Progress in Banking Sector due to Monetary Policy in 2007-08

Presented by, Paritosh Gupte P-10 Supriya Joshi P-13 Rohit Mundhara P-21 Aditi Sabaria C-31 Rakesh Lalwani C-19

Banking Structure in India

Reserve Bank of India

Scheduled Bank (239)

Non Scheduled Bank (4)

Regional Rural Bank (91)

Scheduled Commercial Bank (79)

Scheduled Co-operative Bank (69)

Public Sector Bank (28) Private Sector Bank (23) Foreign Bank (28)

Urban Co-operative Bank (53)

State Co-operative Bank (16)

Reserve Bank Of India

Central Bank of India Established on April 1, 1935 Owned by the Government of India Recommended by Hilton Young Commission To secure monetory stability Started with a paid up share capital of 5 crore The Central Office in Mumbai.

Functions of RBI

Regulates the issue of currency Exchange Management and Control Statutory Bank of Government Exerts Credit Control Bankers Bank Action against Erring banks Overall promotion of Commercial Banks

Monetary Policy

Monetary policy is one of the tools that a national Government uses

to influence its economy. Using its monetary authority to control the supply and availablity of money, a government attempts to influence the overall level of economic activity in line with its political objectives. Usually this goal is "macroeconomic stability"

Objectives of Monetary Policy

Economic Growth Full Employment Price Stability Exchange rate stability Equilibrium in the BOP Developing Banking & Financial Institutions

Instruments of Monetary policy

Quantitative Open Market operations Bank rate policy Cash Reserve ratio Statutory Liquidity Requirement

Instruments of Monetary policy

Qualitative
Credit Ceilings Provision of Minimum Margin requirement Discriminating interest rates Issue of Directives

Major areas covered by Monetary Policy

Monetary Measures Financial Markets

Economy

Monetory Policy

Credit Delivery Mechanism

Highlights

Monetary Policy

2007-08

Economy

Price stability and well-anchored inflation expectations while

ensuring a monetary and interest rate Renewed focus on credit quality and orderly financial markets conditions in securing macroeconomic conditions GDP growth projection for 2007-08 at around 8.5 per cent

Economy

Inflation to be contained close to 5.0 per cent during 2007-08

M3 expansion to be contained at around 17.0-17.5 per cent Deposits projected to increase by around Rs.4,90,000 crore Adjusted non-food credit projected to increase by around 24.025.0 per cent

Monetary Measures

Bank Rate 6.00%

Reverse Repo Rate 6.00%

Repo Rate 7.75%

Scheduled banks required to maintain CRR of 6.5 per cent with

effect from the fortnight beginning April 28, 2007.

Financial Markets

A Non-Competitive Bidding Scheme in the auctions of State Development Loans (SDLs) Average cut-off yield on 182-day Treasury Bills to be used as a benchmark rate for floating rate bonds

Financial Markets

Revised reporting framework on overseas investments for monitoring capital flows The limit for portfolio investment abroad in listed overseas companies by listed Indian companies enhanced from 25 per cent of net worth to 35 per cent of networth The aggregate ceiling on overseas investment by mutual funds to be increased from US $ 3 billion to US $ 4 billion

Credit Delivery Mechanism

The risk weight on loans up to Rs.1 lakh against gold and silver ornaments to be reduced to 50 per cent from the existing level of 125 per cent RRBs to be allowed to take up corporate agency business, without risk participation, for distribution of all insurance products A credit guarantee scheme for distressed farmers to be introduced.

Credit Delivery Mechanism

An evaluation of the bank self help group (SHG) linkage programme to be conducted through the regional offices of the Reserve Bank with a view to ascertaining the degree of transparency in maintaining the accounts by the SHGs and their adherence to well-accepted best practices The boards of banks are advised to lay down internal principles and procedures so that usurious interest, processing and other charges are not charged.

Regional Rural Banks

To combine the local feel and familiarity enjoyed by the cooperatives with the degree of business organization as well as the

ability to mobilize deposits characteristic of commercial banks

RRB's declined from 196 in March'05 to 91 in March'08 operating in 25 states across 586 districts with a network of 14,790 branches. The total number of RRB's, declined to 88 as on August'08. RRB's credit-deposit ratio increased from 56% to 60.3% in March'08.

Recapitalization of RRB's
In Union budget 2007-08 it was announced that RRB's with negative net worth would be recapitalized in phased manner. In July'07, out of 96 RRB's 29 had negative net worth amounting to Rs.1857 cr. After July'07, 2 RRB's with negative net worth were merged with 2 other RRB's of the same state and sponsored by the same banks. Amount required for recapitalization was at Rs.1796 crores. 269 crores - State governments (15%) 629 crores Sponsored banks (35%) 898 crores Government of India (50%)

Financial Performance of RRB's

70000 60000 50000 40000 30000 20000 10000 0

Cash in Hand

Bal with RBI 4886 7164

Other Other Inv Bank Bal 19314 23493 26352 25073

2006-07(96 RRB's) 2007-08(91 RRB's) Column1

1216 1412

Net Loans and Advances 47326 57601

Net Assets 6674 8798

RRB's : Consolidated B/S

120000 100000 80000 60000 40000 20000 0 2006-07 (96 RRB's) 2007-08 (91 RRB's) Column1
2006 07 (96 RRBs) 2007 08 (90 RRBs)

Rs. in Crores

Share Capital 196 196

Reserves 4902 5687

Share Cap deposits 2188 2833

Deposits 83144 99095

Borrowings 9776 11649

Other Liabilities 5562 4081

RRB's Income Statement st March'08 as on 31

2006-07 (96 RRBs) Net Income Rs.7663 Cr Expenditure Rs.7038 Cr Net Profit Rs.625 Cr Net NPA Rs.3.46 Cr

2007-08 (90 RRBs) Net Income Rs.9195 cr Expenditure Rs.7766 cr Net Profit Rs.1374 cr Net NPA Rs.3.02 Cr

Co-Operative Banks

Enlarges the reach of institutional credit both from geographic and socio-economic perspective. Important instrument for achieving greater financial inclusion Focus on revitalising and strengthening the co-operative banking sector in India. The no. of UCBs declined from 1,813 at end-March 2007 to 1,770 at end-March 2008.

Some of the Developments in Co-operative Banks

Granting of branch licenses to be considered to wellmanaged and financially sound Urban Co-operative banks (UCBs) The existing relaxed prudential norms applicable to Tier I and Tier II UCBs to be extended by one year. Allow UCBs to undertake insurance business as corporate agents.

Commercial Banks

Consolidation Interest margins Loans and advances moderated Banks investment in govt. security Deposit growth moderated

Commercial Banks

Banks borrowing increased International liability Priority sector advances declined Agricultural lending policy Financial performance

Summary Commercial Banks

Affected by Macroeconomic and RBI policy Less credit creation Affecting all the sectors except services Deposits growth was strong

NPA

NPA

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. Banks should, classify an account as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter. Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed by the bank.

NPA

As on March 2009

As on March 2008

Substandard

Rs 26730 mn

Rs 12136 mn

Doubtful Loss Asset

Rs 2410 mn Rs 404 mn

Rs 1725 mn Rs 463 mn

NPA
Net NPA
Types of Banks Scheduled Commercial Banks Public Sector Banks 2007 Rs 20101 Cr Rs 15145 Cr 2008 Rs 24734 Cr Rs 17836 Cr

Old Pvt Sector Banks

New Pvt Sector Banks Foreign Banks Total

Rs 891 Cr
Rs 3137 Cr Rs 927 Cr Rs 40201 Cr

Rs 740 Cr
Rs 4907 Cr Rs 1250 Cr Rs 49467 Cr

NPA
Reversed declining Trend High Credit Growth Hardening of Interest rates More in Private Sector & Foreign Banks

NPA

Ratio of Net NPA to Net Advances 2008 2004 2% - 5% 3 Banks 29 Banks 5 % Above 1 Banks 14 Banks

Capital Adequacy Ratio

It refers to the minimum capital to be raised in relation to risk assets. Increase in CAR raises the public confidence.

Capital Adequacy Ratio

Type of Bank Scheduled Commercial Banks Public Sector Banks Old Pvt Sector Banks New Pvt Sector Banks Foreign Banks

2006-07 12.3% 12.4% 12% 12% 12.4%

2007-08 13.0% 12.5% 14% 14.4% 13.1%

Securitisation

Securitisation is the process of pooling and repackaging of homogenous illiquid financial assets into marketable securities that can be sold to investors.

Securitisation has emerged as an important means of financing in

recent times.
Total outstanding Exposure Securitised

2008-09

2007-08

Rs 885 Cr

Rs 1550 Cr

Performance of Banking Sector

Indices BSE Bankex BSE Sensex

2007-08 18.0 19.7

2008-09 -38.0 -41.4

Performance of Banking Sector

Resources Raised through Public Issue Equity 2007-08 2006-07 Bank Central Bank of India State Bank of India ICICI Bank Ltd Federal Bank Ltd Dhanlakshmi Bank Ltd ICICI Bank Ltd 29955 Cr 1066 Cr Debt 500 Cr Total 30455 Cr 1066 Cr

Amount (Including Premium) Rs 816 Cr Rs 16736 Cr Rs 9956 Cr Rs 2141 Cr Rs 199 Cr Rs 500 Cr (Debt Issue)

Capitalization

BSE Market Cap BSE Bankex

Rs 50,76,438.99 Cr Rs 423005.73 Cr

Scrip Wise Weightage in Bankex ICICI Bank ltd Hdfc Bank Ltd SBI Axis Bank Kotak Bank 30.73% 19.69% 18.79% 7.03% 4.62 %

Comparison

March 2008
1) 2) 3) BROAD MONEY NON-FOOD CREDIT CURRENCY WITH PUBLIC 701580 432846 85475 21.20% 23.00% 17.70%

March 2009
740932 406287 97815 18.40% 17.50% 17.20%

4)
5) 6) 7)

GROWTH IN LIQUIDITY
REVERSE REPO RATE REPO RATE CRR

707388
-

20.60%
6.00% 7.75% 7.75%

731918
-

17.60%
3.50% 5.00% 5.00%

Bibliography and Webliography

www.rbi.org.in www.bseindia.com