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7/27/2019 Banking Sector Reforms.ppt
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The Road Ahead of Banking Reforms in India
Presented by :
Shagufta Khan
M1224
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Introduction
• The Indian banking sector is an important constituent of the Indian
financial system
• Without a sound and effective banking system, India can not be
considered as a healthy economy
• Substantial role in the growth of the economy
• Need for banking reforms :
‒ Public had lesser confidence on banks
‒ Enough room for growth and healthy competition
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Major Implications of Narsimham Committee I
(1991)
• Reduction in SLR and CRR :
- Reduction from 63.5 % to 31.5%
- This has left more funds with banks for allocation to agriculture, industry, trade,
etc.
• Prudential norms :
- Proper classification of assets and full disclosure of A/cs of banks & FI
• Deregulation of interest rates on loans from Rs. 20 lakhs to Rs. 2 lakhs
• Setting up of Asset Reconstruction Fund (ARF) :
- To take over a portion of loan portfolio of banks whose recovery has become
difficult
• Stopped Direct Credit Programme :- Reduced the profitability of banks
• Public sector banks allowed for direct access to capital markets :
- The Banking Companies (Acquisition and Transfer of Undertakings) Act
was amended to enable the banks to raise capital through public issues
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Major Implications of Narsimham Committee II
(1998)• Autonomy in banking :
- To implement this, criteria for autonomous status was identified- 17 banks were considered eligible
• Increase in FDI Limit :
- In private banks the limit has been increased from 49% to 74%
• Stronger banking system :
- Use of mergers to build the size and strength of operations for each
bank
- There were a string of mergers in banks during the late 90s and early
2000s• Capital Adequacy Ratio :
- To improve inherent strength of banks & to improve their risk
absorption capacity (RBI norms : 9%)
•
Reduction in NPAs :- 14.4 % in 1998 to 7.2 % in 2004
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Basel II Norms
• Pillar One :
- Minimum capital requirements similar to Basel I, i.e. 9 % – except thatcredit risk calculation is reformed and a new charge for operational risk
to be added
•
Pillar Two :- Banks have to establish Internal Capital Adequacy Assessment Process
which shall be subject to rigorous supervisory review process
• Pillar Three :
- Public disclosures to enhance market transparency
- Specific list includes capital structure, capital adequacy, composition of
loan / credit portfolios by risk rating and detailed risk parameters for
each risk-rating category
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Basel III Norms• Pillar 1 :
- Minimum Regulatory Capital Requirements based on Risk Weighted
Assets (RWAs) :
Maintaining capital calculated through credit, market and operational
risk areas
Increased from 2.5% to 7%
• Pillar 2 :
- Supervisory Review Process :
Regulating tools and frameworks for dealing with peripheral risks that
banks face
• Pillar 3 :
- Market Discipline :
Increasing the disclosures that banks must provide to increase thetransparency of banks
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Future Outlook of Banking
• E - banking :
‒ Branchless banking
‒ Providing customers with cost effective services
‒ Capability to cater to large customers
• Consolidation :
‒ It help save costs and improve operational efficiency
‒ Owing to the diversified operations and credit profiles of merging
banks, it is likely to serve as a risk-mitigation exercise
• Rural banking :
‒ Delivery of banking services at an affordable cost to vast sections
belonging to low income groups
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Future Outlook of Banking• Stronger crisis management tools integrated with technology :
‒
It will ensure competitive advantage ‒ Upgradation in technology proportionately so that the MIS and the
analytical tools for risk management are available
• Enhanced use of technology :
‒ An integrator which holds the key to the future success of banks
‒ Foreign banks have raised the expectation of the customer
(Mobile banking and wireless tools)
‒ Speed, accuracy and quality in operations and delivery mechanism act as
cost efficiency
• Better financial system architecture :
‒ Better regulatory guardrails that stops the financial system from driving
off cliffs
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