing
○
○
the 80-20 thumb rule. It assumes that 80 percent of conditions, is difficult to implement. Under public con-
○
○
bank’s business is carried out by only 20 percent of its trol, the efficiency objective in terms of cost, profit-
○
○
branches. It is the branches with substantial business, ability, and market share is subordinated to the vaguely
○
○
most of which lie in the urban areas, that are initially defined public interest objective.
○
○
A major problem PSBs have to face once IT imple- tion between PSBs since they have a common own-
○
○
mentation reaches its optimum level is staff reten- ership, but Government-imposed constraints have
○
○
tion. While the private sector banks have been re- also meant that they have not been able to effec-
○
○
cruiting trained and experienced IT professionals, it tively compete with private sector banks. India still
○
○
may not be possible for PSBs to do likewise. They has to find a middle path of balancing divergent ex-
○
○
will have to train their existing staff to function ef- pectations of socioeconomic benefits while promot-
○
○
fectively in the new environment. And once the req- ing competitive capitalism.
○
○
uisite skills are acquired by employees, they may have Political sensitivities can make privatization diffi-
○
○
trouble retaining staff. PSBs can only allocate lim- cult but the Government aims to bring down its hold-
○
○
ited capital resources to computerization. They will ings to 51 percent. When that happens, a great stride
○
○
have to choose between high cost of computeriza- will have been completed. In 1998, announcements
○
○
tion at metro and urban centers and low cost com- have been made on corporatization of IDBI and re-
○
○
puterization at rural, semi-urban branches. Also, they duced Government holdings in Bank of Baroda, Bank
○
90 A STUDY OF FINANCIAL MARKETS
of India, Corporation Bank, Dena Bank, IDBI, Ori- branch” criterion is the yardstick that is routinely used
○
○
ental Bank of Commerce, and SBI. to measure the adequacy or otherwise of banking
○
○
facilities in regions that have been demographically
○
Importance of Branches
○
demarcated as follows: rural (population below
○
○
BRAND IDENTITY 10,000), semi-urban (population between 10,000 and
○
○
PSBs and the rural banking system have to build up 100,000), urban (population between 100,000 and
○
○
the transaction and advisory services of their 1 million), and metropolitan (population above one
○
○
branches. In a competitive marketplace, a retail million).
○
○
branch environment that can project and deliver the Dividing the total population by the number of bank
○
○
brand promise has become increasingly important. branches, the population per branch has fallen from
○
○
As retail banks undertake strategic reengineering 64,000 in 1969 to 15,000 as of June 1997. This does
○
○
of distribution and delivery strategies, product and not take into account, however, staff redundancies
○
○
service enhancement and network downsizing, they likely from computer-based banking including the
○
○
ignore the role of the branch and the power of a spread of automated teller machine (ATM) outlets.
○
○
brand at their peril, since the branch is a retail bank’s Even in the most advanced branch banking and com-
○
○
shop window and platform for differentiating its prod- puterized banking environments such as Canada, the
○
○
ucts and services. ratio of population to branch is only 3,000 and if ATM
○
○
With the growth of automated transactions, the banking is included as branch-type retail outlet, the
○
○
role of the branch is changing and must reflect new ratio is still lower. In India, foreign banks are fast ex-
○
○
marketing and brand communication strategies. Is periencing staff redundancy and aging problems but
○
○
the branch to be a retail opportunity drawing cus- not allowed to branch out freely into places requiring
○
○
tomers for financial services advice, or is it an out- competition, especially in foreign trade financing.
○
○
post of technology and remote transaction efficiency? The Government needs to expand the branch net-
○
○
Can the branch network provide both? The answers work to ensure a reduction in the population per
○
○
lie in the strength, depth, and clarity of an branch ratio further to 10,000 (phase I), 5,000 (phase
○
○
organization’s brand identity, which is the foundation II), and 3,000 (phase III) by including, if necessary,
○
○
upon which a retail bank can communicate its unique ATMs and similar outlets as branches at metro and
○
○
Branch investment and reengineering is often the It would be worthwhile for RBI to reward banks
○
○
responsibility of operations or premises departments through a special subsidy for spreading a credit card
○
○
with little regard for coordination with marketing de- culture on the basis of the number of credit cards
○
○
partments. In order to maximize the benefits of and annual transition volumes. The largest bank, SBI,
○
○
branch investment or reengineering, astute manage- did not even have a credit card until the formation of
○
○
ment teams should integrate all aspects of their brand its joint venture with GE Capital in 1998/99.
○
○
RBI currently uses only demographic data for issu- ment securities, which are subject to depreciation
○
○
ing branch licenses. The “population served per risks. Narrow banking is therefore not a solution for
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 91
weak banks. Enhancing the branch network can im- quired skills and actual requirements is increasing as
○
○
prove the bottom line and should be explored. Such more complex product mixes are introduced and tra-
○
○
banks require all-round restructuring. ditional banking products are replaced. Another rea-
○
○
son is the skewed age profile of employees, some of
○
Credit Delivery System
○
whom were taken on 30-35 years back when the
○
○
Table 23 shows the Indian banks’ low coverage of branch expansion programs started.
○
○
bills and receivables financing, and low level of ex- Indian banks are highly unionized and productivity
○
○
posure of bank clientele to the foreign trade seg- benchmarks are not clearly established. To create a
○
○
ment. Partly these should be ascribed to a lack of more constructive work attitude, the disinvestment
○
○
banking services or expertise of centers where de- or privatization programs of PSBs should include share
○
○
mand for the services exists but is met by distantly offerings to staff, an idea successfully carried out by
○
○
placed branches. Inadequate bills and direct receiv- SBI, Bank of Baroda, and Bank of India, among oth-
○
○
ables financing results in underutilization of network ers. The spread of computerization (so far inhibited
○
○
branches through which collections can take place. by staff union pressures on quotas and wage hikes)
○
○
○
must be evaluated in terms of return on information
Human Resources Issues in Banking
○
The number of bank management staff and employ- Another issue requiring attention is regular recruit-
○
○
ees in India is vast (223,000 in SBI; 81,252 in SBI ment in various grades every year, since experienced
○
○
Associates; 581,000 in nationalized banks; 57,241 in employees in banking are built up over several years.
○
○
old private sector banks; 1,620 in new private sector An embargo on recruitment since 1985 has skewed
○
○
banks, and 13,510 in foreign banks operating in the the age profile of the workforce in PSBs. Such im-
○
○
country). The total is 957,623, with the number of balances are difficult to rectify. There are those who
○
○
staff employed in cooperative and rural banks equally argue for productivity-linked wages, which is a dan-
○
○
large. Potentially, the gap between availability of re- gerous recipe in the context of a unionized workforce.
○
○
○
Table 23: Distribution of Outstanding Credit of Scheduled Commercial Banks According to Type of Account,
○
○
Advances against export cash incentives and duty drawback claim 0.0 0.1 0.1
○
What is needed is fair competition, merit-based ca- The Chief Vigilance Commission in 1999 has clari-
○
○
reer progression policies, strong management of staff, fied that banks should be 100 percent computerized
○
○
and transparent performance evaluation systems (ex- by the year 2000 and that bank unions will have no
○
○
perience of international banks paying proprietary re- say in this matter. This is to ensure that frauds, which
○
○
wards and packages for specialist traders, etc., have have reached serious proportions under the manual
○
○
not exactly been happy since such staff have landed processing system, are kept in check. The area of
○
○
some banks with losses). computer fraud, however, is not addressed.
○
○
The merger of banks as recommended by Narasim- Foreign banks have started reducing staff under
○
○
ham Committee (II) to create strong banks that can the Voluntary Retirement Scheme. Such packages
○
○
compete internationally can result only in the creation for staff of weak PSBs remain under discussion.
○
○
of formidable union power and amplify inefficiencies. Table 24 shows the number of staff deployed in
○
○
Policies are also needed to prevent significant turn- scheduled commercial banks (SCBs), and the num-
○
○
over of banking staff in cities, urban as well as semi- ber of deposit accounts and borrowing accounts
○
○
urban and rural branches. Incentives must be given to handled. As can be seen from the table, improve-
○
○
staff in rural and semi-urban branches to increase mo- ments must be made in branch service operations,
○
○
tivation and minimize fast personnel turnover. staffing, and expansion in rural and semi-urban SCBs
○
○
WAGE HIKES and the relatively smaller number of staff per branch
○
○
For the first time, the Government, RBI, and IBA compared with urban/metropolitan SCBs.
○
○
mance. Across-the-board pay hikes blur the dis- Indian banks have been assigned an important public
○
○
tinction between good and bad performers while role of allocating financial resources to specified pri-
○
○
operating costs continue to mount. About 80 per- ority sectors, a system that has contributed to the
○
○
cent of the operating expenses of PSBs are ac- creation of assets, a green revolution, and a white
○
○
5
counted for by wages and salaries. RBI data on revolution, apart from strengthening the base of
○
○
bank intermediation cost (BIC) ratios show that small-scale industries. The level of NPAs should not
○
○
PSBs in the period 1991-1998 recorded an average detract policymakers from supporting banks’ roles
○
○
sector banks, which managed to hold the ratio down. objective assessment of socioeconomic benefits is
○
○
The only way forward now is for banks to be left needed. Branch expansion in unbanked areas will
○
○
free to genuinely compete. have to continue to create wealth and prosperity. The
○
○
○
Table 24: Number of Offices, Deposits and Borrowing Accounts, and Staff in Scheduled Commercial Banks
○
Amount of Amount of
○
Branch Location Branches Staff (Rs million) (Rs million) Branch Branch Branch
○
○
economic reforms cannot be molded to leave 60-70 remained a long haul, though the amounts required
○
○
percent of the country’s population with only a trickle are much smaller than those received by sponsor
○
○
down effect from reforms. banks themselves by way of recapitalization. A large-
○
○
The shackles of “directed lending” have been re- scale merger would force an appropriate recapital-
○
○
moved and replaced by the criteria of merit and com- ization, which entails only a one-time cost to the tax-
○
○
mercial viability. Also, expansion in the definition of payer instead of a continuous annual invisible cost
○
○
priority sector, upgrades in value limit to determine load.
○
○
SSI status, and provisions for indirect lending through Traditionally rural and semi-urban areas have been
○
○
placement of funds with NABARD and SIDBI have looked upon as requiring help and lacking in compe-
○
○
lightened the performance load of banks. SSI and tent management. This mindset in policy formula-
○
○
export financing take place more in metro and urban tion, regulations, and procedures governing the rural
○
○
areas in a competitive environment. As such, prior- banking system has left the rural system ailing, as
○
○
ity sector financing is no longer a drain on banks. was revealed during recapitalization/restructuring
○
○
There is also a need to simplify reporting formats exercises on RRBs, which had operated under ad-
○
6
○
and cutback on paperwork. This can be done by divid- ○
○
verse regulatory constraints. Liberalization of RRBs’
ing bank capital for metro/urban areas branches and activities has permitted them to participate in more
○
○
rural/semi-urban area branches, and imposing the dis- profitable businesses. A single, strong, merged RRB
○
○
cipline of the CAR and CAMELS model for internal setup would bring to the rural economy a well-di-
○
○
performance evaluation at regional offices supervis- rected banking apparatus to take care of infrastruc-
○
○
ing such branches. The cooperative banking segment ture, export financing, and traditional businesses.
○
○
also needs urgent recapitalization support since its This will require better management or setting up
○
○
entire market and client base is in the priority sectors. new RRB branches in district locations and state
○
○
Priority sector financing is a continuing priority capitals, regional boards, and a central board for op-
○
○
for survival of banks with large networks of rural erational policy governance. Such a bank should be
○
○
and semi-urban branches. charged with developing linkages between rural and
○
○
Rural Banking
○
POSITION OF RURAL BANKS uct exports are increasing, establishing the need for
○
○
RRBs (accounting for 30 percent of the branch net- new services even at rural and semi-urban level.
○
○
work of SCBs) are prime candidates for merger to Unfortunately, post-reform thinking has dampened
○
○
create a single large rural-oriented outfit with a com- the will of nationalized banks to serve such needs.
○
○
mercial approach and competencies. Reform proponents have advocated pruning of pri-
○
○
PSBs perceive RRBs as a drag on the system. ority sector credit from 40 to 10 percent for PSBs
○
○
Although RRBs sponsored by different banks are without considering how cooperative banks and
○
○
fragmented outfits, their staff unions have succes- RRBs can fill the void that may be created by with-
○
○
sively fought and secured wage parity with the staff drawal of major players from the activity.
○
○
banking system of branches with highly paid staff CLEARING SYSTEM REFORM
○
○
instead of the original plan to create “barefoot bank- Industrial location policy requires that apart from
○
○
ers.” RRBs as small banks will remain fragile and notified industries of a nonpolluting nature, new in-
○
○
their recapitalization (Rs3.64 billion added so far to dustries must be set up beyond the 25 kilometer ra-
○
○
the Rs1.96 billion of the earlier paid-up capital) has dius of any city with a population of more than
○
94 A STUDY OF FINANCIAL MARKETS
one million. While this has forged close economic links Nonbanking Financial Companies
○
○
and sparked a daily flow of banking transactions be- FRAGILITY OF NONBANKING FINANCIAL
○
○
tween city and rural bank branches, the latter are not COMPANIES
○
○
admitted to the city’s clearing house facilities. Check Unlike in other Asian economies, the nexus between
○
○
collection and related banking services are, as a re- banks and NBFCs in India is not significant. From
○
○
sult, riddled with delays, slowing down the circulation 1985 when mutual funds and merchant banking ex-
○
○
of money and adding to the amount of paperwork, panded, RBI emphasized that there should be an
○
○
interoffice transactions, and risk of fraud. Expansion “arms’ length” relationship between banks and their
○
○
of city clearing systems will radically simplify banking affiliates. This “Chinese Wall” is stronger now than
○
○
and reduce transaction costs of rural branches. ever before.
○
○
Private market lenders are considered to have
○
○
SUPERVISION stronger incentives or greater ability to monitor bor-
○
○
NABARD has a statutory supervisory role over 28 rowers, and better positioned than public creditors to
○
○
state cooperative banks, 364 district central coop- renegotiate contract terms or exercise control rights
○
○
erative banks, and 196 RRBs. It also exercises vol- in the event of problems.
○
○
untary supervision over 19 state-level and 738 pri- While banks and finance companies are equally
○
○
mary-level agricultural rural development banks by likely to finance problematic firms, the latter tend to
○
○
virtue of its refinancing and developmental role. An serve riskier borrowers, particularly those who are
○
○
Expert Committee set up by NABARD in January more leveraged. This is important for a country such
○
○
1998 recommended a comprehensive package of as India, where nationalization of banks has, in many
○
○
reforms, including extending the capital adequacy instances, diluted the informality that lower class of
○
○
norm to cooperative banks and RRBs gradually within borrowers prefer. NBFCs and informal credit mar-
○
○
a period of five years and three years, respectively. kets have thrived on lack of interest in this field among
○
○
The committee noted that a large number of coop- the PSBs and expanded their asset base, fed on ap-
○
○
erative banks (66) and RRBs (170) were debilitated petite for deposits at high rates.
○
○
and not in a position to meet even the minimum capi- With strict capital adequacy, income recognition,
○
○
tal requirements because of heavy erosion of assets. and NPA norms in the offing and with the SSI sector
○
○
In order to improve the prudence of bank man- remaining at the receiving end of the economic slow-
○
○
improved systematically, for instance based on restrictions on NBFCs will create only a void in the
○
○
CAMELS rating model. credit chain that banks cannot fill. Like small private
○
○
Simple personal computer (PC)-based computeriza- this should not be subject to sweeping changes by
○
○
tion of rural and semi-urban branches would cost regulators. If depositors looking for high deposit rates
○
○
about Rs1.8 billion (cost of PC [Rs40,000] X No. of are willing to take risks, there is no need for them to
○
○
branches [45,000]), or about $43 million for PSBs. be cautioned, except in cases of frauds and misfea-
○
○
The business of these branches is largely retail and sance. NBFCs operate in different market segments
○
○
better control on priority sector loans at these with relevant marketing strengths such as in leasing,
○
○
branches requires equipment upgrades. Staff train- hire purchase, factoring, merchant banking, car fi-
○
○
ing and system upgrades at these branches would nancing, transport financing, and home financing. They
○
○
○
○
to be subjected to a strait-jacketed regulatory regime. Several companies and SSI units are often exposed
○
○
RBI announced guidelines for NBFCs in January to credit risks on sales but do not have the required
○
○
1998. Among other things, the directives linked the competencies in receivables portfolio management.
○
○
quantum of public deposits that can be accepted by Banks providing working capital finance do not give
○
○
NBFCs directly to their credit rating, and the excess adequate attention to default risks and the quality of
○
○
deposits held were required to be repaid before 31 receivables. On the basis of recommendations of a
○
○
December 1998. The result was panic among the Government Committee on economic reforms (1985),
○
○
public. RBI has since then modified the rules but the system of factoring was looked into by another
○
○
there is no assessment so far as to how many NBFCs committee, and factoring companies were set up as
○
○
will be deemed as unviable. subsidiaries by banks such as SBI and Canara Bank
○
○
Credit rating is a relatively new field in India and in 1992. In February 1994, perhaps to give further
○
○
public awareness of the nuances of credit rating grades impetus to the factoring system, RBI directed that
○
○
remains poor. NBFCs are mainly deposit-taking com- banks will also have the option to undertake the ac-
○
○
panies and a depositor has no way to secure liquidity ○
○
tivity departmentally, though at select branches of
in the midst of a possible downgrade. Credit-rating the banks since factoring services require special
○
7
○
agencies already have their hands full with corporate skills and infrastructure.
○
○
rating business and it is doubtful if NBFCs operating Aside from the four basic factoring services of
○
○
in remote corners of the country can achieve ratings administration of the sellers’ sales ledger, provision
○
○
to satisfy their depositors and RBI. And it is also un- of prepayment against the debts purchased, collec-
○
○
likely that all NBFCs can be effectively regulated and tion of debts purchased, and covering the credit risk
○
○
inspected by RBI, as the cost would be out of propor- involved, factoring companies can also provide cer-
○
○
tion to the risk to be controlled. The best way out for tain advisory services to the client by virtue of their
○
○
the public affected by the dilemma would be to iden- experience in credit and financial dealings and ac-
○
○
tify priority centers where bank branches should be cess to extensive credit information.
○
○
opened as alternate service providers in place of Credit information services are highly deficient in
○
○
NBFCs ceasing to operate or forced to close down. India and there is little sharing of information among
○
○
NEED FOR INTER-NBFC MONEY MARKET lated services, factoring offers a distinct solution to
○
○
NBFCs will remain important as the Government has the problems posed by working capital tied up in trade
○
○
tasked them to retail the sales of Government secu- debts, more than 70 percent of which arise in Indian
○
○
rities to the saving public. Moreover, the public will businesses by virtue of selling “on account (A/C)
○
○
need their services in all other areas not touched by terms of payment.” This is a large volume over which
○
○
banks. Like banks, NBFCs may have to develop a Indian banks have had poor control. Bankers are rela-
○
○
second tier money market in which borrowing/lend- tively slow in responding to this important aspect of
○
8
○
ing will automatically come under “credit limit” and working capital finance management.
○
○
Policy Recommendations
○
find safe, acceptable investment avenues in the sec- Some major issues are highlighted on the problems
○
○
ond tier money market. Entities such as mutual funds of the Indian banking system arising out of the dis-
○
○
will welcome this. The gain on the whole will be cussion so far, and quoting, where relevant, Narasim-
○
○
○
○
ASSET CLASSIFICATION system should be immediately undertaken.
○
○
RBI should not relax NPA norms in response to a Banks must adopt methods of converting debt into
○
○
slowdown in the economy. For prudential norms re- equities in NPA accounts whenever possible to ei-
○
○
lating to income recognition, it should adopt the ther ensure turnaround in corporate performance or
○
○
Narasimham Committee (I) recommendation to sell equities to limit future losses. Today banks do
○
○
gradually shorten norms from 180 to 90 days for in- not have an exit route.
○
○
comes that stop accruing to be classified as NPAs. Analysis of NPAs needs to be carried out not only
○
○
Asset quality improvement should take place by with reference to sectoral dispersal of NPAs but also
○
○
tightening norms for classifying assets from sub- to specific accounts of NPAs that are common in
○
○
standard to the doubtful category. The downgrad- balance sheets of banks and AIFIs, to bring about
○
○
ing of assets in the Indian system is lax as the move harmonization of their recovery efforts. Among banks
○
○
from substandard to doubtful category is made only and AIFIs, research into cases handled by Credit
○
○
if it is past due for 30 months or remains in the Guarantee Schemes, Export Credit Guarantee Cor-
○
○
substandard category for 24 months. This has to be poration and state-level institutions as well as by BIFR
○
○
improved upon. Also, the quantifiable criterion for should help to crystallize core problems of lending
○
○
defining a weak bank should be: accumulated losses systems and problem areas of economic activity.
○
○
ment defaults by borrowers are mainly due to ne- PROBLEM OF THE REAL SECTOR VS.
○
○
assets, a reason why banks ought to seriously launch Strengthening the viability of the real sector is impor-
○
○
factoring and receivable portfolio management ser- tant for improving Indian banking and the financial sys-
○
○
vices to improve velocity of receivables and the tem as a whole, which is but an institution to facilitate
○
○
Net NPAs have to be brought down to below resources within the economy. The Committee on Capi-
○
○
5 percent by 2000 and to 3 percent by 2002. How- tal Account Convertibility has not dwelt on the impact
○
○
ever, banks with international presence should re- to the real sector of expected inflow of capital in rela-
○
○
duce gross NPAs to 5 and 3 percent by 2000 and tion to efficiency and absorptive capacity of that sector.
○
○
by the same period. on how the real sector and banking sector strengthen
○
○
create some complications in the accounting system. Prudential norms requiring general provision of at
○
○
For instance, if a loan has turned into an NPA shortly least 1 percent on standard assets must be estab-
○
○
before the end of a financial year, the interest pay- lished. Also, the general provision should consider
○
○
ments during that and the previous financial years potential loss assets determined through historical
○
○
are considered not yet earned and the corresponding accounts. International banks practice different gen-
○
○
book entries recognizing interest income should be eral provision standards and these should be exam-
○
○
reversed. The definition of income recognition has ined. General provision should also include tax holi-
○
○
become a critical issue in presenting a clear picture days to be granted as an incentive to banks, to accel-
○
○
on the profit/loss account of banks. A review and, if erate strengthening of their capital base.
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 97
A risk weight of 5 percent should be applied to to “substandard”, and vice versa, as a measure of
○
○
investments in Government and other approved se- the quality of management.
○
○
curities to hedge against market risk. Also, the entire The Indian system of governance (in the public
○
○
portfolio should be marked to market in three years. and private sectors) has long fostered a climate of
○
○
Other non-SLR investment assets of banks need to resistance to bankruptcy and also a tendency to pro-
○
○
be brought in line with risk weights assigned to loans vide bailouts that distort the risk. As such, the re-
○
○
and advances. form process will be a long haul. The sequencing
○
○
A 100 percent risk weight must be applied to for- may not be perfect and will necessitate adjustments.
○
○
eign exchange open positions. Gap management is Restructuring will also be required separately for in-
○
○
needed to correctly reflect foreign exchange risk stitutions remaining in difficulty. Real sector reforms,
○
○
exposure. especially in terms of international auditing standards,
○
○
accounting, timely and accurate information to mar-
○
○
FOCUS ON NONPERFORMING ASSET kets, and good governance practices, must be ag-
○
○
MANAGEMENT gressively pursued to support improvements in the
○
○
Raising interest rates and reflating the economy ○
○
soundness of the financial system.
through increased Government expenditure must be
○
continued industrial slowdown. Thus, NPA manage- The Narasimham Committee (II) suggested that the
○
○
ment can be carried out by maximizing attention to “Basic Core Principles of Effective Bank Supervi-
○
○
the extent of credit concentration and considering sion” be regarded as the minimum to be attained.
○
○
diversification of credit portfolios through consumer Banks must be obligated to take into account market
○
○
financing, housing loan provision, factoring, and agri- risk weights to foster a sound and stable system.
○
○
cultural and SSI financing. For RBI to effectively carry out its monetary policy,
○
○
Management of NPAs should also focus on im- delineation of supervision/regulation from monetary
○
○
proving management culture that permeates various policy is required. The executive associated with
○
○
organization levels instead of being restricted to con- monetary authority should not be in the supervision
○
○
cerns on recovery, capital adequacy, and accounting board, to avoid weakening of monetary policy, or
○
○
processes. The NPA problems and their conse- banking regulation and supervision. The separation
○
○
quences will need to be assessed on the extent of of the Board of Financial Supervision (BFS) from
○
○
and Supervision
○
There should be consolidation of balance sheets of supervision of the financial system, the Narasimham
○
○
different entities of banks to reveal their strength and Committee (II) recommended putting urban coop-
○
○
to disclose connected lendings, pattern of assets and erative banks (UCBs) within the ambit of BFS and
○
○
liabilities (domestic and foreign) in different maturi- proposed prudential and regulatory standards besides
○
○
ties, and NPAs. Some banks overseas are required new capital norms for UCBs.
○
○
to publish cash flows, a practice Indian banks have The Narasimham Committee (II) recommended
○
○
started. The disclosure should also include migration amendments to the RBI Act and Banking Regula-
○
○
patterns of asset classification, e.g., from “standard” tion Act with regard to the formation of BFRS. It
○
98 A STUDY OF FINANCIAL MARKETS
also gives more autonomy and powers to PSBs (Na- Creating equal opportunities for banks and FIs has
○
○
tionalization Act). As the changes in the legal frame- been slow. As a result, financial packaging and clo-
○
○
work affecting the working of the financial sector sure of projects (term loans and working capital)
○
○
sought by the Narasimham Committee are wide rang- suffer. Progress on this structural reform has to be
○
○
ing, an expert committee could be constituted. constantly monitored. IDBI, ICICI, and IFCI should
○
○
Regulation and supervision have been strength- move toward acquiring banking licenses to provide
○
○
ened through prescriptions that include the establish- one-stop services. Since the 1960s, there has ex-
○
○
ment of a statute for BFS. Independence and au- isted an unnatural divide between term-lending func-
○
○
tonomy of BFS would not be impaired by being a tions and working-capital finance. The solution lies
○
○
part of RBI. What is important is autonomy for the in putting in place stringent credit monitoring in which
○
○
RBI and dilution of Government ownership in banks. banks and FIs should share their expertise and infor-
○
○
Some legislative action may be needed to support mation.
○
○
the banking regulatory framework reforms. The re- There is no need for a super regulator as rec-
○
○
9
form issues should be examined by research institu- ommended in 1998/99 by the Khan Committee,
○
○
tions dealing with banking concerns. which examined harmonization of roles/functions
○
○
of banks and FIs. RBI should remain the sole regu-
○
○
REGULATION OF FINANCIAL CONGLOMERATES lator to ensure that the financial system is well
○
○
The BIS Tripartite Group agreed that the term “fi- supervised and that the risks of the real sector do
○
○
nancial conglomerate” should be used to refer to “any not get transmitted to the financial sector by de-
○
○
group of companies under common control whose fault. The current worries about strengthening of
○
○
exclusive or predominant activities consist of provid- the financial system stem more from the industry’s
○
○
ing significant services in at least two different fi- lack of transparency, corporate governance stan-
○
○
nancial sectors [e.g., banking, securities, insurance].” dards, and accountability to shareholders. Requir-
○
○
Many of the problems encountered in the supervi- ing disclosure for quarterly results is changing this
○
○
sion of financial conglomerates arise when they of- situation and making the information flow to in-
○
○
fer not only financial services, but also nonfinancial vestors more orderly. This requirement applies now
○
○
services and products. Coordination between RBI, to banks and FIs that have raised public money.
○
○
Insurance Regulatory Authority, and SEBI is increas- Consequently, tightening of the financial system will
○
○
ingly urgent.
○
be accelerated.
○
○
The likely conflict between monetary policy and su- accounts of Indian companies that are not in line with
○
○
pervisory concerns can be taken as the basis and the high quality international financial reporting standards.
○
○
rationale for combining the two functions. Separate Standards are indeed low but implementing the World
○
○
authority structures for the two functions have more Bank directive would not be practicable without Gov-
○
○
likelihood of coming into conflict with each other. ernment legislation on standardization of various re-
○
○
The regulatory and supervisory systems have to take porting systems and their incorporation into the Com-
○
○
into account peculiarities of the banking and finan- panies Act. The Government has to quickly remove
○
○
cial structures. For instance, India’s RRB structure these bottlenecks to boost investor confidence, at-
○
○
is vast, its cooperative movement quite strong, but tract foreign direct investment, and minimize dam-
○
○
banks in this sector are generally quite weak. ages to the financial sector.
○
○
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 99
Asset Liability Management unless banks introduce factoring, the legitimate bank
○
○
FOCUS ON ASSET LIABILITY MANAGEMENT credit needs of such borrowers will remain unmet.
○
○
In general, the development of ALM operations has Deficiencies of Indian bills and money markets have
○
○
to be in the direction of an objective and comprehen- persisted despite reports by high-level committees
○
○
sive measurement of various risks, a pursuit of re- during the late 1980s. The quality of receivables con-
○
○
turns commensurate with the size of the risk, and a tinues to be unsupervised and securitization is still a
○
○
strategic allocation of capital and human resources remote possibility.
○
○
based on the risk. The evolution in financial manage-
○
○
ment with the sophistication of ALM operations has TRADING RISK MANAGEMENT
○
○
to be an autonomous response and not driven by regu- The trading portfolio of banks in India is becoming
○
○
lators. more diverse with a range of bonds, equities, and
○
○
As banking and financial sector reforms have been derivatives available, and RBI permitting investments
○
○
under way in India for the last six years, the only in overseas markets. Debt swaps and interest rate
○
○
factor that could affect their balance sheets is lack swaps as well as currency swaps are entered into
○
○
of ALM in terms of maturity and interest rate mis- ○
○
with foreign banks and such exposures need special
matches. Banks will have to participate actively in monitoring. There is an eagerness to introduce a va-
○
○
forming money markets and to enforce data genera- riety of derivatives but the regulatory and risk man-
○
○
tion at each branch level. RBI, in its Monetary and agement apparatus is not fully ready.
○
○
the introduction of interest rate swaps but these will INTERNAL AUDIT MACHINERY AND COMPLIANCE
○
○
be used only when banks discover the extent of mis- There are dangers in banks’ practice of cosmetic
○
○
matches that cannot be cleared through term-money cleaning or “evergreening” of advances to prevent
○
10
○
With respect to “off-balance sheet” assets, there that banks’ internal audit machinery and compliance
○
○
will be a need to create a corporate level knowledge are weak. RBI stipulates that audit committees of
○
○
base in banks about items that offer “price risk trans- boards should seek to ensure management’s com-
○
○
ferring” or “credit risk transferring” or both opportu- mitment to internal audit control. This can be made
○
○
nities. Examples of the former are swaps, futures, stronger by stating that internal audits are manage-
○
○
options and loan caps, forward rate agreements, and ment’s reporting responsibility to stockholders. The
○
○
credit enhancing guarantees. Credit risk transferring internal auditing system should be established by train-
○
○
opportunities include letters of credit and note issu- ing bank inspectors and rotating their assignments.
○
○
ance facilities. With regard to computer audits, SBI and IBA have
○
○
BILL CULTURE audit skills are lacking even in India’s chartered ac-
○
○
In order to promote bill culture and the secondary countant firms. It is worth having computer audits as
○
○
market, RBI directives require borrowers to resort a statutory requirement. In the US, the Federal Re-
○
○
to bill financing to a minimum of 25 percent of re- serve and FDIC have jointly issued manuals on elec-
○
○
ceivables. Most borrowers, especially among SSIs, tronic data processing audit on the grounds that “tech-
○
○
find compliance difficult and it is not known how many nology changes the way business is done in banks.”
○
○
are forced to forgo financing from banks and resort The computer audit of computer service agencies
○
○
to market borrowings. The “on account payment” by banks employing them is mandatory (with respect
○
○
Certification of Information Systems Auditors pact of reforms initiated in the first phase. But as the
○
○
(CISA) examinations from the US are now avail- reforms were introduced in stages, it is too early to
○
○
able in India, but few bank staff take them. Banks’ assess their impact. What has been achieved is trans-
○
○
inspectorates and chartered accountant firms should parency with respect to banks’ financial statements,
○
○
have CISA qualified auditors. bringing Indian accounting standards closer to inter-
○
○
Similarly, banks, nonbanks, and companies require nationally accepted norms. One discernible impact
○
○
professionals qualified in handling foreign exchange has been that all but two PSBs (Indian Bank and
○
○
trading. In fact, RBI has taken the lead to define risk United Commercial Bank), had met by 31 May 1997
○
○
management standards in PSUs that take on foreign the capital adequacy norm of 8 percent and some
○
○
exchange exposure. are already well above that threshold. For instance,
○
○
There is also a need for professionals qualified to that for SBI is 14.58 percent; UBI, 10.86 percent;
○
○
carry out securities and stock market trading in all BOI, 9.11 percent; DenaBank, 11.88 percent; and
○
○
the market intermediaries. IDBI, 13.7 percent. The weaknesses that have
○
○
emerged in the banking system are in fact weak-
○
Capital Adequacy
○
nesses of the prereform period. The issues to be tack-
○
○
A capital adequacy of 9 percent should be achieved led in the second phase of reforms are large and
○
○
by the year 2000 and 10 percent by 2002. This goal cannot be delayed because the adjustment process
○
○
should be weighed against the expected financial would become increasingly difficult. As far back as
○
○
support from banks for economic growth and pro- 1961, RBI advised banks to aim for a CAR of 6
○
○
tection of risk assets. In the first phase of reforms percent (of paid-up capital and reserves to deposits)
○
○
(1991-1997), banks changed their approach from because they had been increasing their assets with-
○
○
“growth budgeting” to “balanced growth budgeting” out a corresponding augmentation in the capital base.
○
○
(i.e., with reference to their own funds). The dilemma This ratio declined from 9 percent in 1950 to 4 per-
○
○
of banks’ shortage of capital to cope with increasing cent in 1960, and 1.5 percent in 1978.
○
○
capital adequacy does not become an end in itself. Mergers and Recapitalization
○
○
Measures should not be implemented in isolation. The Narasimham Committee recommended that af-
○
○
If the capital adequacy levels are being brought to ter the activities of DFIs and banks have converged
○
○
tal should also be introduced, i.e., as a subordinated leaving only two types of intermediaries—banks and
○
○
debt instrument (of shorter maturity of two years) nonbanks. While mergers between strong financial
○
○
much like the bonds issued towards tier-2 capital (of institutions would make sense, the weak banks in the
○
○
Other measures to strengthen banks should seek The licensing of new private sector banks needs to
○
○
to eliminate the management dilemma. This can be be reviewed, while foreign banks will have to be en-
○
○
done if banks themselves internalize a culture of self- couraged to extend their operations.
○
○
evaluation under the CAMELS model by undertak- The importance of the tasks ahead is underlined
○
○
ing periodical management audits. The core mes- by the fact that Government recapitalization of na-
○
○
sage of capital adequacy and prudential norms is self- tionalized banks has cost Rs200 billion. SBI has been
○
○
Measures to be taken in the second phase of bank- (since 1974) the task of reflecting its financial strength
○
○
ing reforms should be based upon a study of the im- through the building of reserves. This is due to the
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 101
○
○
tional market for itself and for Indian corporates. SBI FISCAL IMPLICATIONS
○
○
has done this regularly for some years since 1972. It All bank restructuring attempts have fiscal implica-
○
○
was late in establishing offices overseas but quickly tions that are bad if considered in isolation. The ad-
○
○
caught up with international standards of manage- vantage lies in taking on the fiscal impact and not
○
○
ment. One factor that has helped SBI has been the allowing problems to fester. The Government should
○
○
private shareholdings held in it even after 1955 when draw up a total balance sheet of bank nationalization
○
○
RBI acquired a majority share. As a result, SBI has and socioeconomic gains to strengthen PSBs, on
○
○
been required to hold annual general meetings of which it will have to depend if it is to reduce the
○
11
○
shareholders and has benefited from the system of population/branch and ATM ratio from 15,000 to
○
○
checks and balances, disclosure disciplines, and divi- 3,000.
○
○
dend expectations of shareholders.
○
○
With most nationalized banks incurring continu- ASSET RECONSTRUCTION COMPANY
○
○
ous losses since 1992/93, returns on capital have been The Government should not provide capital support
○
○
negative, preventing buildups of reserves. Slow ac- ○
○
or indirect financing to ARCs. The Narasimham
cretion in reserves was also due to higher provision- Committee (II) recommended that there should be
○
○
ing requirements under the new prudential norms. no further bank recapitalization other than the un-
○
○
With the Government no longer willing to provide disbursed amount of Rs4 billion from the previous
○
○
further capital, the only route for PSBs to improve budget provision that can be diverted as seed capi-
○
○
their capital base is through substantial improvement tal for ARCs. ARCs will be required for banks that
○
○
in generation of internal surplus so as to be in a pre- are not viable over a three-year period. Such banks
○
○
sentable shape to approach the capital market. These will have to be referred to the Restructuring Com-
○
○
system should determine the measures required in The Narasimham Committee proposed the es-
○
○
the second phase of reforms. tablishment of ARCs to tide over the backlog of
○
○
Government-guaranteed advances that have turned NPAs. Banks would undertake financial restruc-
○
○
sticky should be classified as NPAs and, in cases where turing by hiving off their NPA portfolios to ARCs
○
○
sovereign guarantee argument is advanced, there and obtaining funding from it through swap bonds
○
○
should be appropriate disclosure in the balance sheet or securitization. But the Indian banking sector does
○
○
of banks. Potential for conversion of such loan assets not require any emergency policy for rebuilding,
○
○
into Government debts in the form of securities issued despite the NPA problem. The only banks that need
○
○
to banks should be looked into as a way of removing to be recapitalized in the near future are some rural
○
○
contamination from banks’ balance sheets. This way, and cooperative banks. The dangers of ARCs are
○
○
a loan asset in a bank’s balance sheet would be trans- obvious since it could prove to be an easy route for
○
○
formed into an investment asset. commercial banks to clean up their balance sheets,
○
○
The measure would not only help to clean up bank creating scope for staff to repeat mistakes instead
○
○
balance sheets but also strengthen the Government’s of learning from them.
○
○
resolve to eventually sell off or privatize the business Banks have managed recoveries and creation of
○
○
units for which the Government provided a guaran- ARCs would only reverse the healthy recovery of
○
○
tee to a bank. This will in turn contribute to an im- management systems that banks are hoping to es-
○
○
○
○
The private sector’s partial ownership of SBI has Some of the issues are at the micro level and best
○
○
contributed to its exceptional operational efficiency achieved if banks internalize the system of self-evalu-
○
○
even after 1955 when RBI acquired majority shares. ation under the CAMELS rating model.
○
○
This suggests that it is advisable in the long term for Banks also need to effectively exploit their net-
○
○
the Indian banking sector to increase the share of works of branches established in the past at low cost.
○
○
private ownership. It is necessary for PSBs to introduce factoring ser-
○
○
In order to reduce the social burden caused by bank- vices and also activate a short-term bill financing
○
○
ing sector inefficiency, banks should be given wider mechanism, both of which entail utilization of the
○
○
management autonomy. The Government should gra- branch network for collection of the factored invoices
○
○
dually but steadily reduce its ownership of the bank- and bills for clients.
○
○
ing industry while maintaining rigorous prudential
○
Autonomy and Governance
○
regulation and rationalizing its supervision capacity.
○
○
To bring about efficiency in banks, the Narasimham Autonomy and sound governance are likely to be
○
○
Committee (II) recommended a number of measures. achieved after privatization of banks has taken place.
○
○
These included revision and regular update of op- The Narasimham Committee’s observation that most
○
○
erational manuals, simplification of documentation sys- banks do not even have updated instruction manuals
○
○
tems, introduction of computer audits, and evolution proves the point. RBI’s selection of statutory audi-
○
○
of a filtering mechanism to reduce concentration of tors for banks may seem to conflict with the require-
○
○
exposures in lending and drawing geographical/in- ment for sound corporate governance. However, such
○
○
dustry/sectoral exposure norms with the Board’s con- regulatory intervention will remain useful until banks
○
○
currence. Besides, the Narasimham Committee sug- can fully strengthen their internal systems and pro-
○
○
gested the assignment of full-time directors in na- cedures, risk management standards, and the required
○
○
improve productivity, it recommended that the same Recruitment and workforce management as well
○
○
be introduced in the fields of building maintenance, as remuneration management should be left for banks
○
○
cleaning, security, dispatch of mail, computer-related to handle. But apart from exceptional cases, this is not
○
○
work, etc., subject to relevant laws. It also suggested a priority area. Although the problem of overstaffing
○
○
ment/RBI in the equity of nationalized banks/SBI be since 1985/86 through restrictions in fresh recruitment.
○
○
With regard to the tenure of a bank’s chief execu- rectors, and executive directors of PSBs and finan-
○
○
tive, the Narasimham Committee indicated a mini- cial institutions should be determined by an appoint-
○
○
mum period of three years. However, a more rea- ment board. The Narasimham Committee felt that
○
○
sonable length of tenure should not be less than five there was an urgent need to raise competency levels
○
○
years. Managers should be given incentives to adapt in PSBs through a lateral induction of talented per-
○
○
their managerial structure to new developments in sonnel. It also indicated that the remuneration struc-
○
○
financial technologies and to changes in client de- ture should be flexible and market driven.
○
○
mand for financial services. The Government needs The Government should quickly take steps to in-
○
○
to seriously consider an increase in management duct shareholder nominees on banks who have raised
○
○
autonomy in the banking industry, because it is es- money from the public but do not have representa-
○
○
It will also have to reorient economic governance There are several institutes and colleges that pro-
○
○
to ensure that transaction costs to the public, trade, vide skills- and management-oriented training pro-
○
○
industry, and financial sectors are reduced or elimi- grams to staff every year. Some are dedicated to
○
○
nated. For example, in 1998, the Government released individual banks, while a few institutes cater to the
○
○
an autonomy package for nine more PSBs (totaling needs of all Indian banks and FIs. However, there
○
○
14 as of 31 March 1998), which result in the elimina- is only one institute that conducts professional ex-
○
12
○
tion of consultations and delays in decision making. aminations—the Indian Institute of Bankers, which
○
○
A step further would be to install regional boards for has completed 70 years of service to the banking
○
○
PSBs in order to delegate power and improve op- industry in the country. It develops professionally
○
○
erational governance. Centralization has built rigidi- qualified and competent bankers through examina-
○
○
ties, fostered mediocrity, and curbed bank expansion tions and continuing professional development pro-
○
○
in the rural and semi-urban areas. If the Govern- grams.
○
○
ment’s plan to computerize all branches is to be Recognizing that the trend throughout the world is
○
○
achieved, capital will be required that can be found to acquire proficiency in management through Mas-
○
○
only through cost cutting which itself is dependent ○
○
ter of Business Administration (MBA) degrees, the
on decentralization. Nationalized banks need to have institute has signed a memorandum of understanding
○
○
regional boards of directors like SBI to decentralize with the Indira Gandhi National Open University, New
○
○
Human resources are not merely an asset but the Banks need to encourage the attainment of relevant
○
○
real capital of a bank. Banking in the future will re- professional qualifications among staff, and the
○
○
quire knowledgeable workers. A bank should have a institute’s activities are steps in the right direction.
○
○
group of chief officers in a variety of fields so that Analysis of NPA management in banks has re-
○
○
the collective wisdom of their organization is at the vealed that instruction manuals in most banks are
○
○
fingertips of every employee. An integrated body of not up-to-date. Audit systems concerned with exer-
○
○
knowledge and professionalism in banking has to be cise of preventive and detective controls cannot be
○
○
in place to ensure continued financial viability. Staff effective in such an environment, while training sys-
○
○
morale plays a crucial role in developing good orga- tems will lack a proper foundation. RBI should as-
○
○
nizational culture. In that context, training is going to sign proportionate punitive negative ratings to banks
○
○
Resuming recruitment of young trainees, training (II) has also called for the updating of manuals in
○
○
and retraining of personnel, accelerated promotions banks. Another area of training should concern codes
○
○
for young people through competition, studious hab- of ethics and public accountability.
○
○
to determine recruitment needs of new skills, and Both Narasimham Committees recommended that
○
○
spread of an IT culture are among the issues that the directed credit component needs to be reduced
○
○
have to be addressed. The focus should be to create from 40 to 10 percent since contamination of banks’
○
○
core competencies for handling various types of risks balance sheets has come from payment defaults in
○
○
and customer sophistication, to meet all needs, from this sector. With more disintermediation and compe-
○
○
rural to urban. tition coupled with rising costs and falling income
○
104 A STUDY OF FINANCIAL MARKETS
margins in metro and urban centers, more than 70 semi-urban areas is equally a commercial proposi-
○
○
percent of the branch network of PSBs situated in tion. As such, the calculation of contamination coef-
○
○
13
rural and semi-urban areas should look upon local ficient of directed credit requires review and should
○
○
market opportunities as being a “priority” for the not lead to policies that curtail financing to important
○
○
banks themselves. These areas are rich in potential, economic segments. Most important, a rural banking
○
○
which banks can tap only if they can introduce tech- system under control of NABARD is too weak to
○
○
nology and computerization at relatively low invest- shoulder the burden of rural credit.
○
○
ment costs. Banks’ neglect in this area explains to The Government and banks interpret the term
○
○
some extent the growth of the informal sector and “directed” as “targeted” in reference to the Nara-
○
○
NBFCs. Yet the farming community in many states simham Committee (I) recommendation for a “di-
○
○
today is well educated and needs modern banking rected credit allocation to the priority sector.” The
○
○
support, which neither foreign banks nor newly shift in focus should be towards timely and adequate
○
○
opened private sector banks would offer. credit to eligible borrowers. The “service area ap-
○
○
According to data quoted in the R. V. Gupta Com- proach” introduced in 1987 that allocated command
○
○
mittee Report (April 1998) on agricultural credit areas to rural banks restricted the choice of bank
○
○
through commercial banks: “There has been an in- for borrowers and choice of borrowers for banks
○
○
crease in the flow of credit to the agricultural sector that allocated command areas to rural banks. The
○
○
from Rs112.02 billion by all agencies in 1991/92 to freedom to manage advocated by Narasimham
○
○
Rs286.53 billion in 1996/97, and to an estimated Committee (II) warrants abandonment of this “ser-
○
○
Rs342.74 billion in 1997/98. This has been possible vice area approach.”
○
○
on account of more refinance extended by NABARD Freedom also should exist for reporting perfor-
○
○
to rural financial institutions, RBI’s increased sup- mances in lending to agriculture with reference to
○
○
port by way of general line of credit to NABARD harvest periods instead of using a fixed date of
○
○
for the short term, and introduction of special agri- 31 March, which is the banks’ balance sheet date,
○
○
cultural credit plans by commercial banks for this when demand for agriculture credit is depressed.
○
○
sector. RBI has played a central role in motivating The Gupta Committee has identified core human
○
○
commercial banks to place a special emphasis on resources problems such as staff of rural/semi-ur-
○
○
agriculture. In spite of these initiatives, there is a ban branches commuting daily from places where
○
○
kept pace with demand.” tion of performance at such branches by their senior
○
○
There is a need to review the best banking prac- management is another problem.
○
○
tices that brought prosperity to rural and semi-urban The issue of merging RRBs to create a single ru-
○
○
areas. The causes of decline should be isolated and ral-oriented banking institution deserves support since
○
○
Most of the factors causing NPAs in the priority not been decided. Also, capital infusion into coop-
○
○
sectors can be brought under control. The priority erative banking is long overdue. This contrasts
○
○
sectors include SSI financing, which is handled promi- sharply with the urgency with which nationalized
○
○
nently at bank branches in metro and urban areas banks received a large amount of recapitalization
○
○
(not only in rural and semi-urban areas) and is com- support from the Government. India cannot have a
○
○
mercial except that it is under priority credit. By the strong banking system only for metro and urban ser-
○
○
same argument, agriculture financing in rural and vices if it wants to be globally competitive.
○
○
○
THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 105
○
○
RURAL BANKING AND SMALL INDUSTRIAL CREDIT from different states as farm laborers and industrial
○
○
In the wake of computerization of banks, the man- workers and these need remittance services.
○
○
agement challenge concerns staff redundancies. Amalgamation will result in creation of a strong
○
○
Branch expansion in rural and semi-urban areas national rural banking apparatus if commercial ori-
○
○
would be a logical way to deploy the excess staff. entation and management upgrades are also tackled
○
○
Some 600 million people (out of a population of more alongside recapitalization. Such a large bank should
○
○
than 900 million) live in these areas. The population- have branches at districts and state capitals to foster
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branch ratio of 12,000 on a gross basis needs to be strong links between these centers and outlying rural
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reworked separately for rural and semi-urban areas areas where the majority of RRB branches operate.
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(making allowance for good communication and Besides creating a strong nationwide payment net-
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transportation networks that are available in metro work, it would achieve harmonization of policy and
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and urban areas) and improved significantly. Eco- growth strategies—especially in agriculture and agro-
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nomic liberalization since 1991/92 has failed to fully industry exports for which adequate services are not
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bring forth the “trickle down” benefits to the rural ○
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available from commercial banks (centers where the
and semi-urban poor and has instead resulted in high business potential is high). The amalgamation of
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investment in the luxury goods sector. The bias should RRBs could take place through four to five subsid-
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be corrected by boosting Government investment in iaries; i.e., groups of RRBs in contiguous regions,
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rural infrastructure and expanding banking activities. or by having a single amalgamated bank structure
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RRBs are presently under the control of four with regional boards and a central board based on
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NABARD, and indirectly RBI (under a system of The Government has introduced a Rural Infra-
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consolidated supervision to which the parent bank of structure Development Fund, which is administered
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the RRB is subjected). A single countrywide entity by NABARD, for financing state governments. Per-
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merging 196 RRBs of more than 14,000 branches haps a strong commercial rural-oriented banking ve-
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(functioning in 23 different states and 435 districts) hicle can deliver better results.
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could end this fragmentation and develop a focused Currently, RRBs are standalone institutions with
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system. This system could mobilize a large volume branches functioning in a highly adverse and isolated
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of deposits through active management and low-cost environment. A centralized institution of RRBs by
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technology to achieve a reduction in transaction costs, merger could attract better managerial talent and also
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have its own dedicated training system, establish in- take its cues from the corporate sector and multina-
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ternal controls, regionalize supervision and audits, tionals, which regard the rural economics of India as
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create payment networks by having branches at each potentially a fast developing market. In fact, some
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district under which present rural branches of any corporates and multinationals today are engaging
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RRB fall, and provide timely, need-based credit at MBA degree holders qualified in rural development
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each rural area. subjects. Some rural areas are potential candidates
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More than 14 countries have benefited from “Pro- for development into export centers for which mod-
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ject Microbanker,” a customized version of which ern banking facilities should be made available, in-
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can be used by RRBs. Alternatively, software can stead of making the customers commute to urban
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be developed that will be feasible and cost effective centers to meet their international banking needs.
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if RRBs are amalgamated. A nationwide payment There are other justifications for merging RRBs
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and remittance system at rural level is necessary into a single unit. It is true that the merger of weak
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106 A STUDY OF FINANCIAL MARKETS
units cannot build strength but the merger will attract ral banking system will have to develop this. Profits
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the required attention to the system in which the scope from agriculture produce are heavily dependent on
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for synergy is high. The risk of putting RRBs in the infrastructure and market information. Market infor-
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same club as cooperative banks is that the method mation system is the key to development of infra-
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of supervision fails to distinguish the ownership structure for rural markets. The system would in-
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pattern and differences between the two sets. clude all information regarding prices, investments,
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NABARD should benefit from realignment of its manufacturing, and requirements of all products. The
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supervisory load if RRBs are merged and provided a Government National Information Centers have a
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strong central management. This rural banking ap- big database in each state, but market-oriented use
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paratus can create competition, which is absent to- and the sharing of it with banks are required.
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tally in the rural banking field. RRBs are already per-
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Nonbanking Financial Companies
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mitted to invest in shares and debentures and units
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of mutual funds up to 5 percent of their incremental The NBFC reform agenda is complex because of
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deposits. All RRBs, if merged, could generate a siz- the large number of NBFCs, their locational spheres,
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able corpus of funds and also management compe- varied composition of assets and liabilities, failure rate,
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tencies to handle such an investment portfolio, which and incidences of fraud that have caused a loss of
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today each RRB has to separately develop. depositors’ confidence. There are also new require-
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The Narasimham Committee proposed that the ments of credit rating, capital adequacy, statutory li-
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operation of rural financial institutions be reviewed quidity, and registration with RBI. In many areas,
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and strengthened in their appraisal, supervision, fol- there might be forced or voluntary closures of NBFCs
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low-up loan recovery strategies and development of that are not able to comply with the norms. RBI
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bank-client relationships, in view of the higher NPAs should identify such places and ask banks to open
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in PSBs due to directed lending. With regard to CAR, branches to provide alternatives to depositors where
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tory and supervisory functions over rural credit insti- Factoring Services
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tutions should rest with the proposed BFRS. Factoring services have not taken off even though
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Banks would have to offer financial solutions to they improve velocity of receivables, thus affording
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private equity, venture funding, and corporate finance systems have been established, namely, SBI, Canara
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to tap the potential of agri-based businesses in Bank, and SIDBI. Experience of existing factoring
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14
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Banks and corporates as well as cooperatives will receivables is cut by more than 25 percent resulting
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have to take into account changes in consumer atti- in cost reduction of working capital. The rigorous
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tude toward processed food and modernize the dis- follow-up by factoring companies also decreases
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advisory services, project financing, venture capital, Application of electronic data interchange (EDI)
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strategic and private equity and asset financing— needs to be progressively adopted to accelerate
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including off-balance sheet financing—to come up growth of factoring services. Banks, corporates,
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with investments in this sector. Though India is the medium-size industries, and SSIs should unite to de-
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third largest producer of fruits and vegetables in the velop electronic message formats in receivable port-
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world, it lacks a market information system. The ru- folio management and collection systems.
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THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 107
The adoption of EDI will allow computer-to-com- payments in a CAC type of regime. The Govern-
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puter exchanges of business transactions such as ment should improve its utilization of aid funds and
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purchase orders, invoices, shipping notices and other foreign capital rather than just basing economic
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standard business correspondence between trading growth requirements on free capital inflows (which
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partners. Exporters and importers as well as domes- cannot be obtained unless outflows are freed).
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tic traders can translate all foreign or domestic trade- Indian banks need to become competitive with
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related documents electronically without any human branches of foreign banks in centers where both exist,
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intervention from their own premises, drastically re- and the number of such centers ought to be enlarged
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ducing paperwork and increasing efficiency. Even to promote modernization in Indian banks. There is
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though measures are being taken to increase exports no risk of Indian banks being dislodged from their
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and earn foreign exchange, the nonimplementation prime position in the home market if more branches
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of EDI is proving to be a major obstacle to boosting of foreign banks open at important centers nor can
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exports because many countries carry out trade their foreign branches become internationally com-
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transactions mostly electronically. petitive since capital that Indian banks can spare for
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foreign branches is marginal and low.
External Sector
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Universal Banking
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to trade, should continue to be a major concern if Caution must be applied on universal banking be-
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stable growth is to be encouraged and economic com- cause of the following considerations:
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If export performance does not improve, the con- bank intermediation between savers and borrow-
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sequences for the banking and financial sectors might ers by a capital market process) is only a de-
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be serious. External assistance to the export sector cade old in India and has badly slowed down
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the Indian banks and FIs. During 1989/90, the World • there is ample room for financial deepening (by
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Bank extended loans to Indian banks to finance ex- banks and DFIs) since loans market will con-
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as equity for banks. This should be undertaken again • DFIs as holders of equity in most of the projects
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in the current and future financing activities of multi- promoted in the past have never used the tools
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Current account convertibility (CAC) is not going to work of services (including branches) in all fields:
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benefit Indian banks, which still have to get to grips remittances, collections, etc.; and
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with the full-scale convertibility on current accounts • reforms of India’s capital market is still at the
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in force for the last few years. At the macroeco- halfway stage. The priority will be to ensure
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nomic level, there are two aspects that merit special branch expansion, financial deepening of the
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attention: India’s external debt is now close to credit markets, and creation of an efficient credit
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$100 billion; and it has a strong parallel economy delivery mechanism that can compete with the
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The Narasimham Committee recommended that only of temporary surpluses and deficits, is actually
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banks and primary dealers alone should be allowed treated as a source of regular funding by banks (par-
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in the interbank call and notice money market. ticularly foreign banks). The need is to remove the
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NBFCs would get access to other forms of instru- word “call” from various reports and publications of
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ments in the money market such as bill rediscount- RBI and define it clearly as a composite money mar-
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ing, commercial papers, and T-bills. It also suggested ket for call funds and term funds. There is little ac-
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opening the T-bill market to FIIs to broaden its base. tivity in the term funds market even though the liabil-
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The imperfections of money market lie in the tradi- ity structure of banks and DFIs has undergone a con-
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tional nomenclature used; for instance, the “call siderable transformation.
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THE INDIAN BANKING SECTOR: ON THE ROAD TO PROGRESS 109
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would also be covered within the above exposure ceiling.
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Banks undertaking factoring services departmentally
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1The State Bank of India (SBI) and Associate Banks of
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should carefully assess the clients’ working capital needs
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SBI were formerly Imperial Bank of India, Ltd. and Major taking into account the invoices purchased. Factoring
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Princely State Banks, respectively. It is legally prescribed services should be extended only in respect of those in-
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that RBI must hold at least 55 percent of SBI. voices that represent genuine trade transactions. Banks
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should take particular care to ensure that by extending
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2The ordinance came into effect on 31 October 1998.
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factoring services, the client is not overfinanced. No worth-
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while progress has taken place, reflecting apathy of banks
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3Debt Recovery Tribunals (DRTs) are established conse- towards factoring.
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quent upon enactment of the Recovery of Debts due to
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Banks and Financial Institutions Act of 1993 (pursuant to 8The Government appointed in 1985 a committee under
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recommendations of Narasimham Committee [I]) but have the chairmanship of Dr. Sukhamoy Chakravasti to review
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not made much impact on recovery performance of banks. the workings of the monetary system. The report of this
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The number of DRTs has remained inadequate with dis- committee provided several directions to the future shape
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posal of cases slow, as gathered from data recorded in of financial sector reforms. Among its various recommen-
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para 2.95 of RBI Report on Trends and Progress of Bank- ○
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dations, the Committee advocated stricter credit discipline
ing in India, 1997-1998. DRTs are known to have func- and a reduction in the importance of cash credit, greater
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tioned with multiple states jurisdiction and inadequate resort to financing of working capital through loans, bills,
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the related problems. 9RBI constituted in 1997 a working group under the chair-
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The accumulation of and age of cases remaining undis- operations of development finance institutions (DFIs) and
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posed are large and recovery suits filed by banks lie in the banks in the emerging operating environment; (ii) sug-
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queue. The Reserve Bank of India’s Health Code Scheme gest measures for bringing about harmonization in lend-
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in the 1980s impelled segregation of loan assets by qual- ing and working capital finance by banks and DFIs; (iii)
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ity of bank balance sheets, which until 1992 (when the examine scope for increased access to short-term funds
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formal reform process started) showed a rosy picture. Banks by DFIs; and (iv) strengthen organization, human re-
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did not take full advantage of the Health Code classifica- sources, and related issues of DFIs and banks in the pros-
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tion with the result that bad borrowers got an extended pect of introduction of capital account convertibility.
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5Production of milk. India is among the world’s biggest of banks, RBI felt the need for a review of existing systems
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6The mindset is loaded with concerns over poverty more up in 1996. The committee made several important recom-
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than recognizing that rural banking promoted since 1969 mendations, which RBI accepted and directed banks to
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advances and should accordingly be given risk weight of 12The main objectives of the institute are as follows:
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100 percent for calculation of capital-to-risk-asset ratio. • to encourage the study of banking and institute a sys-
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Further, the extant guidelines on income recognition, as- tem of examinations, certificates, scholarships, and prizes;
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set classification, and provisioning would also be appli- • to promote information on banking and related subjects
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Abank’s exposure shall not exceed 25 percent of the banks’ with public bodies and individuals, or otherwise; and
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capital funds to an individual borrower and 50 percent to a • to collect and circulate statistics and other information
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group of borrowers. The facilities extended by way of equip- relating to the business of banking in India.
110 A STUDY OF FINANCIAL MARKETS
13See p. 25, paragraph 3.31 of the Narasimham Committee $10 billion; wheat milling and processing, $6 billion;
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(II) report. and beverages, $4 billion by 2005. There would emerge
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the concept of “large market high growth segment” for
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14 A McKinsey & Company/Faida Report estimated
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India and the need for the development of larger food
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the future market size of India’s basic food sector as and agriculture companies and necessary funding ar-
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follows: dairy, $11 billion; animal feed and poultry, rangements.
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