Dr.

S H Uzma, Assistant Professor, School of

Management, NIT Rourkela
 The Banking Regulation (Amendment) Act, 2017
has been used by the Reserve Bank of India (RBI)
to issue definitive directions to banks for the
resolution of stressed assets, including through
the Insolvency and Bankruptcy Code (IBC) 2016.
By the end of FY2017/18, around 40% of NPLs
were under the IBC process. Added to this is the
government's concerted effort at recapitalization.
 The RBI has also sought to use punitive measures
against banks violating banking regulations.
 While the measures are a major step forward in
cleaning up the Indian banking system, the main
problem is governance, particularly in the public
sector banks (PSBs), as demonstrated in the fraud
scandal that has rocked the PNB.
 Yet, RBI officials complain that they have
insufficient enforcement power over PSBs, which
control 80% of the domestic market and where
the NPL problem is most acute. In the PSB sector,
it lacks the power to revoke a banking licence,
merge a bank, shut down a bank, or penalize the
board of directors.
 Another potential point of resistance will come
from the shake-up in bank ownership with the
government considering allowing up to 100%
foreign direct investment in private banks.
Currently, FDI of up to 49% is allowed in private
banks without the permission of the government
and up to 74% with government approval. The
government is also looking to raise the FDI limit
in public sector banks to 49% from 20%. The
move would be aimed at helping banks to meet
minimum capital requirements, but the limit on
no more than 10% ownership by a single entity is
likely to be retained.
As of December 2017, we note that six PSBs
(30% of all PSBs) still do not meet the
minimum Tier 1 ratio under Basel III norms.
The recapitalisation plan therefore also
represents a positive step towards helping all
Indian state-owned banks meet the minimum
8.25% Tier 1 ratio under Basel III norms. The
resultant risk reduction and adherence to
international risk standards should also be
positive for investor sentiment and we expect
this to support credit growth.
 The Indian Ministry of Finance (MoF) announced the
individual bank allocation for the first INR881bn (of
the total INR2.1tn) capital infusion on January 24,
which will see public sector banks (PSBs) with a larger
burden of non-performing loans (NPL) receive a
larger capital infusion. We see this as a major step
towards improving the financial performance of ailing
public sector banks as the capital infusion will aid in
the clean-up of balance sheets and facilitate the
implementation of further banking reforms. This will
likely also spur new loan issuances, which inform our
forecasts for loan growth to come in at 10.0% for
FY2017/18 (April-March) and 12.0% for FY2018/19,
marking a significant pick up from 4.0% in
FY2016/17.
 The Indian banking system consists of 21 public
sector banks (PSBs), 25 private sector banks, 43
foreign banks, 56 regional rural banks, nearly
1,600 urban cooperative banks and over 93,500
rural cooperative banks.
 PSBs represent a market share of just under 80%,
with private banks representing the remainder.
PSBs are characterised by high non-performing
loan (NPL) ratios and a lack of provisioning, but
risk is mitigated by government backing. The
private banking sector is in better health and has
driven the market since liberalisation from the
early 1990s.
 The government-owned, Mumbai-based State
Bank of India (SBI) is by far the biggest bank in
the Indian market, with assets worth INR29.7trn.
Created from the Imperial Bank and integrated
with a number of other smaller banks, SBI was
constituted in 1955, following India's
independence. In keeping with the post-imperial
ethos of the time, the SBI was directed to assist
with rural development in order to sustain and
modernise the agricultural sector as well as the
growing needs of national economic
development.
 On April 1 2017, SBI merged with state-owned
Bharatiya Mahila Bank, which was founded in 2013 as
a bank aimed at advancing financial services for
women. At the same time, five associate banks of the
SBI - State Bank of Bikaner and Jaipur, State Bank of
 Hyderabad, State Bank of Mysore, State Bank of
Patiala and State Bank of Travancore - started trading
as SBI subsidiaries from April 1 2017. The new
combined entity has an asset base estimated at
INR37trn, which is more than five times that of the
second largest bank, ICICI Bank. This moved it from
the world's 52nd largest bank to the 45th. A larger
balance sheet will enhance its risk-taking ability and
enable it to issue more loans.
 The second and third largest banks, based on
total assets, are ICICI and HDFC Bank,
respectively. Both banks were established in
1994 in the relatively early days of India's
banking sector liberalisation and have
become trailblazers for the development of
the Indian banking sector. They offer a wide
range of commercial and transactional
banking services and treasury products to
wholesale and retail customers.
 ICICI Bank was originally promoted in 1994 by ICICI
Ltd, an Indian financial institution formed in 1955 by
the World Bank, the government and Indian
industrialists. ICICI's stake in ICICI Bank has been
reduced to 46% over the years through a public
offering of shares in 1998, an equity offering through
American Depository Shares (ADS) on the New York
Stock Exchange in 2000 and the bank's acquisition of
the Bank of Madura. Over the same period, it
transformed itself from a development financial
institution offering only project finance to a
diversified financial services group offering a wide
range of products and services, both directly and
through a number of subsidiaries and affiliates.
 HDFC Bank was incorporated soon after the liberalisation
of the banking industry by the Reserve Bank of India in
1994 and commenced its operations in January 1995. It
began as a mortgage lender, enabling it to develop leading
expertise in retail mortgage loans. HDFC Group holds
21.67% of the Bank's equity and about 18.87% of the
equity is held by the ADS or Global Depository Receipts
(GDR) depositories. A further 32.57 % of equity is held by
Foreign Institutional Investors (FIIs) and the rest is owned
by over 440,000 shareholders. In 2000, it merged with
Times Bank and in 2008 it merged with the Centurion Bank
of Punjab through a share swap. These mergers added
significant value to HDFC Bank in terms of increased
branch network, geographic reach and customer base. The
bank has a distribution network comprised of over 4,000
branches.
 The Bank of Baroda is India's fourth largest bank
by asset size and the second largest PSB,followed
closely by the Punjab National Bank, Bank of India
and Canara Bank, with Union Bank of India in
ninth place in terms of asset base. All five banks
are state-owned and characterised by high NPL
ratios. These have been accrued due to the
government's past desire to use them to
stimulate the economy and take on the burden of
financing social schemes, only for the 2008
financial crisis to fuel bad debt.
 The privately owned Axis Bank is the eighth
largest bank on the Indian market. It has
gone through a difficult period, but entered
2017 in a better position having resolved
many of its bad assets. A rise in provisions
caused a decline in net profit, but stability in
its asset quality and a falling NPL ratio should
bolster profitability going forward.
 The government is considering allowing up to
100% foreign direct investment in private banks,
according to media reports in January 2018.
Currently, FDI of up to 49% is allowed in private
banks without the permission of the government
and up to 74% with government approval. The
government is also looking to raise the FDI limit
in public sector banks to 49% from 20%. The
move would be aimed at helping banks to meet
minimum capital requirements, but the limit on
no more than 10% ownership by a single entity is
likely to be retained.
 In the private sector, new players are emerging. Aditya
Birla Idea Payments Bank started operations in February
2018 followed in April 2018 by the launch of the Jio
Payments Bank. Both had gained in-principle approval in
2015 for setting up a payments bank. Payments banks can
offer a limited range of products, such as acceptance of
demand deposits and remittances of funds as well as
restricted deposits, currently limited to INR100,000 per
customer. However, these banks cannot issue loans and
credit cards.
 Other payments banks that have started operations are
Airtel Payments Bank Ltd, India Post Payments Bank Ltd,
Paytm Payments Bank Ltd and Fino Payments Bank Ltd.
Three applicants have surrendered their licences, while
two are yet to set up payments banks - Vodafone m-Pesa
Ltd and National Securities Depository Ltd.
 Banking Regulation Act, 1949, referred to as the Banking Act: The Act's provisions
stipulate that a bank may only engage in specific activities, including:
 The borrowing or lending of money.
 The guarantee and indemnity business.
 Drawing and dealing in bills of exchange, promissory notes, warrants, debentures
and other instruments and securities.
 Granting or issuing currency, traveller's cheques or letters of credit.
 Buying and selling foreign exchange.
 Providing safe deposit vaults.
 The collecting and transmitting of money and securities.
 Underwriting, participating and managing of any issue (public or private) of any
loans or of shares, stock, debentures or debenture stock, and lending money for
such purpose.
 Undertaking and executing trusts.
 • Undertaking the administration of estates as executor, trustee or otherwise.
 • Acquiring the whole or any part of the business (if specified under the Banking
Act) of any person or company.
Under the Act, banks are now allowed to:
 Deal in the buying or selling or bartering of
goods, except for realisation of security.
 Hold any immovable property, except as required
for their own use, for any period exceeding seven
years from acquisition of such property.
 Hold shares in any company exceeding 30% of
the paid-up share capital of that company or 30%
of its own paid-up share capital and reserves.
 Provide loans to any company for buy-back of its
own securities.
 Act as managing agent or secretary or treasurer
of a company.
 The Payment and Settlements Act, 2007,
referred to as the PSS Act: The PSS Act
appoints the Reserve Bank of India (RBI) as
the authority and regulates the operation of
payment and settlement systems.
 Negotiable Instruments Act, 1881, referred to
as the NI Act: The NI Act regulates negotiable
instruments, including cheques and
promissory notes.
 Aside from acts of parliament, regulations include
circulars and notifications by the RBI as well as other
legislation. Banks are also regulated by recovery
proceedings by banks and financial institutions through
Debt Recovery Tribunals (DRT) and Debt Recovery
 Appellate Tribunals (DRAT) under the Recovery of Debts
Due to Banks and Financial Institutions Act 1993. Under
the Securitization and the Reconstruction of Financial
Assets and Enforcement of Securities Interest Act 2002
(SARFAESI Act), banks and financial institutions can
appoint asset reconstruction companies or securitisation
companies to recovery debts. Under the Code of Civil
Procedure 1908, banks and financial institutions can
recover debts in recovery proceedings in the civil courts.
 In October 2016, the RBI issued guidelines for the
operation of small finance banks (SFBs)/payments
banks, although the Banking Act will continue to
provide over-arching principles for differentiated
banks. Payments banks are initially restricted to
holding a maximum balance of INR100,000 per
individual customer and allowed to issue ATM and
debit cards as well as other prepaid payment
instruments, but not credit cards. Payments banks
allow mobile firms, supermarket chains and others to
cater to individuals and small businesses. SFBs can
provide basic banking services to unbanked sections
of the economy, such as small farmers, micro
business enterprises, micro and small industries and
unorganised sector entities.
 Banks are restricted in the amount they can
lend to a single borrower to 15% of their
capital funds, with the exception of
infrastructure projects, in which lending can
be raised to 20%. For group borrowers, this is
limited to 30%, with up to 40% for
infrastructural investment. In both cases, a
bank's board of directors may extend lending
by a further 5%.
 In terms of the Cash Reserve Ratio (CRR),
banks are required to keep a minimum of 4%
of their net demand and time liabilities
(NDTL) on a fortnightly basis in the form of
cash with the RBI. Daily maintenance must be
above 95% of required reserves; if the CRR
falls below this, the bank receives a penalty of
3% above the bank rate applied on the
number of days of default multiplied by the
amount by which the amount falls short of
the prescribed level.
 In addition to the CRR, banks are required to
maintain a Statutory Liquidity Ratio (SLR) of
22-40% of NDTL in gold, cash or certain
approved securities. The excess SLR holdings
can be used to borrow under the Marginal
Standing Facility (MSF) on an overnight basis
from the RBI. Under the MSF, the interest is
100 basis points above the repo rate, with
borrowing capped at 2% of NDTL.
 The banking sector in India is regulated by
the Ministry of Finance, with the RBI as the
primary regulator. The RBI also has
responsibility for regulating small banks,
including local area banks and payment
banks. These smaller banks have niche roles
in serving small enterprises, the casual
workforce and low income households and
farmers. These are divided into two separate
categories: SFBs and Payments banks.
 The RBI, established by the Reserve Bank of India
Act 1934, is the main regulator, with its central
board appointed by the government. The
regulatory functions are performed by the Board
for Financial Supervision (BFS), which is chaired
by the governor, with the rest of the membership
comprised of four deputy governors. As the
central bank, the RBI issues currency and
oversees monetary, foreign reserves and
exchange rate policies and supervises the
financial system. It also has a specific function to
provide financial services to farmers, rural
communities and women.
 Banking licences are awarded on the basis
that groups have a 10-year track record of
operations through a non-operative financial
holding company (NOFHC) wholly owned by
the directors. The minimum paid-up voting
equity capital is INR5bn with NOFHC holding
at least 40%, reduced to 15% over 12 years.
Shares have to be listed within three years of
the start of the bank's operations.
 Foreign shareholding is limited to 49% for the first five
years of operation, after which a bank can apply to the RBI
to raise the stake to 74%. Banks are also required to open
a quarter of their branches in unbanked rural areas.
 There are also government bodies that oversee the
financing of specific sectors. The regulator of institutional
credit for the agricultural sector is the National Bank for
Agriculture and Rural Development (NABARD), which was
established in 1981 under the National Bank for
Agriculture and Rural Development Act. The Small
Industries Development Bank of India (SIDBI), which was
established in 1990 under the Small Industries
Development Act, is the main institution for the financing
of SMEs. The National Housing Bank (NHB), which was
established in 1997, is dedicated to financing for the
housing market and public housing.
 India Banking & Financial Services Report | Q3
2018