The New Economic Policies

Evolution of Indian Banking

Liberalisation Measures Macro-Economic Reforms and Structural Adjustments

New Industrial Policy New Trade Policy Macro-Economic Reforms Structural Adjustments

New Industrial Policy New Trade Policy

• Liberalisation of industrial licencing • Lowering of import tariffs
» Delicencing,Decontrol,Deregulation,Broad
banding , Abolition of registration • Abolition of import licences
• FERA liberalisation • A more open exim regime
» Liberalisation of foreign investment
» Liberalisation of technology import • Convertibility of rupee
• MRTP liberalisation • Encouragement to exports
» Abolition of threshold asset limits
» No MRTP clearance needed for expansions,
• Encouragement to foreign investment
mergers
• Integrating India’s economy with the
• Curtailment of public sector global economy
» Several industries hitherto reserved for public
sector opened up to private sector
» Only eight core industries remain reserved for
the public sector
» Purview of BIFR extended to the public sector

Macro-Economic Reforms Structural Adjustments

• Fiscal and monetary reforms • Phasing out subsidies
• Banking sector reforms • Dismantling of price controls and
• Capital market reforms introduction to market driven price
environment
• Public sector restructure
disinvestment

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Banking Reforms FLOW OF FINANCIAL RESOURCES

Net Supplier of Funds

Household Sector
• Banks to operate as commercial institutions
• Phasing out of priority sector lending Fund from
Commercial Stock Exchanges Investment
Banks
• Deregulation of deposit interest rates ROW Institutions

• Operational freedom in lending rates

• Adherance to norms on capital adequacy, DFIs, SFCs,

income recognition and provision for bad

SIDCs

debts Net Uses of Funds

• Disinvestment in public sector banks Govt./Industrial Sector
Agricultural. Sector
• Permission for new private sector banks

Beginning of Modern Banking in

India
In 1786, the English Agency Houses had established the Bank of Bengal at
Evolution of Indian Banking Calcutta.
This heralded the beginning of modern banking in India.

Pre-Independence
Reserve Bank of India
• On the eve of independence in 1947,
there were 648 commercial banks
comprising 97 scheduled and 551 non- Schedule Banks Non Schedule Banks
scheduled banks.
• The number of offices of Banks stood at
State Co-op Bank Commercial Banks
2,987, total deposits at Rs. 10,800
million, and advances at Rs. 4750
million. SBI & SUBSIDIARIES PUBLIC SECTOR BANKS PRIVATE SECTOR BANKS (OLD) PRIVATE SECTOR BANKS (NEW) FOREIGN BANKS

REGIONAL RURAL BANKS(RRBs)

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RBI
• The Reserve Bank of India (RBI) came
into existence in 1935 as the central
banking authority of the country.
FORMATION
OF
STATE BANK OF INDIA (SBI)
• The State Bank of India Act 1955 was
passed under which RBI took control of
the imperial Bank of India, which was
renamed State Bank of India (SBI).
• Later in 1959, the State Bank of India
(Subsidiary Bank) Act was passed
enabling SBI to take over eight princely-
state-associated banks as the
subsidiaries.
NATIONALISATION OF BANKS
• In July 1969, the Government of India
nationalised 14 major scheduled
commercial banks, each having a
minimum aggregate deposit of Rs. 500
million.
Reserve Bank of India
• Establishment on April 1935 in
accordance with the provisions of
RBI Act 1934
• To act as the note issuing authority
• Bankers’ Bank and Banker to
Government
• Monetary Regulations
• To promote the growth of the
Economy
• To maintain the exchange value of
rupee
• Internal debt management
Banking Development:
Pre-Nationalisation
8 Credit was excessively skewed in favour of
large borrowers
8 Agricultural sector got only about 2% of
total bank credit
8 Features with the goal of achieving
equitable allocation of credit and relative
priorities set out in the Five Year Plans
Rationale for Nationalisation
Æ Removal of control and monopoly
by few large Industrial / Business
houses.
Æ Provision of adequate credit for
agriculture, small industry,
exports etc.
Æ Giving professional bent to
management.
Æ Encouraging a new class of
entrepreneurs.
Æ Change over from Class Banking to
Mass Banking
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OBJECTIVES AND REASONS OF NATIONALISATION
An institution such as the banking
systems, which touches and should
touch lives of millions has to be inspired
by a larger social purpose and has to
sub-serve national priorities and
objectives such as rapid growth in
agriculture, small industry and exports,
raising employment levels,
encouragement of new entrepreneurs,
and the development of the backward
areas.
CONTD…
SECOND ROUND OF NATIONALISATION
Again, in 1980, the Government of
India nationalised another six
banks, each having deposits of Rs.
2000 million or above raising the
total number of nationalised banks
from 14 to 20.
Impact of Nationalisation
Î Unprecedented growth in branch
network of commercial banks.
Î Rapid increase in deposit mobilisation
and expansion of credit
Î However, Commercial Banks witnessed
decline in profitability.
− Directed lending, less flexibility
− Declining Interest Income for Banks
− Increasing Cost of Operation
OBJECTIVES AND REASONS OF NATIONALISATION (
CONTD…)
For this purpose it was
necessary for the Government
to take direct responsibility for
extension and diversification of
banking services.
Social Control-
NATIONALISATION
Government of India brought social control on
commercial banks initially to fulfill the social
obligations. However, shortly thereafter,
Government of India took over the ownership of
the banks through nationalisation
Formation of the Regional Rural Banks (RRBs)
• Formation of the Regional Rural Banks (RRBs)
under the Regional Rural Banks Act 1976.
• These are state sponsored, region based,
rural-based, rural-oriented, commercial banks.
• Their ownership vests with the sponsoring
commercial bank, the Central Government,
and the Government of the state in which
they are geographically located.
• Under this approach, 196 RRBs were set up.
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 Structure of Indian Commercial Banks as
RRB
of 31st March 2002
• A new type of institution, which
combined the rural touch, and
experience of co-operatives with the Bank Group No of Banks Branches
modernised outlook and capacity to Public Sector 27 46,384
mobilise deposits possessed by Indian Private Sector 30 5,311
commercial banks. Foreign Banks 40 194
Total Commercial 97 51,889
Banks
RRBs 196 14,390
Total of All 293 66,279

Reforms Measures relating to Banking: External

• In 1991, the Government of India had launched an
extensive economic reform programme.
• The main objective of the reform is
– to promote efficiency of the banking systems
through intensified competitive forces.
– to improve operational efficiency of the banking
system and
– to impart functional autonomy
• Strategy involved
– imparting greater transparency in dealing and
reporting
– developing and integrating various segments of the
financial system such as call money market, debt
market, forex market and capital market.
• Improving financial health of banks through
prescription of risk weighted capital adequacy ratios,
re-capitalisation and restructuring of weak banks
• Relaxation in respect of investments simultaneously
tightening the valuation principles of such
investments
• Amendment to the bank branch licensing policy with a
view to help banks to rationalise their branch network
and to deal effectively with the loss making branches
• Promoting higher standards of disclosure through
prescribing and gradual tightening of norms for
income recognition, asset classification and
provisioning of assets on the international lines

Measures relating to Banking: External

Measures relating to Banking: External
• Imparting flexibility in credit delivery system
through withdrawing the concept of Maximum
Permissible Bank Finance (MPBF) and
increasing the share of loan segment in bank
credit
• Setting up of special Debt Recovery Tribunals
(DRTs) for improving recovery of banks loans,
and
• Introduction of a scheme to disclose
information about wilful defaulters.
• Reduction in the pre-emption of funds through
lowering of the Cash Reserve Ratio (CRR) and
Statuary Liquidity Ratio (SLR),
• Redefining and redesigning directed credit
programmes
• Dismantling administered interests
• Setting up of a level playing field by redefining the
roles of banks and other financial entities
• Promoting competition by permitting new banks in
the private sector

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 Narasimham Committee recommendations
Measures relating to Banking: Internal -prudential norms
• Adoption of reporting standards comparable RBI has implemented the prudential
to the international ones
• Strengthening internal monitoring through norms for improving the financial
audit and control systems through reporting health of commercial banks and the
• Adoption of modern technology quality of their loan portfolio based
• Rationalisation of manpower including the on the Narasimhan Committee
introduction of voluntary retirement scheme
• Adoption of the principles of Corporate
recommendations.
Governance

NARASIMHAM COMMITTEE Determinant of NPAs

• INCOME RECOGNITION
• income recognition should be based on actual recovery than
on any subjective considerations.
• ASSET CLASSIFICATION.
• Health Code Concept: satisfactory.irregular.sick – viable.sick Year ending March 31st Four quarters
– non viable, advance recalled,suit filed account,decreed
debts, bad and doubtful debts
March,1993
• Present classification: standard, sub-standard, doubtful and
loss categories
• PROVISIONING NORMS Year ending March 31st Three quarters
• 0.25% for standard, 10% on sub standard,20%/30%/50% on March,1994
doubtful and 100% on loss assets.
• Provisioning is on the basis of tenure and not on value of
security . No discretion on the basis of assets. Year ending March 31st 180 days
• CAPITAL ADEQUACY NORMS
March,1995

Year ending March 31st 90 days

March,2004

The Securitisation and Reconstruction of Financial

RECOVERY OF DEBTS THROUGH Assets And Enforcement Of Security Interest Act -
2002
• CIVIL SUIT
• PERSONAL DEBT RECOVERY ACT • The Act has come into force w.e.f.
21.06.2002.
• LOK ADALATS
• OBJECTIVE :
• FORMATION OF DRT • To regulate Securitisation of Financial
• OTS of RBI Assets
• THE SECURITISATION AND • To regulate Reconstruction of Financial
RECONSTRUCTION OF FINANCIAL Assets
ASSETS AND ENFORCEMENT OF • For enforcement of Securities created in
favour of Secured Creditors
SECURITY INTEREST ACT - 2002
• Bank to issue 60 days demand notice requiring
borrower to pay the entire bank dues

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LENDING TO PRIORITY SECTOR
• Agriculture
• Small Scale Industries
• Other activities / borrowers (such
as small business, retail trade,
CHALLENGES AND OPPORTUNITIES
small transport operators,
professional and self employed
persons, housing, education
loans, microcredit etc.)

Opportunities THREATS
• Competition
• Survival of the fittest
• No obligations of concessional
lending • Exist or exit
• Vast scope for infrastructure funding
• New instruments of lending
– Products and services
• Lending in both wholesale and retail
segments
• Lending in long and short term
instruments

Conclusion
• Profits will be characterised by
- reduced margins and increasing
volumes
- ability to minimise NPAs
STRATEGIC RESPONSES - Treasury management
• Client focus
- customer satisfaction
- marketing of products

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Conclusion (contd) An Analysis by Prof. Peter Drucker
• Risk Management
– measurement and monitoring
– setting risk limits • Financial sector industry needs radical
– From existing risk to a more acceptable risk shake up if it is to survive and thrive
profile
• There are only three possible roads the
• Skill upgradation financial services industry can take
– Quality of Human resources will be crucial
– Keep on doing what worked in the past
for change; Professionalism is a must
• which means steady decline
• Universal Banking solutions to clients – To be replaced by innovating outsiders and
newcomers
• Schumpeters “creative destruction”

Prof. Peter Drucker’s Analysis (contd.)

– Third and final road: to become
innovators themselves and their own
creative destroyers

Message: Innovate or Perish THANK YOU

Choice: We should choose the third

option