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Reforms in Banking Sector
Reforms in Banking Sector
A bank is a financial institution that accepts deposits and channels those deposits into lending activities. Banks primarily provide financial services to customers while enriching investors. Government restrictions on financial activities by banks vary over time and location. Banks are important players in financial markets and offer services such as investment funds and loans. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies.
CENTRAL BANK
Commercial Banks
Institutional banks
Associate Banks
Land Mortgage Rural Credit Industrial Dev. Housing Finance EXIM Bank
Private Sector
Foreign Banks
State bank of India and its associates Name of bank Year of incorporation State Bank of Bikaner & Jaipur State Bank of 1941 Hyderabad State Bank of India 1955*. State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Nationalized Banks Year of incorporation Name of bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India 1865 1923 1908 1906 1935 1906 1911 1906 1938 1907 1937 1943 1908 1895 1925 1943 1919 No. of Offices 2027 1159 2772 2668 1330 2627 3239 799 1072 1417 1583 1166 787 4117 1905 1801 2140 1960 1913 1917 1902 1945 No. of Offices 833 943 9161 456 639 754 429 681
1950 1931
1343 966
Old private Sector Banks Name of bank Year of incorporation No. of Offices Bank of Rajasthan 1943 388 Bharat Overseas Bank 1973 91 Catholic Syrian Bank 1920 314 City Union Bank 1904 137 Development Credit Bank 1995** 88 Dhanalakshmi Bank 1927 180 Federal Bank 1931 471 Ganesh Bank of Kurundwad -31 ING Vysya Bank 1930 381 Jammu & Kashmir Bank 1938 439 Karnataka Bank 1924 398 Karur Vysya Bank 1926 249 Lakshmi Vilas Bank 1926 239 Lord Krishna Bank 1940 118 Nainital Bank 1922 69 Ratnakar Bank 1943 75 Sangli Bank 1948 192 SBI Comm. & Intl. Bank 1993 3 South Indian Bank 1929 438 Tamilnad Mercantile Bank 1921 183 United Western Bank 1936 237 ** Converted to a private sector commercial bank on 31st May, 1995. Started as a Credit Society set up by the followers of His Highness the Aga Khan in the 1930s and later converted into Co-operative Bank. New Private Sector banks Name of bank Bank of Punjab* Centurion Bank HDFC Bank ICICI Bank IDBI Bank Ltd. IndusInd Bank Kotak Mahindra Bank Year of incorporation 1995 1994 1994 1994 1994 1995 1985 No. of Offices 120 77 446 519 157 127 54
UTI Bank 1994 Yes Bank 2003 * Now merged with Centurion Bank Foreign Banks No. of Offices Name of bank ABM Amro 19 Bank Abu Dhabi Commercial Bank 2 American Express Bank 8 Antwerp Diamond Bank 1 Arab Bangladesh Bank 1 Bank International Indonesia 1 Bank of America 5 Bank of Bahrain & Kuwait 2 Bank of Ceylon 1 Bank of Nova Scotia 5 Bank of Tokyo Mitsubishi 3 Barclays Bank 1 BNP Paribas 9 Calyon Bank 4 Chinatrust Commercial Bank 1 Cho Hung Bank 1 Citibank 35 DBS Bank 1 Deutsche Bank 5 Hongkong & Shanghai Banking Corpn. 39 JP Morgan Chase Bank 1 Krung Thai Bank 1 Mashreq Bank 2 Mizuho Corporate Bank 1 Oman International Bank 2 Societe Generale 2 Sonali Bank 1 Standard Chartered Bank 85 State Bank of Mauritius 3 UFJ Bank 1 (Source: A profile on banks 2004-05, RBI))
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Future is bright: The Information Technology (IT) is becoming an important component of the banking sector. The customers have become more demanding and they need value added services from the banks. The foreign banks have raised the expectations of the customers causing the bank to invest strongly on IT. The Indian banks have started to meet the expectations of the people by opening both onsite and offsite ATMs. Banks have also started telebanking, anytime/anywhere banking, mobile banking and Internet banking to give the facilities to the customers. Banks have also following the RBI sponsored technology programmes like mail messaging, Electronic fund transfers (EFT), Structured Financial Messaging System (SFMS), (Real Time Gross Settlement (RTGS), Centralized Fund Management System (CFMS) and Negotiated Dealing System / Public Debt Office (NDS/PDO). Banks have been given more teeth to tackle the Non performing assets by passing the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under this Act, the banks can take over the assets of the defaulters either by themselves or with the help of Court. The power is in addition to the power to recover through the Debt Recovery Tribunal. The Asset Reconstruction Companies have been formed which also take over the distress assets from the banks.
5. It was felt that there is enough room for growth and healthy competition for public and private sector banks as well as foreign and domestic banks.
Banking sector in pre reform period was facing very poor performance due to excessive loans in comparison to total deposits having a ratio more than 50 percent consisting of about 90 percent of all commercial banking and continuous escalation in non-performing assets (NPAs) in the portfolio of banks also posed a significant threat to the very stability of the financial system.
4. Transparency in Balance sheets 5. Establishment of Special Tribunals to speed up the process of debts recovery 6. Establishment of an Assets Reconstruction Fund with special power of recovery 7. Bank restructuring through evolving a system of a broad pattern consisting of 3 or 4 large banks including SBI, 8-10 national Banks engaged in Universal Banking with a network of branches, local banks confined to a specific region and RRBs confined to the rural areas engaged in financing of agriculture and allied activities. 8. Abolishment of branch licensing and leaving the matter of opening and closing of branches to the commercial judgment of individual banks 9. Progressive reduction in pre-emptive reserves. 10.Introduction of prudential norms to ensure capital adequacy norms, proper income recognition, more stringent recognition of NPAs, classification of assets based on their quality and provisioning against bad and doubtful debts by constituting the special debt recovery tribunals 11.Introduction of greater competition by entry of private sector banks and foreign banks and permitting them to access capital market 12.Partial deviation from directed lending 13.Strengthening the supervisory mechanism by creating a separate Board for Banking and Financial supervision 14.Up gradation of technology through the introduction of computerized system in banks. 15.Freedom to appoint chief executive and officers of the banks and changes in the constitutions of the board 16.Bringing NBFCS under the ambit of regulatory framework. The Government also appointed another committee on banking sector reforms under the Chairmanship of M. Narasimham which submitted its report in April 1998. The committee focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable. The major recommendations of Narasimham Committee II were1. In case of capital adequacy, strengthening the banking system through an increase in the minimum capital adequacy ratio (CRAR) from 8 percent to 10 percent by 2002, 100 percent of fixed income portfolio marked-to-market by 2001 (up from 70 percent), 5 percent market risk weight for fixed income securities and open foreign exchange positions limits (no market risks weights previously) and 100 percent commercial
risks weight to Government-Guaranteed advances (previously treated as risk free) 2. To bring down net NPAs below 5 percent by 2000 and to 3 percent by 2002. Reducing the minimum stipulated holding of the Government or RBI in the equity of nationalized banks or SBI to 33 percent 1. Merging financially strong institutions and giving a revival package to the weak banks 2. Strengthening the operation of rural financial institutions in terms of appraisal, supervision and follow-up, loan recovery strategies and development of bank-client relationships in view of higher NPAs in public sector banks due to directed lending. 3. Amendment to RBI Act and Banking Regulation Act4 The Government focused on competition enhancing measures by way of granting operational autonomy to public sector banks, reduction of public ownership in public sector banks by allowing them to raise capital from equity market up to 49 percent of paid-up capital; setting of transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance companies, giving permission for foreign investment in the financial sector in the form of foreign direct investment (FDI) as well as portfolio investment, giving permission to banks to diversify product portfolio and business activities, to prepare aroadmap for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks, public sector banks and NBFCs, and providing guidelines on ownership and governance in private sector banks. Government focused through reform process on enhancing the role of market forces by making sharp reduction in pre-emption through reserve requirement, market determined pricing for government securities, disbanding of administered interest rates with a few exceptions and enhanced transparency and disclosure norms to facilitate market discipline;introduction of pure inter-bank call money market, auction-based repos-reverse repos for short-term liquidity management, facilitation of improved payments and settlement mechanism, and requirement ofsignificant advancement in dematerialization and markets for securitized assets are being developed. A provision was made for introduction and phased implementation of international best practices and norms on risk-weighted capital adequacy
requirement, accounting, income recognition, provisioning and exposure, taking suitable measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for investment portfolio and limits on deployment of fund in sensitive activities, and'Know Your Customer' and 'Anti Money Laundering' guidelines, roadmap for Basel II, introduction of capital charge for market risk, higher graded.
with operational and lending inefficiencies. The Verma Committee in 2000 identified Indian Bank, UCO Bank and United Bank of India as the weakest of the twenty-seven public sector banks, in terms of NPAs and accumulated losses. In March 2002, the gross NPAs of scheduled commercial banks amounted to Rs. 71,000 crores out of which Rs. 57,000 crores or roughly 80 percent came from the public sector banks. Financial liberalization has, however, had a predictable effect in the distribution of scheduled commercial banking in India. Between 1969 and 1991 for instance, the share of the rural branches increased from about 22 percent to over 58 percent. The number of rural bank branches actually declined from the 1991 figure of over 35,000 branches by about 3000 branches. Between 1969 and 1991 the share of urban and metro branches fell from over 37 percent to less than 23 percent. In the years since it has crawled back up to over 31 percent.
EFFECT OF REFORMS
These reform measures have had major impact on the overall efficiency and stability of the banking system in India. The present capital adequacy of Indian banks is comparable to those at international level. There has been a marked improvement in the asset quality with the percentage of gross nonperforming assets (NPAs) to gross advances for the banking system reduced from 14.4 per cent in 1998 to 7.2 per cent in 2004. The reform measures have also resulted in an improvement in the profitability of banks. The Return on Assets (RoA) of the banks rose from 0.4 per cent in the year 1991-92 to 1.2 per cent in 2003-04. Considering that, globally, the RoA has been in the range 0.9 to 1.5 per cent for 2004, Indian banks are well placed. The banking sector reforms also emphasized the need to review the manpower resources and rationalize the requirements by drawing a realistic plan so as to reduce the operating cost and improve the profitability. During the last five years, the business per employee for public sector banks more than doubled to around Rs.25 million in 2004.
CONCLUSION
Since the process of liberalization and reform of the financial sector were introduced in 1991, banking sector has undergone major transformation. The underlying objectives of the reform were to make the banking system more competitive, productive and profitable. Indian banks especially the public sector banks and the old private sector banks are lagging far behind their competitors in terms of both productivity and profitability so the public sector banks and old private sector banks need to go for the major transformation program for increase their productivity and profitability. No doubt, the banking sector has been successful in improving the health and efficiency of banking sector in India but they have failed in achieving growth with equity. Privatization and globalization have also introduced excessive competition (domestic as well as foreign) before Indian public sector banks which has created an unstable banking environment. After studying banking reform process it can be suggested that the public sector banks must create strategic alliance with the rural regional banks to open up rural branches and increased use of technology for improved products and services for the same. Banks must reinvent themselves so that they can make a viable market out of the middle and low corporates.9 Government should be strong enough to ensure accountability of professionally managed firms causing the sub prime crisis in well known financial institutions. Branch and ATM licensing should be abolished in order to reduce competition. Prevailing conditions in current scenario are not opportunistic in terms of fee income. Although liberalization of financial services and competition has improved customer services but experience shows that customers' interests are not always accorded priority.10 The banks need to focus at ensuring greater financial stability to tackle lots of challenges successfully to keep growing and strengthen the Indian banking sector.
REFERENCES
1. www.google.com 2. www.rbi.org.in 3. www.wikepedia.org 4. Report on Trend and Progress of Banking in India by RBI . 5. www.jstor.org 6. www.ssrn.com
AN ASSIGNMENT ON
SUBMITTED BY: Prabhjot Kaur Roll No.5525 MBA Finance 10th sem