PGDM (IFS ) By: Dr. Neelam Tandon COMMERCIAL BANKS A.

DEREGULATION OF SAVING RATES AND COMMERCIAL BANKS With the steady process of deregulation since the early 1990s, the only rupee in terest rate that continued to remain regulated was the savings deposit interest rate. In order to delineate the advantages and disadvantages of deregulating the savings deposit rate, the Reserve Bank prepared a discussion paper which was pl aced on the RBI website for suggestions from general public in April 2011. The D iscussion Paper evoked wide ranging responses from a cross-section of stakeholde rs. The Reserve Bank after weighing both pros and cons, decided to deregulate th e savings bank deposit rate in its Second Quarter Review of Monetary Policy 2011 -12 released on October 25, 2011. Accordingly, banks can freely determine their savings bank deposit interest rates subject to the following two conditions: Each bank will have to offer a uniform interest rate on savings bank deposits up to `1 lakh, irrespective of the amount in the account within this limit. For savings bank deposits over `1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination fro m customer to customer on interest rates for similar amount of deposit. Though it is true that saving deposits have been an almost constant factor for t he banking system, these dynamics may change gradually once customers see differ ential interest rates. One cannot conjecture whether this proportion of 23 per c ent will move up or down when rates change. This was also observed when banks st arted very short-term deposits of 15 days and above a move to get customers to r oll over these deposits at a rate that was higher than the savings account rate. Customers did move funds to banks offering higher rates on these deposits. By o ffering higher rates on savings accounts, there could be migration to these depo sits not just within the bank, but also across banks. This will cut administrati ve costs. Therefore, at the micro level, banks will have scope to play with thei r balance sheet more effectively. Individuals usually hold cash at home for liquidity, savings deposits for securi ty and convenience, and term deposits for income. While funds may be swapped bet ween banks or across deposits, the overall amount of deposits may not change if rates are increased, given the profile of customers who are already exposed to v arious alternatives. Therefore, at the macro level the impact may be minimal sin ce it should be recognised that liquid debt funds tend to give higher post-tax y ields. Similarly, if the rates come down, customers may not actually withdraw su bstantially from this account. We have already seen disparate reactions from banks. The large ones have been si lent, while some smaller ones have increased these rates. This will really be th e challenge for banks at the micro level where the share of savings accounts is lower, as in the case of foreign banks (about 15 per cent) and old private banks (around 19 per cent). Those that are already at 23-24 per cent may not really h ave scope to do so, based on past trends in terms of garnering deposits. The onu s will be on banks to actually manage this portion of funds. So, is it good for the banking system? Certainly yes, since it gives banks the f reedom to manage their funds more adroitly. The consequences of the impact on th e amount of deposits may not change but as long as it is market-determined, the system will be efficient. The real challenge is for the Reserve Bank of India wh en interest rates come down substantially as they did in 2002-2005 when term dep osits gave returns of around five per cent. Logically, the savings rate should h ave also come down proportionately to close to nil in case a spread of, say, 400 -500 basis points is to be maintained as is the case today. B. RISING NPA IN COMMERICAL BANKS Rising NPA of SBI The nation's largest lender SBI had reported a massive 99 percent plunge in net profits to a paltry Rs 20.88 crore for quarter to March 2011 as it had to make p rovisions of over Rs 9,000 crore, including a one-time Rs 500 crore for the teas er loans, towards bad loans, pensions and gratuity. NPA provisions jumped 49 percent to Rs 3,264 crore in Q4 while its net NPAs rose

to Rs 1,235 core. An integrated approach to review and manage stressed assets (both standard asset s and NPAs)including rehabilitation and restructuring of such assets, has been p ut in place to arrest slippages and also for upgrading NPAs. Other measures that SBI has taken to rein in the mounting NPAs include holding more recovery camps, setting up an outbound call centre, engaging in wide publicity of the 3 percent interest subvention on repayment being offered by the government, and a regular review mechanism, besides close monitoring of special mention accounts and stan dard restructured accounts. Besides, the bank has also created a stressed asset management room and resoluti on centres. Bank is aware of the need to improve asset quality and will keep an eye on the net NPA numbers. Most of the restructured assets are covered by a s ecurity. And these accounts have been with the bank for several years. Public Sector Banks and rising NPA Dared 20th March 2012 Public sector banks' gross bad debt jumped over 51 per cent to a whopping Rs 1,0 3,891 crore in 2011, the gross Non Performing Assets (NPAs) of public sector ban ks has increased from Rs 68,597.09 crore at December 2010 end, to Rs 103,891.27 crore as on December 2011. Banks have been instructed to see how NPAs can be reduced. some of the loans to sectors like power, steel, MSME and aviation have gone bad or declared NPA. Avia tion sector, had an outstanding of Rs 39,000 crore, of which Rs 741 crore was NP A. Similarly, power companies had a total outstanding of Rs 1,21,000 crore, of w hich overdue amount is Rs 446 crore. The gross NPAs of public sector banks, in t erms of percentage of Gross Advances, has increased from 2.27 per cent to 3.18 p er cent. Increase in interest rates and slowing economic growth had adversely im pinged on the repayment capacity of all categories of borrowers, especially smal l and medium enterprises. C. FINANCIAL INCLUSION PLAN In January 2010, all public and private sector banks were advised to put in plac e a Board-approved three-year Financial Inclusion Plan (FIP) and submit the same to the Reserve Bank by March 2010. These banks prepared and submitted their FIP s containing targets for March 2011, 2012 and 2013. These plans broadly include self-determined targets in respect of rural brick and mortar branches to be open ed; BCs to be employed; coverage of unbanked villages with population above 2,00 0 as also other unbanked villages with population below 2,000 through branches/B Cs/other modes; no-frill accounts opened including through BC-ICT; Kisan Credit Cards (KCC) and General Credit Cards (GCC) and other specific products designed by them to cater to the financially excluded segments. Banks were advised to int egrate Board-approved FIPs with their business plans and to include the criterio n on financial inclusion as a parameter in the performance evaluation of their s taff. The implementation of these plans is being closely monitored by the Reserv e Bank. In order to review the progress of banks in the implementation of FIPs during th e year 2010-11 and making way for accelerated progress in future, the Reserve Ba nk has been conducting one-to-one meetings with Chairman and Managing Director ( CMD)/Chief Executive Officer (CEO) of banks. Few of the important action points which emanated out of the discussions held during May-June 2011 are as follows: Banks shall review their delivery models so that Financial Inclusion results in a profitable business for them. In addition to providing banking services in villages with more than 2,000 popul ation, they will also focus on providing banking services in peripheral villages with population of less than 2,000. In future, banks need to focus more on opening of brick and mortar branches in u nbanked villages. It may be a low cost and simple intermediary structure compris ing of minimum infrastructure for operating small customer transactions and supp orting upto 10 BCs at a reasonable distance of 2-3 km. Such an approach will hel p banks in having a better customer redressal mechanism and at the same time, he lp in developing a better BC-monitoring mechanism. This will lead to efficiency in cash management, documentation and redressal of customer grievances.

Banks shall expand financial inclusion initiatives in urban and semi-urban areas by targeting pockets of migrant workers and small vendors and leveraging Aadhaa r enrolment for opening bank accounts. Banks shall formulate financial inclusion plans for RRBs sponsored by them and d evelop an effective monitoring mechanism so that targets assigned to the RRBs ar e also achieved meticulously. D. BANC ASSURANCE The Reserve Bank of India being the regulatory authority of the banking system, recognising the need for banks to diversify their activities at the right time, permitted them to enter into insurance sector as well. Furtherance to this line, it issued a set of detailed guidelines setting out various ways for a bank in I ndia to enter into insurance sector. In the insurance sector, the Insurance Regu latory and Development Authority (IRDA), despite its recent origin in 2000, avow ed to regulate and develop the insurance sector in India through calibrated poli cy initiatives. Given India's size as a continent it has, however, a very low insu rance penetration and low insurance density. As opposed to this, India has a wel l entrenched wide branch network of banking system which only few countries in t he world could match with. The `bancassurance strategy' integrates banking and insur ance sector to harness the synergy and its allied problems and prospects in the Indian context. In terms of `insurance penetration ratio'(defined as ratio of insurance premium to G DP), a key indicator of the spread of insurance coverage and insurance culture, India compares poorly by international standards. The penetration ratio was less than one per cent in 1990s and it improved to 4.8% by end-March 2006. As agains t this, a Survey Report of Swiss Re revealed that the penetration ratio as at en d-March 2006, in respect of some of the European countries, viz., UK and Switzer land at 16.5% and 11.0%. In Asia, Taiwan and South Korea had registered their r espective ratio of as high as 14.5% and 11.1%. Insurance Penetration ratio for t he World was placed at 7.5% far greater than that of India. Thus in a country with more than 1.2 billion population, the poor penetration ra tio indicates that a vast majority of population remain outside the reach of the insurance, especially in rural and semi-urban areas, in the context of the abse nce of social security schemes. This clearly suggests the presence of vast pote ntial for tapping the insurance market particularly by widening the distribution channels. This is where the strategy of banc assurance could possibly become mo re relevant. E. Evolving Role of RBI as a regulator of Money Market As the process of reform continues, the role of financial markets in the economy gets significantly enhanced. While this process essentially involves domestic l iberalisation, the decision to open up the economy adds urgency and complexity t o the process of developing financial markets in India. The changing role and in creasing responsibility of RBI has to be seen in this context and in conjunction with development of financial markets in areas outside of RBI jurisdiction but relevant to its activities, especially equity markets and insurance activities. More specifically, the role of the RBI in the financial markets should be assess ed in the light of the following: First, the primary interest of the RBI in financial markets is because of its cr iticality in the transmission of monetary policy. Second, the conscious effort by the RBI towards the development of efficient, st able and healthy financial markets is important since they were repressed in several ways in the past by law, regulation and policies. Mere lifting of restrictions will not automatically help create vibrant financial markets. Hence, the RBI has been and should continue to facili tate the development of markets through legal changes, technological and institutional de velopment and dynamic improvements in market microstructure. Third, regulation of some financial markets is warranted by virtue of RBI's charte r. This relates to money market which is central to monetary policy, Government

Securities market which is significant from the point of view of developing a yi eld curve, forex market which is integral to external sector management and gold markets, which have been more recently deregulated. This position has been form alised with the recent amendments to the Securities Contract Regulations Act and Government notifications there under giving jurisdi ction to the RBI. Fourth, with the gradual development of sophisticated instruments and innovation s in market practices, technological infrastructure has become an indispensable part of the reform of the financial markets. The RBI has, therefore, to equip itself to perform its developmental and regulat ory roles effectively. The process involves constant interaction with the rest o f the world in order to identify best practices, benchmark existing practices in our markets, identify gaps and take measures to move towards these internationa l standards, within the framework of our unique country circumstances. Secondly, coordination with other regulators within the country is important to sort out regulatory gaps and overlaps. Thirdly, it is important to constantly interact with market participants without in any way compromising confidentiality so as to effect changes in the regulato ry aspects of the markets through consultative mechanisms. Fourthly, with increased liberalisation, there is also need to update informatio n and market intelligence to assess the prevailing situation and take quick acti ons. Fifthly, a major challenge within the RBI will be to institute arrangements to i mprove its skill to keep pace with the speed and the skills of market participa nts. F. Health Insurance Portability Few years ago, Mumbai based Gopal Vaswani bought a Rs 7 lakh family floater heal th cover for his wife and children. This year he was in for an unpleasant shock when his insurer raised the premium from R 7,690 to R 29,715 in spite of making zero claims on his insurance during the previous year. But Vaswani did not want to discontinue his policy as he had already completed three years, the period af ter which specific diseases, such as hernia, cataract, dysfunctional uterine ble eding, are covered. Also, he was just a year short of getting a cover for other pre-existing conditions. What could Vaswani do? Vaswani did not have to worry much. The move by the Insurance Regulatory and Dev elopment Authority (IRDA) in October 2011 to introduce health insurance portabil ity would prove to be a welcome change to people like Vaswani. You can carry ove r the pre-existing disease (PED) benefits in your previous policy to the new ser vice provider under portability. This move by the IRDA would not only ensure better customer service but also gua rantee the need for insurance companies to broaden their existing product portfo lios and introduce competitive products. Health insurance portability allows a p olicyholder to shift from one insurer to another without losing out on his accru ed benefits such as no-claim bonus and waiting period for pre-existing diseases at the time of renewal. However, all good things come with terms and conditions; and so does health insu rance portability. One of the key issues that prevent policyholders from switchi ng between insurance companies is the pre-existing disease cover. IRDA has direc ted that those issuing health insurance policies should allow for credit gained by the insured in terms of waiting period, for pre-existing conditions when he s witches between insurers or insurance plans. However, this is applicable only if the previous policy was maintained without break. The IRDA has ensured that the porting procedure is kept simple and that consumer s can port between insurers with ease. However it takes a while before the polic yholder can port and his new policy benefit can get effective; as he has to appr oach the new insurer 45 days prior to his existing policy renewal date. During t his time, one should be aware of a few critical points. The new insurer may not be liable to offer portability if policyholder fails to approach the new insurer at least 45 days before the premium renewal date.

It's important to note that portability benefits are only restricted to waiver of pre-existing conditions and time bound exclusions on benefits that are common to both plans. If there is additional coverage being provided with the new insuran ce company, the waiting period for those additional benefits will apply. Basis the underwriting guidelines (specific to each company) and current health status and claims history, portabi lity request may or may not be accepted by the insurance company. Besides this, some of the other things that the customer should keep in mind whi le porting a policy are: Claims servicing standards including cashless and reimbursement services Wellness benefits like health related articles, a helpline number, discount offe rs on health specific products/ services While choosing the right health insurance, one should also keep in mind addition al benefits and services provided by the insurer as they add value to your polic y. It is recommended that the policyholder should primarily port only if he/she is not happy with the services provided by the insurance company. This may include services at buying stage or during the policy term and even claims servicing sta ge. If the policyholder wishes to port, he has to understand and follow the guid elines closely and the new insurer's policy coverage details. Lastly, an overridin g factor to all product features, is the trust that the brand evokes in a custom er.